<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-26556
LEXINGTON B & L FINANCIAL CORP.
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(Exact name of small business issuer as specified in its charter)
Missouri 43-173955
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) I.D. Number)
919 Franklin Avenue, Lexington, Missouri 64067
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (660) 259-2247
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to
Section 12(g) of the Act: Common Stock, par value $.01 per share
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(Title of Class)
Check whether the Registrant: (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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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Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
other information statements incorporated by reference in Part III of this Form
10-KSB or any amendments to this Form 10-KSB. X
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The Registrant's revenues for the fiscal year under report were $7.3
million.
As of December 23, 1998, there were issued and outstanding 1,008,685 shares
of the Registrant's Common Stock. The Common Stock is listed for trading on the
Nasdaq SmallCap Market under the symbol "LXMO." Based on the bid and ask
prices, the aggregate value of the Common Stock outstanding held by the
nonaffiliates of the Registrant on December 23, 1998 was $11,473,792 (1,008,685
shares at $11.375 per share). For purposes of this calculation, officers and
directors of the Registrant are considered nonaffiliates of the Company.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Annual Report to Stockholders for the Fiscal Year Ended
September 30, 1998 ("Annual Report") (Parts I and II).
2. Portions of Definitive Proxy Statement for the 1999 Annual Meeting of
Stockholders (Part III).
<PAGE>
PART I
ITEM 1. BUSINESS
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GENERAL
Lexington B & L Financial Corp. ("Company"), a Missouri corporation, was
organized on November 29, 1995 for the purpose of becoming the holding company
for B & L Bank (formerly The Lexington Building and Loan Association, F.A.) upon
its conversion from a federal mutual savings and loan association to a federal
stock savings bank ("Conversion"). The Conversion was completed on June 5,
1996.
B&L Bank was originally chartered in 1887 as a Missouri-chartered mutual
savings and loan association under the name "The Lexington Building and Loan
Association," and converted to a federal charter and adopted the name "The
Lexington Building and Loan Association, F.A." in June 1995. B&L Bank is
regulated by the Office of Thrift Supervision ("OTS"), its primary federal
regulator, and the Federal Deposit Insurance Corporation ("FDIC"), the insurer
of its deposits. B&L Bank's deposits are federally insured by the FDIC under
the Savings Association Insurance Fund ("SAIF"). B&L Bank is a member of the
Federal Home Loan Bank ("FHLB") System.
On October 1, 1997, the Company acquired Lafayette County Bank of
Lexington/Wellington ("Lafayette County Bank") through the merger of Lafayette
County Bank's parent corporation, Lafayette Bancshares, Inc., with the Company.
All outstanding shares of Lafayette Bancshare's common stock were converted into
$.92 in cash plus .0851 share of the Company's common stock. A total of 96,111
shares of the Company's common stock were issued from treasury shares and
$1,039,284 was paid to Lafayette Bancshares' shareholders. The Company also
paid $195,939 for the minority interest of Lafayette County Bank. The
acquisition was accounted for as a purchase under generally accepted accounting
principles.
Lafayette County Bank is a Missouri state chartered bank whose deposits are
insured up to applicable limits by the Bank Insurance Fund ("BIF") of the FDIC.
Lafayette County Bank conducts its business from its main office in Lexington,
Missouri and its branch offices in Wellington and Callao, Missouri.
The Company's banking subsidiaries are community oriented financial
institutions that engage primarily in the business of attracting deposits from
the general public and using these funds to originate one- to four-family
residential mortgages, commercial, agricultural and consumer loans within their
market areas. The Company is a portfolio lender and generally does not sell the
mortgage loans that it originates.
The Company also incorporated a mortgage banking subsidiary, B&L
Mortgage, Inc., in November 1998. B&L Mortgage offices are located in Odessa,
Missouri. Its primary business is the origination of 1-4 family mortgages for
sale in the secondary market.
Market Area
Lexington, Missouri is located on the southern bank of the Missouri River
approximately 45 miles east of Kansas City, Missouri. Lexington, estimated
population of 4,900, is the county seat and the largest town in Lafayette
County. Lafayette County is predominately rural and contains several small
towns, although the western portions are becoming bedroom communities for
commuters to jobs in the Kansas City metropolitan area. The Company considers
its market area for loans and deposits to encompass Lafayette County and the
bordering areas of three surrounding counties (southern Ray County, northern
Johnson County and western Jackson County) and the area surronding its Callao
office which encompasses all of Macon County.
The economy encompassing the Company's market area has its roots in
agriculture, although agriculture has declined as a source of revenue over the
decades. Most of the employment today is primarily based in services, light
manufacturing, state and local government and retail trade. Tourism is also
part of the local economy as Lexington has historic ties to the Civil War.
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<PAGE>
LENDING ACTIVITIES
GENERAL. The principal lending activity of the Company is the origination
of conventional mortgage loans for the purpose of purchasing, constructing or
refinancing owner-occupied, one- to four-family residential property. The
Company also originates multi-family, commercial real estate, land, commercial,
agricultural and consumer loans. The Company's net loans receivable totalled
$62.3 million at September 30, 1998, representing 66.5% of consolidated total
assets.
LOAN PORTFOLIO ANALYSIS. The following table sets forth the composition of
the Company's loan portfolio by type of loan as of the dates indicated. The
Company had no concentration of loans exceeding 10% of total gross loans other
than as set forth below.
<TABLE>
<CAPTION>
At September 30,
------------------------------------------------------
1998 1997 1996
---------------- ----------------- ----------------
Amount Percent Amount Percent Amount Percent
------- -------- ------- -------- ------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Type of Loan:
- -------------
Mortgage loans:
One- to four-family....... $42,318 66.99% $39,721 85.48% $40,537 88.51%
Commercial real estate
and multi-family.......... 3,690 5.84 1,553 3.34 1,120 2.45
Land...................... 653 1.03 536 1.15 489 1.07
Construction.............. 626 .99 1,101 2.37 613 1.34
------- ------ ------- ------ ------- ------
Total mortgage loans.... 47,287 74.85 42,911 92.34 42,759 93.37
Commercial loans........... 4,042 6.40 -- -- -- --
Agriculture loans.......... 3,171 5.02 -- -- -- --
Consumer and other loans:
Home equity................ 790 1.25 608 1.31 486 1.06
Loans on savings accounts.. 1,986 3.14 1,101 2.37 1,210 2.64
Automobile loans........... 4,968 7.86 1,446 3.11 1,090 2.38
Other...................... 933 1.48 401 0.87 253 0.55
------- ------ ------- ------ ------- ------
Total other loans........ 15,890 25.15 3,556 7.66 3,039 6.63
------- ------ ------- ------ ------- ------
Total loans.............. 63,177 100.00% 46,467 100.00% 45,798 100.00%
====== ====== ======
Add net deferred:
Loan origination fees 18 15 --
Less:
Loans in process........... 281 373 249
Allowance for possible
loan losses............... 599 221 201
------- ------- -------
Loans receivable, net..... $62,315 $45,888 $45,348
======= ======= =======
</TABLE>
The following table sets forth at September 30, 1998 certain information
regarding the dollar amount of loans maturing in the Company's portfolio based
on contractual terms to maturity, but does not include scheduled payments or
potential prepayments. Demand loans (loans having no stated repayment schedule
and no stated maturity) and overdrafts are reported as due in one year or less.
Mortgage loans which have adjustable interest rates are reported as maturing at
their next maturity date. Loan balances do not include undisbursed loan
proceeds, unearned discounts, and allowance for loan losses.
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<PAGE>
<TABLE>
<CAPTION>
After After After After
One Year 3 Years 5 Years 10 Years
Within Through Through Through Through After
One Year 3 Years 5 Years 10 Years 15 Years 15 Years Total
-------- ------- ------- -------- -------- -------- ------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family ..................................... $ 3,278 $ 6,884 $5,862 $11,703 $ 8,394 $6,197 $42,318
Commercial real estate
and multi-family......................................... 1,072 751 461 725 375 306 3,690
Land..................................................... 38 79 135 227 117 57 653
Construction............................................. 626 -- -- -- -- -- 626
------- ------- ------- ------- ------ ------- ------
Total mortgage loans.................................... 5,014 7,714 6,458 12,655 8,886 6,560 47,287
Commercial loans.......................................... 3,369 628 12 33 -- -- 4,042
Agriculture loans......................................... 2,787 282 102 -- -- -- 3,171
Consumer and other loans.................................. 3,801 3,648 1,066 139 18 5 8,677
------- ------- ------- ------- ------ ------- -------
Total loans............................................ $14,971 $12,272 $7,638 $12,827 $8,904 $6,565 $63,177
======= ======= ======= ======= ====== ======= =======
</TABLE>
The following table sets forth the dollar amount of all loans due after
September 30, 1999, which have fixed interest rates and have floating or
adjustable interest rates.
<TABLE>
<CAPTION>
Fixed- Floating- or
Rates Adjustable-Rates
----------- ----------------
Total (In Thousands)
-------
<S> <C> <C>
Mortgage loans:
One- to four-family...................... $ 7,563 $31,477
Commercial real estate and multi-family.. 1,214 1,404
Land..................................... 148 467
Construction............................. -- --
------- -------
Total mortgage loans.................. 8,925 33,348
Commercial loans........................... 673 --
Agriculture loans.......................... 385 --
Consumer and other loans................... 4,875 --
------- -------
Total................................. $14,858 $33,348
======= =======
</TABLE>
Scheduled contractual principal repayments of loans do not reflect the
actual life of such assets. The average life of loans ordinarily is
substantially less than their contractual terms because of prepayments. The
average life of mortgage loans tends to increase, however, when current mortgage
loan market rates are higher than rates on existing mortgage loans and,
conversely, decrease when rates on existing mortgage loans are higher than
current mortgage loan market rates.
RESIDENTIAL REAL ESTATE LENDING. The primary lending activity of the
Company is the origination of mortgage loans to enable borrowers to purchase
existing one- to four-family homes. The Company presently originates for
retention in its portfolio both adjustable rate mortgage ("ARM") loans with
terms of up to 25 years and fixed-rate mortgage loans with terms of up to 10
years. Borrower demand for ARM loans versus fixed-rate mortgage loans is a
function of the level of interest rates, the expectations of changes in the
level of interest rates and the difference between the initial interest rates
and fees charged for each type of loan. The relative amount of fixed-rate
mortgage loans and ARM loans that can be originated at any time is largely
determined by the demand for each in a competitive environment.
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<PAGE>
The loan fees charged, interest rates and other provisions of the Company's
ARM loans are determined on the basis of its own pricing criteria and
competitive market conditions. The Company originates one-year ARM loans
secured by owner-occupied residences whose interest rates and payments generally
are adjusted annually to a rate typically equal to 2.875% above the one-year
constant maturity U.S. Treasury ("CMT") index. The Company occasionally offers
ARM loans with initial rates below those that would prevail under the foregoing
computations, determined by the Company based on market factors and competitive
rates for loans having similar features offered by other lenders for such
initial periods. At September 30, 1998, the initial interest rate on ARM loans
offered by the Bank ranged from 6.00% to 7.50% per annum. The periodic interest
rate cap (the maximum amount by which the interest rate may be increased or
decreased in a given period) on the Company's ARM loans is generally 1% per
adjustment period and the lifetime interest rate cap is generally 5% over the
initial interest rate of the loan.
The Company does not originate negative amortization loans. The terms and
conditions of the ARM loans offered by the Company, including the index for
interest rates, may vary from time to time. The Company believes that the
adjustment features of its ARM loans provide flexibility to meet competitive
conditions as to initial rate concessions while preserving the Company's
objectives by limiting the duration of the initial rate concession.
A significant portion of the Company's residential mortgage loans are not
readily saleable in the secondary market because they are not originated in
accordance with the purchase requirements of Freddie Mac or Fannie Mae. Although
such loans satisfy the Company's underwriting requirements, they are non-agency-
conforming because they do not satisfy collateral requirements, income and debt
ratios, acreage limits, or various other requirements imposed by the Freddie Mac
and Fannie Mae. In addition, substantially all of the Company's ARM loans have
periodic interest rate caps of 1% per adjustment period and 5% lifetime over the
initial loan interest rate, while Freddie Mac and Fannie Mae secondary market
guidelines require higher adjustment periods and lifetime caps of 2% and 6%,
respectively. Accordingly, the Company's non-agency-conforming loans could be
sold only after incurring certain costs and/or discounting the purchase price.
The Company however, currently does not intend to sell its loans. The Company
has historically found that its origination of non-agency-conforming loans has
not resulted in high amounts of non-performing loans. In addition, the Company
believes that these loans satisfy a need in the Company's local community. As a
result, the Company intends to continue to originate such non-agency-conforming
loans.
The retention of ARM loans in the Company's loan portfolio helps reduce the
Company's exposure to changes in interest rates. There are, however,
unquantifiable credit risks resulting from the potential of increased costs due
to changed rates to be paid by the customer. It is possible that during periods
of rising interest rates the risk of default on ARM loans may increase as a
result of repricing and the increased costs to the borrower. Furthermore,
because the ARM loans originated by the Company generally provide, as a
marketing incentive, for initial rates of interest below the rates that would
apply were the adjustment index used for pricing initially (discounting), these
loans are subject to increased risks of default or delinquency. Another
consideration is that although ARM loans allow the Company to increase the
sensitivity of its asset base to changes in interest rates, the extent of this
interest sensitivity is limited by the periodic and lifetime interest rate
adjustment limits. Because of these considerations, the Company has no
assurance that yields on ARM loans will be sufficient to offset increases in the
Company's cost of funds.
While fixed-rate single-family residential real estate loans are normally
originated with up to 10 year terms, such loans typically remain outstanding for
substantially shorter periods. This is because borrowers often prepay their
loans in full upon sale of the property pledged as security or upon refinancing
the original loan. In addition, some mortgage loans in the Company's loan
portfolio contain due-on-sale clauses providing that the Company may declare the
unpaid amount due and payable upon the sale of the property securing the loan.
Typically, the Company enforces these due-on-sale clauses to the extent
permitted by law and as business judgment dictates. Thus, average loan maturity
is a function of, among other factors, the level of purchase and sale activity
in the real estate market, prevailing interest rates and the interest rates
payable on outstanding loans.
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<PAGE>
The Company generally requires title insurance insuring the status of its
lien on all of the real estate secured loans. The Company also requires that
fire and extended coverage casualty insurance (and, if appropriate, flood
insurance) be maintained in an amount at least equal to the outstanding loan
balance.
Appraisals are obtained on all properties and are conducted by independent
fee appraisers approved by the Board of Directors of each of its banking
subsidiaries. The Company's lending policies generally limit the maximum loan-
to-value ratio on mortgage loans secured by owner-occupied properties to 80% of
the lesser of the appraised value or the purchase price, with the condition that
the loan-to-value ratio may be increased to 90% provided that private mortgage
insurance coverage is obtained for the amount in excess of 80%.
INCOME PROPERTY LENDING. Historically, the Company has engaged in limited
amounts of commercial real estate and multi-family lending (collectively,
"income property lending"). The Company does not actively solicit income
property loans but generally extends them as an accommodation to existing
customers and intends to continue to do so in the future. At September 30,
1998, income property loans aggregated $3.7 million, or 5.84% of the gross loan
portfolio.
The average principal balance of the loans in the Company's income property
loan portfolio was approximately $3.7 million at September 30, 1998.
Substantially all of the income property loans are secured by properties located
in the Company's market area. Such properties include residential properties of
five or more units, strip shopping malls generally containing between two and
six store fronts, churches, and professional offices. Income property loans are
generally made for terms of 20 years with five- to 10-year balloon payments and
at variable interest rates that adjust annually.
Income property loans generally involve greater risks than one- to four-
family residential mortgage loans. Payments on loans secured by such properties
often depend on successful operation and management of the properties. Repayment
of such loans may be subject to a greater extent to adverse conditions in the
real estate market or the economy. The Company seeks to minimize these risks
in a variety of ways, including limiting the size of such loans, limiting the
maximum loan-to-value ratio to 70% and strictly scrutinizing the financial
condition of the borrower, the quality of the collateral and the management of
the property securing the loan. All of the properties securing the Company's
income property loans are inspected by the Company's lending personnel before
the loan is made. The Company also obtains appraisals on each property in
accordance with applicable regulations.
CONSTRUCTION LENDING. The Company occasionally originates residential
construction loans to individuals or local builders to construct one- to four-
family homes. At September 30, 1998, construction loans totalled $626,000, or
.99% of the gross loan portfolio.
Substantially all construction loans made to individuals provide for the
Company to originate a permanent loan upon the completion of construction, which
is generally an ARM loan as described under "-- Lending Activities --
Residential Real Estate Lending." The origination fee for construction loans is
generally 1.5% of the principal amount. Construction loans are generally made
for terms of up to six months. Loans to builders are made less frequently and
may be for the construction of a pre-sold home or may be a loan to construct a
speculative home (i.e., a home for which no purchaser has been identified).
Loans to builders are generally limited to local builders well known to the
Company.
Construction lending is generally considered to involve a higher level of
risk as compared to one- to four-family residential permanent lending because of
the inherent difficulty in estimating both a property's value at completion of
the project and the estimated cost of the project. The nature of these loans is
such that they are generally more difficult to evaluate and monitor. If the
estimate of value proves to be inaccurate, the Company may be confronted at, or
prior to, the maturity of the loan, with a project whose value is insufficient
to assure full repayment. Loans for the construction of speculative homes carry
more risk because the payoff for the loan is dependent on the builder's ability
to sell the property prior to the time that the construction loan is due.
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<PAGE>
LAND LENDING. The Company originates loans secured by farm residences and
combinations of farm residences and farm real estate. The Company also
originates loans for the acquisition of land upon which the purchaser can then
build or upon which the purchaser makes improvements necessary to build upon or
to sell as improved lots. At September 30, 1998, the land loan portfolio
totalled $653,000, or 1.03% of total gross loans, substantially all of which
were secured by properties located in the Company's market area. Land loans
are generally made for the same terms and at the same interest rates as those
offered on income property loans, except that the loan-to-value ratio is
generally limited to 60%.
Loans secured by farm real estate generally involve greater risks than one-
to four-family residential mortgage loans. Payments on loans secured by such
properties may, in some instances, be dependent on farm income from the
properties. To address this risk, the Company does not consider farm income
when qualifying borrowers. In addition, such loans are more difficult to
evaluate. If the estimate of value proves to be inaccurate, the Company may be
confronted with a property the value of which is insufficient to assure full
repayment in the event of default and foreclosure.
AGRICULTURAL LENDING. At September 30, 1998, the agricultural loan
portfolio totalled $3.2 million or 5.02% of total gross loans. The Company
presently originates both adjustable-rate and fixed-rate loans secured by
farmland located in the Company's market area.The Company offers adjustable-rate
loans that adjust monthly, quarterly and annually with maturities up to a 25-
year term. The Company also offers fixed-rate loans with a ten-year term and a
ten-year amortization schedule. The Company also makes agricultural operating
loans. Agricultural operating loans or lines generally are made for a term of
one year and are usually secured by a first or second mortgage, or liens on
property, farm equipment, grain, or growing crops. Personal guarantees are
frequently required for loans made to corporations and other business entities.
The agruiculture loan portfolio is diversified and there is no concentration to
any one borrower.
In originating an agricultural real estate loan, the Company considers the
debt service coverage of the borrower's cash flow, the amount of working capital
available to the borrower, the financial history of the farmer and the appraised
value of the underlying property as well as the Company's experience with and
knowledge of the borrower. An environmental assessment is also performed. The
maximum loan-to-value for agricultural real estate loans is 75%.
The Company is approved to originate agricultural real estate and operating
loans with guarantees from USDA-FMHA up to a maximum of 90% of the principal and
interest. Once the guaranteed loan has been funded, the Company retains the
loan in its loan portfolio.
Agricultural lending affords the Company the opportunity to earn yields
higher than those obtainable on residential real estate lending. However,
agricultural lending involves a greater degree of risk than residential real
estate loans. Payments on agricultural loans are dependent on the successful
operation or management of the farm property securing the loan. The success of
the farm may be affected by many factors outside the control of the farm
borrower, including adverse weather conditions that limit crop yields (such as
hail, drought and floods), declines in market prices for agricultural products
and the impact of government regulations (including changes in price supports,
subsidies and environmental regulations). In addition, many farms are dependent
on a limited number of key individuals whose injury or death may significantly
affect the successful operation of the farm.
The risk of crop damage by weather conditions can be reduced by the farmer
with multi-peril crop insurance which can guarantee set yields to provide
certainty of repayment. Unless the circumstances of the borrower merit
otherwise, the Company generally does not require its borrowers to procure
multi-peril crop or hail insurance. Farmers may mitigate the effect of price
declines through the use of futures contracts, options or forward contracts.
The Company does not monitor or require the use by borrowers of these
instruments.
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<PAGE>
COMMERCIAL LENDING Commercial business loans generally include equipment
loans with terms ranging up to seven years and working capital lines of credit
secured by inventory and accounts receivable. Working capital lines of credit
are generally renewable and made for a one-year term with a requirement that the
borrower extinguish any outstanding balance for a particular time period during
the year. Interest rates on commercial business loans are generally indexed to
the prime rate or an internal base rate. The Company generally requires annual
financial statements from its commercial business borrowers and personal
guarantees if the borrower is a corporation.
Commercial business lending generally involves greater risk than residential
mortgage lending and involves risks that are different from those associated
with residential, commercial and multi-family real estate lending. Real estate
lending is generally considered to be collateral based lending with loan amounts
based on predetermined loan to collateral values and liquidation of the
underlying real estate collateral is viewed as the primary source of repayment
in the event of borrower default. Although commercial business loans are often
collateralized by equipment, inventory, accounts receivable or other business
assets, the liquidation of collateral in the event of a borrower default is
often not a sufficient source of repayment because accounts receivable may be
uncollectible and inventories and equipment may be obsolete or of limited use,
among other things. Accordingly, the repayment of a commercial business loan
depends primarily on the creditworthiness of the borrower (and any guarantors),
while liquidation of collateral is a secondary and often insufficient source of
repayment.
CONSUMER LENDING. Consumer lending has traditionally been a small part of
the Company's business. However, with the acquistion of Lafayette County Bank,
consumer loans have become a larger portion of the Company's loan portfolio.
Consumer loans generally have shorter terms to maturity and higher interest
rates than mortgage loans. The Company's consumer loans consist primarily of
home equity loans, deposit account loans, automobile loans and, to a
substantially lesser extent, unsecured loans. At September 30, 1998, the
Company's consumer loans totalled approximately $8.7 million, or 13.7% of the
Company's gross loans. The Company intends to emphasize consumer lending to a
greater degree by primarily cross-selling to its existing customer base.
Consumer loans are made at fixed interest rates and for varying terms.
Automobile and other loans are generally made for terms up to 60 months, while
home equity loans are made for terms up to 10 years. With respect to
substantially all home equity loans, the Company holds the first mortgage on
the borrower's residence.
Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans which are unsecured or secured by
rapidly depreciating assets such as automobiles. In such cases, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance as a result of the greater likelihood
of damage, loss or depreciation. The remaining deficiency often does not
warrant further substantial collection efforts against the borrower beyond
obtaining a deficiency judgment. In addition, consumer loan collections are
dependent on the borrower's continuing financial stability, and thus are more
likely to be adversely affected by job loss, divorce, illness or personal
bankruptcy. Furthermore, the application of various federal and state laws,
including federal and state bankruptcy and insolvency laws, may limit the amount
that can be recovered on such loans.
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<PAGE>
LOAN SOLICITATION AND PROCESSING. Loan applicants come primarily from walk-
in customers and referrals by realtors and previous and present customers of the
Company. Upon receipt of a loan application from a prospective borrower, a
credit report and other data are obtained to verify specific information
relating to the loan applicant's employment, income and credit standing. An
appraisal of the real estate offered as collateral generally is undertaken by a
Board-approved independent fee appraiser who is certified by the State of
Missouri.
Consumer loans may be made by loan officers up to amounts authorized by
the bank's loan policies. All loans over specified amounts must be approved by
the Board of Directors of each banking subsidiary. Management of the Company
believes its local decision-making capabilities and the accessibility of its
senior officers is an attractive quality to customers within its market area.
The Company's loan approval process allows consumer loans to be approved in one
to two days and to expedite the approval and closing of mortgage loans.
LOAN ORIGINATIONS, SALES AND PURCHASES. During the year ended September 30,
1998, the Company's total gross loan originations were $28.1 million.
Consistent with its asset/liability management strategy, the Company's policy
has been to retain in its portfolio nearly all of the loans that it originates.
The Company has occasionally purchased whole loans and loan participation
interests, primarily during periods of reduced loan demand in its market area.
At September 30, 1998, $2.1 million of the Company's gross loan portfolio
consisted of purchased whole loans and purchased participation interests. Any
such purchases are made in conformance with the Company's underwriting
standards. The Company may decide to purchase additional loans in the future
depending upon the demand for mortgage credit in its market area. During the
fiscal year ended September 30, 1998, the Company did not purchase any loans.
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<PAGE>
The following table shows total loans originated, purchased, sold and
repaid during the periods indicated.
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------
1998 1997 1996
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Total loans at beginning
of period......................... $46,109 $45,569 $41,311
------- ------- -------
Loans acquired from Lafayette
County Bank on 10/1/98............ 16,544 -- --
Loans originated:
One- to four-family................. 8,460 7,288 6,589
Commercial real estate and
multi-family...................... 2,962 365 376
Land................................ 189 219 124
Construction........................ 700 1,219 900
------- ------- -------
Total mortgage loans originated.. 12,311 9,091 7,989
Commercial.......................... 3,705 -- --
Agricultural........................ 3,095 -- --
Consumer............................ 8,959 517 793
------- ------- -------
Total loans originated........... 28,067 9,608 8,862
Loans purchased:
One- to four-family................. -- 209 3,815
Commercial real estate and
multi-family..................... -- 318 --
------- ------- -------
Total loans purchased.......... -- 527 3,815
Loans sold:
Commercial real estate............. 119 -- --
Principal repayments................ 27,687 9,595 8,419
------- ------- -------
Net loan activity................... 16,805 540 4,258
------- ------- -------
Total gross loans at
end of period..................... $62,914 $46,109 $45,569
======= ======= =======
</TABLE>
LOAN COMMITMENTS. The Company issues, without fee, commitments for one- to
four-family residential mortgage loans and operating or working capital lines of
credit. Such commitments are made in writing on specified terms and conditions
and at a specified rate of interest. The Company had outstanding net loan
commitments of approximately $1.3 million at September 30, 1998, $1.1 million of
which were for variable rate loans. See Note M of Notes to the Consolidated
Financial Statements.
LOAN ORIGINATION AND OTHER FEES. The Company, in some instances, receives
loan origination fees. Loan fees are a percentage of the principal amount of
the loan which are charged to the borrower for funding the loan. The amount of
fees charged by the Company is generally up to 1% for mortgage loans and 1.5%
for construction loans. Current accounting standards require that origination
fees received (net of certain loan origination costs) for originating loans to
be deferred and amortized into interest income over the contractual life of the
loan. Net deferred fees or costs associated with loans that are prepaid are
recognized as income at the time of prepayment.
-9-
<PAGE>
NON-PERFORMING ASSETS AND DELINQUENCIES. When a loan borrower fails to
make a required loan payment when due, the Company institutes collection
procedures. All loan payments that are contractually due are not considered
delinquent and collection procedures are not instituted until after the "actual
due date" which may vary between 15 to 30 days following the payment due date.
Borrowers are charged a late penalty on all payments made after the actual due
date. On real estate, commercial and agriculture loans, a pre-foreclosure
letter setting forth a date certain (generally 35 days after the date of the
letter) for instituting foreclosure procedures is mailed on or before 90 days
after the actual due date. Foreclosure procedures are instituted on the date
specified in the pre-foreclosure letter if the delinquency continues to that
date.
When a consumer loan borrower fails to make a required payment on a consumer
loan within seven days of the payment due date, the Company institutes
collection procedures. The first notice is mailed to the borrower approximately
seven days following the actual due date. If payment is not promptly received,
second and third notices are mailed to the borrower approximately 15 and 20 days
following the actual due date and the customer is contacted by telephone to
ascertain the cause of the delinquency. If the delinquency remains uncured, the
Company mails a right to cure notice to the borrower on or before 30 days
following the actual due date. In most cases, delinquencies are cured promptly;
however, if by the 90th day of delinquency the delinquency has not been cured,
the Company begins legal action to repossess the collateral. The Company
transfers to repossessed assets the estimated market value of the collateral and
charges to allowance for loan losses with any deficinency at foreclosure.
Except for extenuating circumstances loan past due 120 days are charged off.
The Board of Directors of the Company's banking subsidiaries are informed
monthly as to the status of all loans that are delinquent more than 30 days, the
status on all loans currently in foreclosure, and the status of all foreclosed
and repossessed property owned by the Bank.
The Company has experienced fluctuating and, periodically, relatively high
levels of loan delinquencies. Management attributes this experience primarily to
its practice, consistent with its mission as a community-oriented financial
institution, of offering non-agency-conforming loan products that enable
borrowers with lesser financial resources to otherwise qualify for a loan. The
Company's loss experience, however, as measured by charge offs, has not been
significant. See "-- Lending Activities -- Allowance for Loan Losses." No
assurances can be given as to future delinquency and loss levels.
The following table sets forth information regarding the Company's
delinquent loans, excluding loans 90 days or more delinquent and accounted for
on a non-accrual basis.
<TABLE>
<CAPTION>
At September 30,
------------------------------------------------------------------
1998 1997 1996
----------------------- --------------------- -------------------
Percentage Percentage Percentage
Principal of Gross Principal of Gross Principal of Gross
Balance Loans Balance Loans Balance Loans
----------- ---------- ---------- -------- ---------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans delinquent for:
30 - 59 days.. $ 623 0.99% $ 939 2.02% $1,088 2.38%
60 - 89 days.. 649 1.03 328 0.71 331 0.72
------ ---- ------ ---- ------ ----
$1,272 2.02% $1,267 2.73% $1,419 3.10%
====== ==== ====== ==== ====== ====
</TABLE>
-10-
<PAGE>
The following table sets forth information with respect to the Company's
non-performing assets at the dates indicated. The Company had no restructured
loans within the meaning of Statement of Financial Accounting Standards ("SFAS")
No. 15, at any of the dates indicated. However, at September 30, 1998, there
were loans totalling $57,000 which were past due contractually 90 days or more
as to principal or interest that were still accruing interest. In the opinion
of management collection of principal and interest on these loans is expected
to resume and sufficient collateral is believed to exist to protect the Company
from any significant loss.
<TABLE>
<CAPTION>
At September 30,
----------------------
1998 1997 1996
------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C>
Loans 90 days or more delinquent
and accounted for on
a non-accrual basis:
Residential real estate.......... $ 248 $ 334 $ 495
Commercial real estate........... 143 -- 106
Commercial....................... 15 -- --
Consumer......................... 118 60 177
----- ----- -----
Total non-accrual loans........ 524 394 778
Real estate owned................. -- -- --
----- ----- -----
Total non-performing assets....... $ 524 $ 394 $ 778
===== ===== =====
Total non-performing loans
to net loans.................... 0.84% 0.86% 1.33%
===== ===== =====
Total non-performing loans
to total assets................. 0.56% 0.67% 1.26%
===== ===== =====
Total non-performing assets to
total assets.................... 0.56% 0.67% 1.26%
===== ===== =====
</TABLE>
At September 30, 1998, management of the Company was unaware of any material
loans not disclosed in the above table but where known information about
possible credit problems of the borrowers caused management to have serious
doubts as to the ability of such borrowers to comply with their loan repayment
terms at that date and which may result in future inclusion in the non-
performing assets category.
The amount of interest collected in cash and included in the results of
operations on non-accruing loans for the year ended September 30, 1998 amounted
to approximately $38,000, before such loans were placed on non-accrual status.
Had such non-accruing loans been current in accordance with their original
terms, no additional interest income would have been recorded for the year
ended September 30, 1998.
FORECLOSED REAL ESTATE. See Note A of Notes to the Consolidated Financial
Statements for a discussion of the Company's procedures for accounting for
foreclosed real estate. The Company had no foreclosed real estate at September
30, 1998.
ASSET CLASSIFICATION. The Federal regulators have adopted various
regulations regarding problem assets of banking institutions. The regulations
require that each insured institution review and classify its assets on a
regular basis. In addition, in connection with examinations of insured
institutions, bank examiners have authority to identify problem assets and, if
appropriate, require them to be classified. There are three classifications for
problem assets: substandard, doubtful and loss. Substandard assets have one or
more defined weaknesses and are characterized by the distinct possibility that
the insured institution will sustain some loss if the deficiencies are not
corrected. Doubtful assets have the weaknesses of substandard assets with the
additional characteristic that the weaknesses make collection or liquidation in
full on the basis of currently existing facts, conditions and values
questionable, and there is a high
-11-
<PAGE>
possibility of loss. An asset classified as loss is considered uncollectible and
of such little value that continuance as an asset of the institution is not
warranted. If an asset or portion thereof is classified as loss, the insured
institution establishes specific allowances for loan losses for the full amount
of the portion of the asset classified as loss. All or a portion of general loan
loss allowances established to cover possible losses related to assets
classified substandard or doubtful may be included in determining an
institution's regulatory capital, while specific valuation allowances for loan
losses generally do not qualify as regulatory capital. Assets that do not
currently expose the insured institution to sufficient risk to warrant
classification in one of the aforementioned categories but possess weaknesses
are designated "special mention" and are monitored by the Company.
The aggregate amounts of the Company's classified assets and general and
specific loss allowances at the dates indicated, were as follows:
<TABLE>
<CAPTION>
At September 30,
---------------------
1998 1997 1996
------ ----- ------
(In Thousands)
<S> <C> <C> <C>
Loss....................... $ 26 $ 15 $ 59
Doubtful................... 15 -- --
Substandard assets......... 926 350 602
Special mention............ 460 151 67
------ ----- -----
Total classified assets.. $1,427 $ 516 $ 728
====== ===== =====
General loss allowances.... $ 573 $ 206 $ 142
Specific loss allowances... 26 15 59
------ ----- -----
Total allowances......... $ 599 $ 221 $ 201
====== ===== =====
</TABLE>
ALLOWANCE FOR LOAN LOSSES. The Company has established a systematic
methodology for determining provisions for loan losses. The methodology is set
forth in a formal policy and considers the need for an overall general valuation
allowance as well as specific allowances for individual loans.
In originating loans, the Company recognizes that losses will be experienced
and that the risk of loss will vary with, among other things, the type of loan
being made, the creditworthiness of the borrower over the term of the loan,
general economic conditions and, in the case of a secured loan, the quality of
the security for the loan. The Company increases its allowance for loan losses
by charging provisions for loan losses against the Bank's income.
The general valuation allowance is maintained to cover losses inherent in
the portfolio of performing loans. Management reviews the adequacy of the
allowance at least quarterly based on management's assessment of current
economic conditions, past loss and collection experience, and risk
characteristics of the loan portfolio. The amount of the allowance is based on
management's evaluation of the collectibility of the loan portfolio, credit
concentrations, trends in historical loss experience, specific impaired loans
and economic conditions. Allowances for impaired loans are generally determined
based on collateral values or the present value of estimated cash flow.
Specific valuation allowances are established to absorb losses on loans for
which full collectibility may not be reasonably assured. The amount of the
allowance is based on the estimated value of the collateral securing the loan
and other analyses pertinent to each situation.
At September 30, 1998, the Company had an allowance for loan losses of
$599,000, which management believed to be adequate to absorb losses inherent in
the portfolio at that date. Although management believes that it uses the best
information available to make such determinations, future adjustments to the
allowance for loan losses may be necessary and results of operations could be
significantly and adversely affected if circumstances differ substantially from
the assumptions used in making the determinations.
-12-
<PAGE>
While the Company believes it has established its existing allowance for
loan losses in accordance with generally accepted accounting principles, there
can be no assurance that regulators, in reviewing the Company's loan portfolio,
will not request the Company to increase significantly its allowance for loan
losses. In addition, because future events affecting borrowers and collateral
cannot be predicted with certainty, there can be no assurance that the existing
allowance for loan losses is adequate or that substantial increases will not be
necessary should the quality of any loans deteriorate as a result of the factors
discussed above. Any material increase in the allowance for loan losses may
adversely affect the Company's financial condition and results of operations.
The following table sets forth an analysis of the Company's allowance for
loan losses for the periods indicated. Where specific loan loss reserves have
been established, any differences between the loss allowances and the amount of
loss realized has been charged or credited to current income. As indicated by
the table, there has not been any material fluctuations in the allowance for
loan losses. Periodically, however, the allowance for loan losses has been
replenished in response to low level charge offs. No assurances can be given as
to the level of future charge offs.
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------
1998 1997 1996
-------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Allowance at beginning of period.......... $ 221 $ 201 $ 201
------ ------ ------
Allowance acquired from Lafayette
County Bank.............................. 391 -- --
Provision for loan losses................. 26 29 10
Recoveries................................ 22 -- --
Charge-offs:
Residential real estate................... -- -- --
Commercial................................ 26 -- --
Commercial real estate and multi-family... 6 -- --
Construction.............................. -- -- --
Consumer.................................. 29 9 10
------ ------ ------
Total charge-offs..................... 61 9 10
------ ------ ------
Net charge-offs....................... 39 9 10
------ ------ ------
Balance at end of period.................. $ 599 $ 221 $ 201
====== ====== ======
Ratio of allowance to total
loans outstanding at the
end of the period........................ 0.95% 0.48% 0.44%
====== ====== ======
Ratio of net charge-offs to
average loans outstanding
during the period........................ 0.06% 0.02% 0.02%
====== ====== ======
Ratio of allowance to
non-accrual loans........................ 114.31% 56.10% 25.83%
====== ====== ======
</TABLE>
-13-
<PAGE>
The following table sets forth the breakdown of the allowance for loan
losses by loan category for the periods indicated. The portion of the allowance
to each loan category does not necessarily represent the total available for
losses within that category since the total allowance applies to the entire loan
portfolio. The allocation of the allowance to each category is not necessarily
indicative of future losses and does not restrict the use of the allowance to
absorb losses in any other category.
<TABLE>
<CAPTION>
At September 30,
--------------------------------------------------------------
1998 1997 1996
------------------- --------------------- -------------------
% of % of % of
Loans Loans Loans
in Each in Each in Each
Category Category Category
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
------- ----------- ------- ---------- ------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate mortgage:
One- to four-family....... $ 100 66.99% $ 55 85.48% $ 65 88.51%
Commercial and multi-
family................... 125 5.84 61 3.34 59 2.45
Land...................... -- 1.03 -- 1.15 -- 1.07
Construction.............. -- .99 -- 2.37 -- 1.34
Commercial.................. 100 6.40 -- -- --
Agricultural................ 25 5.02 -- -- -- --
Consumer.................... 150 13.73 40 7.66 77 6.63
Unallocated................. 99 -- 65 -- -- --
----- ------ ---- ------ ---- ------
Total allowance for loan
losses................... $ 599 100.00% $221 100.00% $201 100.00%
===== ====== ==== ====== ==== ======
</TABLE>
INVESTMENT ACTIVITIES
The Company is permitted under federal law to invest in various types of
liquid assets, including U.S. Treasury obligations, securities of various
federal agencies and of state and municipal governments, deposits at the FHLB-
Des Moines, certificates of deposit of federally insured institutions, certain
bankers' acceptances and federal funds. Subject to various restrictions, the
Company may also invest a portion of its assets in commercial paper and
corporate debt securities. Savings institutions like B&L Bank are also required
to maintain an investment in FHLB stock.
B&L Bank is required under federal regulations to maintain a minimum amount
of liquid assets. At September 30, 1998, B&L Bank's regulatory liquidity of
18.27% was significantly in excess of the 4% required by OTS regulations.
Management intends to hold all securities in B&L Bank's investment portfolio in
order to enable B&L Bank to provide liquidity for loan funding upon maturity of
such investment securities and to match more closely the interest-rate
sensitivities of its assets and liabilities.
The Board of Directors' of B&L Bank and Lafayette County Bank approved
investment policies and procedures. The investment policies generally limit
investments to U.S. Government and agency securities, municipal bonds,
certificates of deposits, marketable investment grade corporate debt obligations
and mortgage-backed securities. Investments are made based on certain
considerations, which include the interest rate, yield, settlement date and
maturity of the investment, liquidity position, and anticipated cash needs and
sources (which in turn include outstanding commitments, upcoming maturities,
estimated deposits and anticipated loan amortization and repayments). The
effect that the proposed investment would have on the credit and interest rate
risk, and risk-based capital is also given consideration during the evaluation.
-14-
<PAGE>
The Company adopted SFAS No. 115 on October 1, 1993. At September 30, 1998,
the Company's portfolio classified as "held to maturity" and available for sale
contained all of the state and local debt securities and U. S Treasury
securities and the majority of its portfolio of federal agency securities
while the remaining portfolio of federal agency obligations and all of the
mortgage-backed securities are classified as "available for sale." Consistent
with the Company's asset/liability management strategy, at September 30, 1998,
the majority of the investment portfolio matures within five years of that date.
See Note B of Notes to the Consolidated Financial Statements for the specific
classification of securities under SFAS No. 115.
The following table sets forth the composition of the Company's mortgage-
backed securities portfolio at carrying value at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
----------------------------
1998 1997 1996
-------- -------- --------
Carrying Carrying Carrying
Value Value Value
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Government National
Mortgage Association
("GNMA").............. $ 265 $ 290 $ 319
Fannie Mae.............. 224 409 524
Freddie Mac............. 348 970 1,220
----- ------ ------
Total............... $ 837 $1,669 $2,063
===== ====== ======
</TABLE>
The following table sets forth the composition of the Company's investment
securities portfolio and FHLB stock at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
---------------------------------------------------------------------
1998 1997 1996
----------------------- --------------------- ---------------------
Carrying Percent of Carrying Percent of Carrying Percent of
Value Portfolio Value Portfolio Value Portfolio
---------- ----------- -------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Investment securities:
U.S. Government and federal agency
obligations(1)..................... $14,580 84.09% $1,709 40.16% $2,906 49.96%
State and local obligations(1)...... 1,921 11.08 878 20.63 848 14.58
Mortgage-backed securities(1)....... 837 4.83 1,669 39.21 2,063 35.46
------- ------- ------ ------ ------ ------
Total investment securities.......... $17,338 100.00% $4,256 100.00% $5,817 100.00%
======= ======= ====== ====== ====== ======
Capital stock - FHLB- Des Moines(2).. $ 520 $ 464 $ 464
======= ====== ======
</TABLE>
(1) The Company adopted SFAS No. 115 on October 1, 1993. Mortgage-backed
securities and certain U.S. Government and federal agency obligations are
classified as "available-for-sale" and are valued at fair value at
September 30, 1998, 1997 and 1996. State and local obligations and the
balance of U.S. Government and federal agency obligations are classified as
"held-to-maturity" and are reflected at amortized cost.
(2) The dividend yield on the capital stock of the FHLB-Des Moines was 6.75%
for the fiscal year ended September 30, 1998.
-15-
<PAGE>
The following table sets forth the maturities of the investment securities
portfolio at September 30, 1998.
<TABLE>
<CAPTION>
One Year After One To Over Five to After
or Less Five Years Ten Years Ten Years Total Investment Securities
----------- ------------- ------------- ----------- ---------------------------
Book Value Book Value Book Value Book Value Book Value Market Value
----------- ------------- ------------- ----------- ------------ ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Available for sale............ $ -- $ -- $1,300 $ 223 $ 1,523 $ 1,536
U.S. Government and Federal
Agencies.................... 81 -- 48 687 816 837
------ ------- ------ ------ ------- -------
Mortgage-backed securities.... 81 -- 1,348 910 2,339 2,373
Held-to-maturity.............. 3,043 9,468 503 30 13,044 13,093
U.S. Government and Federal
Agencies..................... 141 861 376 543 1,921 2,096
------ ------- ------ ------ ------- -------
State and local obligations... 3,184 10,329 879 573 14,965 15,189
------ ------- ------ ------ ------- -------
Total investment securities... $3,265 $10,329 $2,227 $1,483 $17,304 $17,562
====== ======= ====== ====== ======= -------
Weighted average yield........ 5.74% 5.98% 6.67% 8.13% 6.18%
====== ======= ====== ====== =======
</TABLE>
DEPOSIT ACTIVITIES AND OTHER SOURCES OF FUNDS
GENERAL. Deposits and loan repayments are the major sources of the
Company's funds for lending and other investment purposes. Scheduled loan
repayments are a relatively stable source of funds, while deposit inflows and
outflows and loan prepayments are influenced significantly by general interest
rates and money market conditions. Borrowings through the FHLB-Des Moines may be
used on a short-term basis to compensate for reductions in the availability of
funds from other sources. At September 30, 1998, the Company had no other
borrowing arrangements.
DEPOSIT ACCOUNTS. Substantially all of the Company's depositors are
residents of the State of Missouri. Deposits are attracted from within the
Company's market area through the offering of a broad selection of deposit
instruments, including negotiable order of withdrawal ("NOW") accounts, money
market deposit accounts, regular savings accounts, certificates of deposit and
retirement savings plans. Deposit account terms vary, according to the minimum
balance required, the time periods the funds must remain on deposit and the
interest rate, among other factors. In determining the terms of its deposit
accounts, the Company considers current market interest rates, profitability to
the Company, matching deposit and loan products and its customer preferences and
concerns. The Company reviews its deposit mix and pricing weekly.
The following table sets forth the composition of the Company's deposits at
September 30, 1998.
<TABLE>
<CAPTION>
Percentage
of Total
Checking and Savings Deposits Balance Deposits
- ------------------------------------- -------- ----------
<S> <C> <C>
Demand non-interest bearing $ 4,658 6.1%
NOW accounts 5,920 7.7
Money market accounts 6,670 8.7
Passbook savings accounts 6,328 8.2
------- -----
23,576 30.7
Certificates of Deposits
- -------------------------------------
With balances of less than $100,000 46,724 60.9
With balances in excess of $100,000 6,464 8.4
------- -----
53,188 69.3
------- -----
Total Deposits $76,764 100.0%
======= -----
</TABLE>
-16-
<PAGE>
The following table indicates the amount of the Company's certificates
of deposit of $100,000 or more by time remaining until maturity as of
September 30, 1998.
<TABLE>
<CAPTION>
Maturity Period Amount
--------------- -------------
<S> <C>
(In Thousands)
Three months or less..................... $ 1,118
Over three through six months............ 1,104
Over six through 12 months............... 1,118
Over 12 months........................... 3,124
-------
Total ............................. $ 6,464
=======
</TABLE>
DEPOSIT FLOW. The following table sets forth the balances and changes in
dollar amounts of deposits in the various types of accounts offered by the
Company at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
--------------------------------------------------------------------------------------
1998 1997 1996
------------------------------------ ------------------------------ ----------------
Percent Percent Percent
of Increase of Increase of
Amount Total (Decrease) Amount Total (Decrease) Amount Total
---------------- ------- ---------- ------- -------- ---------- ------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest-bearing....................... $ 4,658 6.07% $ 3,971 $ 687 1.61% $ 182 $ 505 1.20%
NOW checking............................... 5,920 7.71 4,848 1,072 2.51 100 972 2.30
Regular savings accounts (1)............... 6,328 8.24 2,447 3,881 9.09 29 3,852 9.12
Money market deposits...................... 6,670 8.69 4,255 2,415 5.66 333 2,082 4.93
------- ------ ------- ------- ------ ----- ------- ------
23,576 30.71 15,521 8,055 18.87 644 7,411 17.55
Fixed-rate certificates which mature (1):
Within 1 year............................ 28,910 37.66 9,487 19,423 45.49 557 18,866 44.67
After 1 year, but within 2 years......... 10,033 13.07 4,703 5,330 12.48 (986) 6,316 14.95
After 2 years, but within 5 years........ 13,534 17.63 3,994 9,540 22.35 442 9,098 21.54
Certificates maturing thereafter........... 711 .93 365 346 0.81 (200) 546 1.29
------- ------ ------- ------- ------ ----- ------- ------
53,188 69.29 18,549 34,639 81.13 (187) 34,826 82.45
------- ------ ------- ------- ------ ----- ------- ------
Total..................... $76,764 100.00% $34,070 $42,694 100.00% $ 457 $42,237 100.00%
======= ====== ======= ======= ====== ===== ======= ======
</TABLE>
- ----------------------------
(1) Included in savings accounts and certificate balances were individual
retirement account ("IRA") balances of $6,199,000, $3,782,000 and
$3,567,000 at September 30, 1998, 1997 and 1996, respectively.
TIME DEPOSITS BY RATES. The following table sets forth the time deposits
in the Company classified by rates at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
--------------------------
1998 1997 1996
------- ------- --------
(In Thousands)
<S> <C> <C> <C>
3.00 - 3.99%.... $ 667 $ 22 $ 8
4.00 - 4.99%.... 403 229 913
5.00 - 5.99%.... 36,786 22,909 20,863
6.00 - 6.99%.... 8,988 5,362 7,222
7.00 - 7.99%.... 2,416 2,381 2,230
8.00 - 8.99%.... 3,906 3,736 3,590
9.00% and over.. 22 -- --
------- ------- -------
Total........ $53,188 $34,639 $34,826
======= ======= =======
</TABLE>
-17-
<PAGE>
The following table sets forth the amount and maturities of time
deposits at September 30, 1998.
<TABLE>
<CAPTION>
Amount Due Percent
--------------------------------------------------------- of Total
Less Than 1-2 2-3 3-4 After Certificate
One Year Years Years Years 4 Years Total Accounts
---------- --------- --------- ---------- ----------- ---------- -----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
3.00 - 3.99% $ 667 $ -- $ -- $ -- $ -- $ 667 1.25%
4.00 - 4.99% 403 -- -- -- -- 403 .76
5.00 - 5.99% 26,116 7,359 2,612 264 977 37,328 70.18
6.00 - 6.99% 1,313 2,014 2,403 1,371 1,495 8,596 16.16
7.00 - 7.99% 388 660 1,154 27 37 2.266 4.26
8.00 - and over 22- - 3,906 -- -- 3,928 7.39
------- ------- ------- ---------- ----------- ------- ------
Total $28,909 $10,033 $10,046 $1,646 $2.509 $53,188 100.00%
======= ======= ======= ========== =========== ======= ======
</TABLE>
DEPOSIT ACTIVITIES. The following table sets forth the deposit
activities of the Company for the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------
1998 1997 1996
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Beginning balance................................. $42,694 $42,237 $42,401
------- ------- -------
Deposits acquired in the acquisition
of Lafayette County Bank......................... 31,355 --- ---
Net deposits (withdrawals)
before interest credited......................... (777) (1,220) (1,765)
Interest credited................................. 3,492 1,677 1,601
------- ------- -------
Net increase (decrease) in
deposits......................................... 34,070 457 (164)
------- ------- -------
Ending balance.................................... $76,764 $42,694 $42,237
======= ======= =======
</TABLE>
BORROWINGS. The Company has the ability to use advances from the FHLB-Des
Moines to supplement its supply of lendable funds and to meet deposit withdrawal
requirements. The FHLB-Des Moines functions as a central reserve bank providing
credit for savings and loan associations and certain other member financial
institutions. As a member of the FHLB-Des Moines, the Company's banking
subsidiaries are authorized to apply for advances on the security of such stock
and certain of its mortgage loans and other assets (principally securities that
are obligations of, or guaranteed by, the U.S. Government) provided certain
creditworthiness standards have been met. Advances are made pursuant to several
different credit programs. Each credit program has its own interest rate and
range of maturities. Depending on the program, limitations on the amount of
advances are based on the financial condition of the member institution and the
adequacy of collateral pledged to secure the credit.
-18-
<PAGE>
The Company had average advances totalling $307,000 during the year
ended September 30, 1998. The following table sets forth the amount and
maturity of advances at September 30, 1998:
<TABLE>
<CAPTION>
Advance Interest Maturity
Date Rate Amount Date
<S> <C> <C> <C>
March 15, 1994 6.30% $ 35,000 March 15, 1999
March 15, 1994 6.50% 35,000 March 15, 2000
March 15, 1994 6.70% 35,000 March 15, 2001
March 15, 1994 6.80% 35,000 March 15, 2002
--------
$140,000
========
</TABLE>
During the years ended September 30, 1997 and 1996, B&L Bank had no borrowings
from the FHLB-Des Moines.
REGULATION
GENERAL
B&L Bank is subject to extensive regulation, examination and supervision by
the OTS as its chartering agency, and the FDIC, as the insurer of its deposits.
The activities of federal savings institutions are governed by the Home Owners'
Loan Act, as amended (the "HOLA") and, in certain respects, the Federal Deposit
Insurance Act ("FDIA") and the regulations issued by the OTS and the FDIC to
implement these statutes. As a state bank that is not a member of the Federal
Reserve, Lafayette County Bank is subject to extensive regulation, examination
and supervision by the State of Missouri and the FDIC. These laws and
regulations delineate the nature and extent of the activities in which
depository institutions may engage. Lending activities and other investments
must comply with various statutory and regulatory capital requirements. In
addition, the Banks' relationship with their depositors and borrowers is also
regulated to a great extent, especially in such matters as the ownership of
deposit accounts and the form and content of the Banks' mortgage documents. The
Banks must file reports with their regulators concerning their activities and
financial condition in addition to obtaining regulatory approvals prior to
entering into certain transactions such as mergers with, or acquisitions of,
other financial institutions. There are periodic examinations by regulatory
authorities to review the Banks' compliance with various regulatory
requirements. The regulatory structure also gives the regulatory authorities
extensive discretion in connection with their supervisory and enforcement
activities and examination policies, including policies with respect to the
classification of assets and the establishment of adequate loan loss reserves
for regulatory purposes. Any change in such policies could have a material
adverse impact on the Banks and their operations.
FEDERAL REGULATION
OFFICE OF THRIFT SUPERVISION. The OTS is an office in the Department of
the Treasury subject to the general oversight of the Secretary of the Treasury.
The OTS generally possesses the supervisory and regulatory duties and
responsibilities formerly vested in the Federal Home Loan Bank Board. Among
other functions, the OTS issues and enforces regulations affecting federally
insured savings associations and regularly examines these institutions.
FEDERAL HOME LOAN BANK SYSTEM. The FHLB System, consisting of 12 FHLBs, is
under the jurisdiction of the Federal Housing Finance Board ("FHFB"). The
designated duties of the FHFB are to supervise the FHLBs, to ensure that the
FHLBs carry out their housing finance mission, to ensure that the FHLBs remain
adequately capitalized and able to raise funds in the capital markets, and to
ensure that the FHLBs operate in a safe and sound manner. B&L Bank, as a member
of the FHLB-Des Moines, is required to acquire and hold shares of capital stock
in the FHLB-Des Moines in an amount equal to the greater of (i) 1.0% of the
aggregate outstanding principal amount of residential mortgage loans, home
purchase contracts and similar obligations at the beginning of each year, or
(ii) 1/20 of its advances (i.e., borrowings) from the FHLB-Des Moines. B&L Bank
is in compliance with this requirement with an investment in FHLB-Des Moines
stock of $412,600 at September 30, 1998. Among other benefits, the FHLB-Des
Moines provides a central credit facility primarily for member institutions. It
is funded primarily from proceeds derived from the sale
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<PAGE>
of consolidated obligations of the FHLB System. It makes advances to members in
accordance with policies and procedures established by the FHFB and the Board of
Directors of the FHLB-Des Moines.
FEDERAL DEPOSIT INSURANCE CORPORATION. The FDIC is an independent federal
agency that insures the deposits, up to prescribed statutory limits, of
depository institutions. The FDIC currently maintains two separate insurance
funds:BIF and the SAIF. As insurer of the Banks' deposits, the FDIC has
examination, supervisory and enforcement authority over the Banks.
B&L Bank's accounts are insured by the SAIF and Lafayette County Bank's
deposits are insured by the BIF, each to the maximum extent permitted by law.
The Banks pay deposit insurance premiums based on a risk-based assessment system
established by the FDIC. Under applicable regulations, institutions are
assigned to one of three capital groups that are based solely on the level of an
institution's capital -- "well capitalized," "adequately capitalized," and
"undercapitalized" -- which are defined in the same manner as the regulations
establishing the prompt corrective action system, as discussed below. These
three groups are then divided into three subgroups which reflect varying levels
of supervisory concern, from those which are considered to be healthy to those
which are considered to be of substantial supervisory concern. The matrix so
created results in nine assessment risk classifications.
Pursuant to the Deposit Insurance Funds Act ("DIF Act"), which was enacted
on September 30, 1996, the FDIC imposed a special assessment on each depository
institution with SAIF-assessable deposits which resulted in the SAIF achieving
its designated reserve ratio. In connection therewith, the FDIC reduced the
assessment schedule for SAIF members, effective January 1, 1997, to a range of
0% to 0.27%, with most institutions, including B&L Bank, paying 0%. This
assessment schedule is the same as that for the BIF, which reached its
designated reserve ratio in 1995. In addition, since January 1, 1997, SAIF
members are charged an assessment of .065% of SAIF-assessable deposits for the
purpose of paying interest on the obligations issued by the Financing
Corporation ("FICO") in the 1980s to help fund the thrift industry cleanup.
BIF-assessable deposits will be charged an assessment to help pay interest on
the FICO bonds at a rate of approximately .013% until the earlier of December
31, 1999 or the date upon which the last savings association ceases to exist,
after which time the assessment will be the same for all insured deposits.
The DIF Act provides for the merger of the BIF and the SAIF into the
Deposit Insurance Fund on January 1, 1999, but only if no insured depository
institution is a savings association on that date. The DIF Act contemplates the
development of a common charter for all federally chartered depository
institutions and the abolition of separate charters for national banks and
federal savings associations. It is not known what form the common charter may
take and what effect, if any, the adoption of a new charter would have on the
operation of B&L Bank.
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged or
is engaging in unsafe or unsound practices, is in an unsafe or unsound condition
to continue operations, or has violated any applicable law, regulation, order or
any condition imposed by an agreement with the FDIC. It also may suspend
deposit insurance temporarily during the hearing process for the permanent
termination of insurance, if the institution has no tangible capital. If
insurance of accounts is terminated, the accounts at the institution at the time
of termination, less subsequent withdrawals, shall continue to be insured for a
period of six months to two years, as determined by the FDIC. Management is
aware of no existing circumstances that could result in termination of the
deposit insurance of the Banks.
LIQUIDITY REQUIREMENTS. Under OTS regulations, each savings institution is
required to maintain an average daily balance of liquid assets (cash, certain
time deposits and savings accounts, bankers' acceptances, and specified U.S.
Government, state or federal agency obligations and certain other investments)
equal to a monthly average of not less than a specified percentage (currently
4.0%) of its net withdrawable accounts plus short-term borrowings. Monetary
penalties may be imposed for failure to meet liquidity requirements.
PROMPT CORRECTIVE ACTION. Under the FDIA, each federal banking agency is
required to implement a system of prompt corrective action for institutions that
it regulates. The federal banking agencies have promulgated substantially
similar regulations to implement this system of prompt corrective action. Under
the regulations, an
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<PAGE>
institution shall be deemed to be (i) "well capitalized" if it has a total risk-
based capital ratio of 10.0% or more, has a Tier I risk-based capital ratio of
6.0% or more, has a leverage ratio of 5.0% or more and is not subject to
specified requirements to meet and maintain a specific capital level for any
capital measure; (ii) "adequately capitalized" if it has a total risk-based
capital ratio of 8.0% or more, has a Tier I risk-based capital ratio of 4.0% or
more, has a leverage ratio of 4.0% or more (3.0% under certain circumstances)
and does not meet the definition of "well capitalized;" (iii) "undercapitalized"
if it has a total risk-based capital ratio that is less than 8.0%, has a Tier I
risk-based capital ratio that is less than 4.0% or has a leverage ratio that is
less than 4.0% (3.0% under certain circumstances); (iv) "significantly
undercapitalized" if it has a total risk-based capital ratio that is less than
6.0%, has a Tier I risk-based capital ratio that is less than 3.0% or has a
leverage ratio that is less than 3.0%; and (v) "critically undercapitalized" if
it has a ratio of tangible equity to total assets that is equal to or less than
2.0%.
A federal banking agency may, after notice and an opportunity for a
hearing, reclassify a well capitalized institution as adequately capitalized and
may require an adequately capitalized institution or an undercapitalized
institution to comply with supervisory actions as if it were in the next lower
category if the institution is in an unsafe or unsound condition or has received
in its most recent examination, and has not corrected, a less than satisfactory
rating for asset quality, management, earnings or liquidity. (Regulatory
authorities may not, however, reclassify a significantly undercapitalized
institution as critically undercapitalized.)
An institution generally must file a written capital restoration plan that
meets specified requirements, as well as a performance guaranty by each company
that controls the institution, with the appropriate federal banking agency
within 45 days of the date that the institution receives notice or is deemed to
have notice that it is undercapitalized, significantly undercapitalized or
critically undercapitalized. Immediately upon becoming undercapitalized, an
institution shall become subject to various mandatory and discretionary
restrictions on its operations.
At September 30, 1998, the Banks were categorized as "well capitalized"
under the applicable prompt corrective action regulations.
STANDARDS FOR SAFETY AND SOUNDNESS. The federal banking regulatory
agencies have prescribed, by regulation, standards for all insured depository
institutions relating to: (i) internal controls, information systems and
internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv)
interest rate risk exposure; (v) asset growth; (vi) asset quality; (vii)
earnings; and (viii) compensation, fees and benefits ("Guidelines"). The
Guidelines set forth the safety and soundness standards that the federal banking
agencies use to identify and address problems at insured depository institutions
before capital becomes impaired. If the appropriate regulatory authority
determines that an institution fails to meet any standard prescribed by the
Guidelines, the agency may require the institution to submit to the agency an
acceptable plan to achieve compliance with the standard. Federal regulations
establish deadlines for the submission and review of such safety and soundness
compliance plans.
QUALIFIED THRIFT LENDER TEST. All savings associations are required to
meet a qualified thrift lender ("QTL") test to avoid certain restrictions on
their operations. A savings institution that fails to become or remain a QTL
shall either convert to a national bank charter or be subject to the following
restrictions on its operations: (i) the institution may not make any new
investment or engage in activities that would not be permissible for national
banks; (ii) the institution may not establish any new branch office where a
national bank located in the savings institution's home state would not be able
to establish a branch office; (iii) the institution shall be ineligible to
obtain new advances from any FHLB; and (iv) the payment of dividends by the
institution shall be subject to the rules regarding the statutory and regulatory
dividend restrictions applicable to national banks. Also, beginning three years
after the date on which the savings institution ceases to be a QTL, the savings
institution would be prohibited from retaining any investment or engaging in any
activity not permissible for a national bank and would be required to repay any
outstanding advances to any FHLB. In addition, within one year of the date on
which a savings association controlled by a company ceases to be a QTL, the
company must register as a bank holding company and become subject to the rules
applicable to such companies. A savings institution may requalify as a QTL if
it thereafter complies with the QTL test.
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<PAGE>
Currently, the QTL test requires that either an institution qualify as a
domestic building and loan association under the Internal Revenue Code or that
65% of an institution's "portfolio assets" (as defined) consist of certain
housing and consumer-related assets on a monthly average basis in nine out of
every 12 months. Assets that qualify without limit for inclusion as part of the
65% requirement are loans made to purchase, refinance, construct, improve or
repair domestic residential housing and manufactured housing; home equity loans;
mortgage-backed securities (where the mortgages are secured by domestic
residential housing or manufactured housing); FHLB stock; direct or indirect
obligations of the FDIC; and loans for educational purposes, loans to small
businesses and loans made through credit cards. In addition, the following
assets, among others, may be included in meeting the test subject to an overall
limit of 20% of the savings institution's portfolio assets: 50% of residential
mortgage loans originated and sold within 90 days of origination; 100% of
consumer loans; and stock issued by Freddie Mac or Fannie Mae. Portfolio assets
consist of total assets minus the sum of (i) goodwill and other intangible
assets, (ii) property used by the savings institution to conduct its business,
and (iii) liquid assets up to 20% of the institution's total assets. At
September 30, 1998, B&L Bank was in compliance with the QTL test.
OTS CAPITAL REQUIREMENTS. Under OTS regulations a savings association must
satisfy three minimum capital requirements: core capital, tangible capital and
risk-based capital. Savings associations must meet all of the standards in
order to comply with the capital requirements.
OTS capital regulations establish a 3% core capital or leverage ratio
(defined as the ratio of core capital to adjusted total assets). Core capital
is defined to include common stockholders' equity, noncumulative perpetual
preferred stock and any related surplus, and minority interests in equity
accounts of consolidated subsidiaries, less (i) any intangible assets, except
for certain qualifying intangible assets; (ii) certain mortgage servicing
rights; and (iii) equity and debt investments in subsidiaries that are not
"includable subsidiaries," which is defined as subsidiaries engaged solely in
activities not impermissible for a national bank, engaged in activities
impermissible for a national bank but only as an agent for its customers, or
engaged solely in mortgage-banking activities. In calculating adjusted total
assets, adjustments are made to total assets to give effect to the exclusion of
certain assets from capital and to account appropriately for the investments in
and assets of both includable and non-includable subsidiaries. Institutions
that fail to meet the core capital requirement would be required to file with
the OTS a capital plan that details the steps they will take to reach
compliance. In addition, the OTS's prompt corrective action regulation provides
that a savings institution that has a leverage ratio of less than 4% (3% for
institutions receiving the highest CAMEL examination rating) will be deemed to
be "undercapitalized" and may be subject to certain restrictions. See "--
Federal Regulation-- Prompt Corrective Action."
Savings associations also must maintain "tangible capital" not less than
1.5% of adjusted total assets. "Tangible capital" is defined, generally, as core
capital minus any "intangible assets" other than purchased mortgage servicing
rights.
Savings associations must maintain total risk-based capital equal to at
least 8% of risk-weighted assets. Total risk-based capital consists of the sum
of core and supplementary capital, provided that supplementary capital cannot
exceed core capital, as previously defined. Supplementary capital includes (i)
permanent capital instruments such as cumulative perpetual preferred stock,
perpetual subordinated debt and mandatory convertible subordinated debt, (ii)
maturing capital instruments such as subordinated debt, intermediate-term
preferred stock and mandatory convertible subordinated debt, subject to an
amortization schedule, and (iii) general valuation loan and lease loss
allowances up to 1.25% of risk-weighted assets.
The risk-based capital regulation assigns each balance sheet asset held by
a savings institution to one of four risk categories based on the amount of
credit risk associated with that particular class of assets. Assets not
included for purposes of calculating capital are not included in calculating
risk-weighted assets. The categories range from 0% for cash and securities that
are backed by the full faith and credit of the U.S. Government to 100% for
repossessed assets or assets more than 90 days past due. Qualifying residential
mortgage loans (including multi-family mortgage loans) are assigned a 50% risk
weight. Consumer, commercial, home equity and residential construction loans
are assigned a 100% risk weight, as are nonqualifying residential mortgage loans
and that portion of land loans and nonresidential
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<PAGE>
construction loans that do not exceed an 80% loan-to-value ratio. The book value
of assets in each category is multiplied by the weighing factor (from 0% to
100%) assigned to that category. These products are then totaled to arrive at
total risk-weighted assets. Off-balance sheet items are included in risk-
weighted assets by converting them to an approximate balance sheet "credit
equivalent amount" based on a conversion schedule. These credit equivalent
amounts are then assigned to risk categories in the same manner as balance sheet
assets and included risk-weighted assets.
The OTS has incorporated an interest rate risk component into its
regulatory capital rule. Under the rule, savings associations with "above
normal" interest rate risk exposure would be subject to a deduction from total
capital for purposes of calculating their risk-based capital requirements. A
savings association's interest rate risk is measured by the decline in the net
portfolio value of its assets (i.e., the difference between incoming and
----
outgoing discounted cash flows from assets, liabilities and off-balance sheet
contracts) that would result from a hypothetical 200 basis point increase or
decrease in market interest rates divided by the estimated economic value of B&L
Bank's assets, as calculated in accordance with guidelines set forth by the OTS.
A savings association whose measured interest rate risk exposure exceeds 2% must
deduct an interest rate risk component in calculating its total capital under
the risk-based capital rule. The interest rate risk component is an amount
equal to one-half of the difference between the institution's measured interest
rate risk and 2%, multiplied by the estimated economic value of the Bank's
assets. That dollar amount is deducted from an association's total capital in
calculating compliance with its risk-based capital requirement. Under the rule,
there is a two quarter lag between the reporting date of an institution's
financial data and the effective date for the new capital requirement based on
that data. A savings association with assets of less than $300 million and
risk-based capital ratios in excess of 12% is not subject to the interest rate
risk component, unless the OTS determines otherwise. The rule also provides
that the Director of the OTS may waive or defer an association's interest rate
risk component on a case-by-case basis. Under certain circumstances, a savings
association may request an adjustment to its interest rate risk component if it
believes that the OTS-calculated interest rate risk component overstates its
interest rate risk exposure. In addition, certain "well-capitalized"
institutions may obtain authorization to use their own interest rate risk model
to calculate their interest rate risk component in lieu of the OTS-calculated
amount. The OTS has postponed the date that the component will first be
deducted from an institution's total capital.
FDIC CAPITAL REQUIREMENTS. The FDIC's minimum capital standards applicable
to FDIC-regulated banks and savings banks require the most highly-rated
institutions to meet a "Tier 1" leverage capital ratio of at least 3% of total
assets. Tier 1 (or "core capital") consists of common stockholders' equity,
noncumulative perpetual preferred stock and minority interests in consolidated
subsidiaries minus all intangible assets other than limited amounts of purchased
mortgage servicing rights and certain other accounting adjustments. All other
banks must have a Tier 1 leverage ratio of at least 100 to 200 basis points
above the 3% minimum. The FDIC capital regulations establish a minimum leverage
ratio of not less than 4% for banks that are not highly rated or are
anticipating or experiencing significant growth. Based on the definitions
contained in the FDIC's capital regulations, Lafayette County Bank had a Tier 1
leverage capital ratio of 7.47% as of September 30, 1998.
The FDIC's capital regulations require higher capital levels for banks
which exhibit more than a moderate degree of risk or exhibit other
characteristics which necessitate that higher than minimum levels of capital be
maintained. Any insured bank with a Tier 1 capital to total assets ratio of
less than 2% is deemed to be operating in an unsafe and unsound condition unless
the insured bank enters into a written agreement, to which the FDIC is a party,
to correct its capital deficiency. Insured banks operating with Tier 1 capital
levels below 2% (and which have not entered into a written agreement) are
subject to an insurance removal action. Insured banks operating with lower than
the prescribed minimum capital levels generally will not receive approval of
applications submitted to the FDIC. Also, inadequately capitalized state
nonmember banks will be subject to such administrative action as the FDIC deems
necessary.
FDIC regulations also require that banks meet a risk-based capital
standard. The risk-based capital standard requires the maintenance of total
capital (which is defined as Tier 1 capital and Tier 2 or supplementary capital)
to risk weighted assets of 8% and Tier 1 capital to risk-weighted assets of 4%.
In determining the amount of risk-weighted assets, all assets, plus certain off
balance sheet items, are multiplied by a risk-weight of 0% to 100%, based on the
risks the FDIC believes are inherent in the type of asset or item. The
components of Tier 1 capital are equivalent to those
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discussed above under the 3% leverage requirement. The components of
supplementary capital currently include cumulative perpetual preferred stock,
adjustable-rate perpetual preferred stock, mandatory convertible securities,
term subordinated debt, intermediate-term preferred stock and allowance for
possible loan and lease losses. Allowance for possible loan and lease losses
includable in supplementary capital is limited to a maximum of 1.25% of risk-
weighted assets. Overall, the amount of capital counted toward supplementary
capital cannot exceed 100% of Tier 1 capital. Since September 1995, the FDIC
includes in its evaluation of a bank's capital adequacy an assessment of the
exposure to declines in the economic value of the bank's capital due to changes
in interest rates. However, no measurement framework for assessing the level of
a bank's interest rate risk exposure has been codified. In the future, the FDIC
will issue a proposed rule that would establish an explicit minimum capital
charge for interest rate risk, based on the level of a bank's measured interest
rate risk exposure.
FDIC capital requirements are designated as the minimum acceptable
standards for banks whose overall financial condition is fundamentally sound,
which are well-managed and have no material or significant financial weaknesses.
The FDIC capital regulations state that, where the FDIC determines that the
financial history or condition, including off-balance sheet risk, managerial
resources and/or the future earnings prospects of a bank are not adequate and/or
a bank has a significant volume of assets classified substandard, doubtful or
loss or otherwise criticized, the FDIC may determine that the minimum adequate
amount of capital for that bank is greater than the minimum standards
established in the regulation.
LIMITATIONS ON CAPITAL DISTRIBUTIONS. OTS regulations impose uniform
limitations on the ability of all savings associations to engage in various
distributions of capital such as dividends, stock repurchases and cash-out
mergers. In addition, OTS regulations require B&L Bank to give the OTS 30 days'
advance notice of any proposed declaration of dividends, and the OTS has the
authority under its supervisory powers to prohibit the payment of dividends.
The regulation utilizes a three-tiered approach which permits various levels of
distributions based primarily upon a savings association's capital level.
A Tier 1 savings association has capital in excess of its capital
requirement (both before and after the proposed capital distribution). A Tier 1
savings association may make (without application but upon prior notice to, and
no objection made by, the OTS) capital distributions during a calendar year up
to 100% of its net income to date during the calendar year plus one-half its
surplus capital ratio (i.e., the amount of capital in excess of its requirement)
----
at the beginning of the calendar year or the amount authorized for a Tier 2
association. Capital distributions in excess of such amount require advance
notice to the OTS. A Tier 2 savings association has capital equal to or in
excess of its minimum capital requirement but below its requirement (both before
and after the proposed capital distribution). Such an association may make
(without application) capital distributions up to an amount equal to 75% of its
net income during the previous four quarters depending on how close B&L Bank is
to meeting its capital requirement. Capital distributions exceeding this amount
require prior OTS approval. Tier 3 associations are savings associations with
capital below the minimum capital requirement (either before or after the
proposed capital distribution). Tier 3 associations may not make any capital
distributions without prior approval from the OTS.
B&L Bank currently meets the criteria to be designated a Tier 1 association
and, consequently, could at its option (after prior notice to, and no objection
made by, the OTS) distribute up to 100% of its net income during the calendar
year plus 50% of its surplus capital ratio at the beginning of the calendar year
less any distributions previously paid during the year.
LOANS TO ONE BORROWER. Under the HOLA, savings institutions are generally
subject to the national bank limit on loans to one borrower. Generally, this
limit is 15% of B&L Bank's unimpaired capital and surplus, plus an additional
10% of unimpaired capital and surplus, if such loan is secured by readily-
marketable collateral, which is defined to include certain financial instruments
and bullion. The OTS by regulation has amended the loans to one borrower rule
to permit savings associations meeting certain requirements, including capital
requirements, to extend loans to one borrower in additional amounts under
circumstances limited essentially to loans to develop or complete residential
housing units. At September 30, 1998, B&L Bank's regulatory limit on loans to
one borrower was $1.8 million. At September 30, 1998, B&L Bank's largest
aggregate amount of loans to one borrower was $1.0 million.
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<PAGE>
ACTIVITIES OF SAVINGS ASSOCIATIONS AND THEIR SUBSIDIARIES. A savings
association may establish operating subsidiaries to engage in any activity that
the savings association may conduct directly and may establish service
corporation subsidiaries to engage in certain preapproved activities or, with
approval of the OTS, other activities reasonably related to the activities of
financial institutions. When a savings association establishes or acquires a
subsidiary or elects to conduct any new activity through a subsidiary that the
association controls, the savings association must notify the FDIC and the OTS
30 days in advance and provide the information each agency may, by regulation,
require. Savings associations also must conduct the activities of subsidiaries
in accordance with existing regulations and orders.
The OTS may determine that the continuation by a savings association of its
ownership control of, or its relationship to, the subsidiary constitutes a
serious risk to the safety, soundness or stability of the Bank or is
inconsistent with sound banking practices or with the purposes of the FDIA.
Based upon that determination, the FDIC or the OTS has the authority to order
the savings association to divest itself of control of the subsidiary. The FDIC
also may determine by regulation or order that any specific activity poses a
serious threat to the SAIF. If so, it may require that no SAIF member engage in
that activity directly.
ACTIVITIES AND INVESTMENTS OF INSURED STATE-CHARTERED BANKS. Federal law
generally limits the activities and equity investments of FDIC-insured, state-
chartered banks to those that are permissible for national banks. Under
regulations dealing with equity investments, an insured state bank generally may
not directly or indirectly acquire or retain any equity investment of a type, or
in an amount, that is not permissible for a national bank. An insured state
bank is not prohibited from, among other things, (i) acquiring or retaining a
majority interest in a subsidiary, (ii) investing as a limited partner in a
partnership the sole purpose of which is direct or indirect investment in the
acquisition, rehabilitation or new construction of a qualified housing project,
provided that such limited partnership investments may not exceed 2% of the
bank's total assets, (iii) acquiring up to 10% of the voting stock of a company
that solely provides or reinsures directors', trustees' and officers' liability
insurance coverage or bankers' blanket bond group insurance coverage for insured
depository institutions, and (iv) acquiring or retaining the voting shares of a
depository institution if certain requirements are met.
In addition, an insured state bank (i) that is located in a state which
authorized as of September 30, 1991 investment in common or preferred stock
listed on a national securities exchange ("listed stock") or shares of a
registered investment company ("registered shares"), and (ii) which during the
period beginning September 30, 1990 through November 26, 1991 ("measurement
period") made or maintained investments in listed stocks and registered shares,
may retain whatever shares that were lawfully acquired or held prior to December
19, 1991 and continue to acquire listed stock and registered shares, provided
that the bank does not convert its charter to another form or undergo a change
in control. In order to acquire or retain any listed stock or registered
shares, however, the bank must file a one-time notice with the FDIC which meets
specified requirements and which sets forth the bank's intention to acquire and
retain stocks or shares, and the FDIC must determine that acquiring or retaining
the listed stocks or registered shares will not pose a significant risk to the
deposit insurance fund of which the bank is a member.
FDIC regulations provide that an insured state-chartered bank may not,
directly, or indirectly through a subsidiary, engage as "principal" in any
activity that is not permissible for a national bank unless the FDIC has
determined that such activities would pose no risk to the insurance fund of
which it is a member and the bank is in compliance with applicable regulatory
capital requirements. Any insured state-chartered bank directly or indirectly
engaged in any activity that is not permitted for a national bank must cease the
impermissible activity.
As an insured state-chartered bank, Lafayette County Bank may not,
directly or indirectly, lend to any one borrower an amount or amounts which
exceed 20% of its unimpaired capital, which consist of common stock, capital
surplus, retained earnings and reserves. At September 30, 1998, Lafayette
County Bank's lending limit to any one borrower was $ 640,000. At September
30, 1998, the largest aggregate amount of loans to one borrower, less any
governement guarantees, was $ 268,000.
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TRANSACTIONS WITH AFFILIATES. Savings associations must comply with
Sections 23A and 23B of the Federal Reserve Act relative to transactions with
affiliates in the same manner and to the same extent as if the savings
association were a Federal Reserve member bank. A savings and loan holding
company, its subsidiaries and any other company under common control are
considered affiliates of the subsidiary savings association under the HOLA.
Generally, Sections 23A and 23B: (i) limit the extent to which the insured
association or its subsidiaries may engage in certain covered transactions with
an affiliate to an amount equal to 10% of such institution's capital and surplus
and place an aggregate limit on all such transactions with affiliates to an
amount equal to 20% of such capital and surplus, and (ii) require that all such
transactions be on terms substantially the same, or at least as favorable to the
institution or subsidiary, as those provided to a non-affiliate. The term
"covered transaction" includes the making of loans, the purchase of assets, the
issuance of a guarantee and similar types of transactions. Any loan or
extension of credit by the Bank to an affiliate must be secured by collateral in
accordance with Section 23A.
Three additional rules apply to savings associations: (i) a savings
association may not make any loan or other extension of credit to an affiliate
unless that affiliate is engaged only in activities permissible for bank holding
companies; (ii) a savings association may not purchase or invest in securities
issued by an affiliate (other than securities of a subsidiary); and (iii) the
OTS may, for reasons of safety and soundness, impose more stringent restrictions
on savings associations but may not exempt transactions from or otherwise
abridge Section 23A or 23B. Exemptions from Section 23A or 23B may be granted
only by the Federal Reserve, as is currently the case with respect to all FDIC-
insured banks.
The Banks' authority to extend credit to executive officers, directors and
10% shareholders, as well as entities controlled by such persons, is currently
governed by Sections 22(g) and 22(h) of the Federal Reserve Act, and Regulation
O thereunder. Among other things, these regulations require that such loans be
made on terms and conditions substantially the same as those offered to
unaffiliated individuals and not involve more than the normal risk of repayment.
Regulation O also places individual and aggregate limits on the amount of loans
the Banks may make to such persons based, in part, on the Bank's capital
position, and requires certain board approval procedures to be followed. The
OTS regulations, with certain minor variances, apply Regulation O to savings
institutions.
FEDERAL RESERVE SYSTEM. Regulation D of the Federal Reserve Board
requires all depository institutions that maintain transaction accounts or
nonpersonal time deposits. These reserves may be in the form of cash or non-
interest-bearing deposits with the regional Federal Reserve Bank. NOW accounts
and other types of accounts that permit payments or transfers to third parties
fall within the definition of transaction accounts and are subject to Regulation
D reserve requirements, as are any nonpersonal time deposits at a bank. Under
Regulation D, a bank must establish reserves equal to 3% of the first $47.7
million of transaction accounts, of which the first $4.3 million is exempt, and
10% on the remainder. The reserve requirement on nonpersonal time deposits with
original maturities of less than 1-1/2 years is 0%. As of September 30, 1998,
Lafayette County Bank met its reserve requirements.
COMMUNITY REINVESTMENT ACT. The Banks are subject to the provisions of the
Community Reinvestment Act of 1977, which requires the appropriate federal bank
regulatory agency, in connection with its regular examination of a savings
association, to assess the saving association's record in meeting the credit
needs of the community serviced by the savings association, including low and
moderate income neighborhoods. The regulatory agency's assessment of the
savings association's record is made available to the public. Further, such
assessment is required of any savings association which has applied, among other
things, to establish a new branch office that will accept deposits, relocate an
existing office or merge or consolidate with, or acquire the assets or assume
the liabilities of, a federally regulated financial institution.
BANK HOLDING COMPANY REGULATION
GENERAL. Upon consummation of the acquisition of Lafayette County Bank the
Company become a bank holding company. Bank holding companies are subject to
comprehensive regulation by the Board of Governors of the Federal Reserve System
(the "Federal Reserve") under the Bank Holding Company Act ("BHCA") and the
regulations of the Federal Reserve. As a bank holding company, the Company is
required to file with the Federal Reserve annual
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<PAGE>
reports and such additional information as the Federal Reserve may require and
will be subject to regular examinations by the Federal Reserve. The Federal
Reserve also has extensive enforcement authority over bank holding companies,
including, among other things, the ability to assess civil money penalties, to
issue cease and desist or removal orders and to require that a holding company
divest subsidiaries (including its bank subsidiaries). In general, enforcement
actions may be initiated for violations of law and regulations and unsafe or
unsound practices.
Under the BHCA, a bank holding company must obtain Federal Reserve approval
before: (1) acquiring, directly or indirectly, ownership or control of any
voting shares of another bank or bank holding company if, after such
acquisition, it would own or control more than 5% of such shares (unless it
already owns or controls the majority of such shares); (2) acquiring all or
substantially all of the assets of another bank or bank holding company; or (3)
merging or consolidating with another bank holding company.
The BHCA also prohibits a bank holding company, with certain exceptions,
from acquiring direct or indirect ownership or control of more than 5% of the
voting shares of any company which is not a bank or bank holding company, or
from engaging directly or indirectly in activities other than those of banking,
managing or controlling banks, or providing services for its subsidiaries. The
principal exceptions to these prohibitions involve certain non-bank activities
which, by statute or by Federal Reserve regulation or order, have been
identified as activities closely related to the business of banking or managing
or controlling banks. The list of activities permitted by the Federal Reserve
includes, among other things, operating a savings institution, mortgage company,
finance company, credit card company or factoring company; performing certain
data processing operations; providing certain investment and financial advice;
underwriting and acting as an insurance agent for certain types of credit-
related insurance; leasing property on a full-payout, non-operating basis;
selling money orders, travelers' checks and United States Savings Bonds; real
estate and personal property appraising; providing tax planning and preparation
services; and, subject to certain limitations, providing securities brokerage
services for customers.
INTERSTATE BANKING AND BRANCHING. On September 29, 1994, the Riegle-Neal
Interstate Banking and Branching Act of 1994 (the "Riegle-Neal Act") was enacted
to ease restrictions on interstate banking. The Riegle-Neal Act allows the
Federal Reserve to approve an application of an adequately capitalized and
adequately managed bank holding company to acquire control of, or acquire all or
substantially all of the assets of, a bank located in a state other than such
holding company's home state, without regard to whether the transaction is
prohibited by the laws of any state. The Federal Reserve may not approve the
acquisition of a bank that has not been in existence for the minimum time period
(not exceeding five years) specified by the statutory law of the host state.
The Riegle-Neal Act also prohibits the Federal Reserve from approving an
application if the applicant (and its depository institution affiliates)
controls or would control more than 10% of the insured deposits in the United
States or 30% or more of the deposits in the target bank's home state or in any
state in which the target bank maintains a branch. The Riegle-Neal Act does not
affect the authority of states to limit the percentage of total insured deposits
in the state which may be held or controlled by a bank holding company to the
extent such limitation does not discriminate against out-of-state banks or bank
holding companies. Individual states may also waive the 30% state-wide
concentration limit contained in the Riegle-Neal Act.
Additionally, the federal banking agencies are authorized to approve
interstate merger transactions without regard to whether such transaction is
prohibited by the law of any state, unless the home state of one of the banks
opts out of the Riegle-Neal Act by adopting a law after the date of enactment of
the Riegle-Neal Act and prior to June 1, 1997 which applies equally to all out-
of-state banks and expressly prohibits merger transactions involving out-of-
state banks. Interstate acquisitions of branches will be permitted only if the
law of the state in which the branch is located permits such acquisitions.
Interstate mergers and branch acquisitions will also be subject to the
nationwide and statewide insured deposit concentration amounts described above.
The Riegle-Neal Act authorizes the applicable federal banking agency to
approve interstate branching de novo by national and state banks, but only in
states which specifically allow for such branching.
DIVIDENDS. The Federal Reserve has issued a policy statement on the
payment of cash dividends by bank holding companies, which expresses the Federal
Reserve's view that a bank holding company should pay cash dividends
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<PAGE>
only to the extent that the company's net income for the past year is sufficient
to cover both the cash dividends and a rate of earnings retention that is
consistent with the company's capital needs, asset quality and overall financial
condition. The Federal Reserve also indicated that it would be inappropriate for
a company experiencing serious financial problems to borrow funds to pay
dividends.
Bank holding companies are required to give the Federal Reserve prior
written notice of any purchase or redemption of its outstanding equity
securities if the gross consideration for the purchase or redemption, when
combined with the net consideration paid for all such purchases or redemptions
during the preceding 12 months, is equal to 10% or more of their consolidated
net worth. The Federal Reserve may disapprove such a purchase or redemption if
it determines that the proposal would constitute an unsafe or unsound practice
or would violate any law, regulation, Federal Reserve order, or any condition
imposed by, or written agreement with, the Federal Reserve. This notification
requirement does not apply to any company that meets the well-capitalized
standard for commercial banks, has a safety and soundness examination rating of
at least a "2" and is not subject to any unresolved supervisory issues.
CAPITAL REQUIREMENTS. The Federal Reserve has established capital
requirements for bank holding companies that generally parallel the capital
requirements for national banks. The Federal Reserve regulations provide that
capital standards will generally be applied on a bank only (rather than a
consolidated) basis on the case of a bank holding company with less than $150
million in total consolidated assets.
TAXATION
FEDERAL TAXATION
GENERAL. The Company reports its income on a fiscal year basis using the
accrual method of accounting and will be subject to federal income taxation in
the same manner as other corporations with some exceptions, including
particularly the Bank's reserve for bad debts discussed below. The following
discussion of tax matters is intended only as a summary and does not purport to
be a comprehensive description of the tax rules applicable to the Bank or the
Company. For additional information regarding income taxes, see Note H of Notes
to Consolidated Financial Statements.
BAD DEBT RESERVE. Historically, savings institutions such as B&L Bank
which met certain definitional tests primarily related to their assets and the
nature of their business ("qualifying thrift") were permitted to establish a
reserve for bad debts and to make annual additions thereto, which may have been
deducted in arriving at their taxable income. B&L Bank's deductions with respect
to "qualifying real property loans," which are generally loans secured by
certain interest in real property, were computed using an amount based on B&L
Bank's actual loss experience, or a percentage equal to 8% of B&L Bank's taxable
income, computed with certain modifications and reduced by the amount of any
permitted additions to the non-qualifying reserve. Due to B&L Bank's loss
experience, B&L Bank generally recognized a bad debt deduction equal to 8% of
taxable income.
The thrift bad debt rules were revised by Congress in 1996. The new rules
eliminated the percentage of taxable income method for deducting additions to
the tax bad debt reserves for all thrifts for tax years beginning after
December 31, 1995. These rules also required that all institutions recapture all
or a portion of their bad debt reserves added since the base year (last taxable
year beginning before January 1, 1988). For taxable years beginning after
December 31, 1995, B&L Bank's bad debt deduction must be determined under the
experience method using a formula based on actual bad debt experience over a
period of years or, if the Bank is a "large" Bank (assets in excess of $500
million) on the basis of net charge-offs during the taxable year. The new rules
allowed an institution to suspend bad debt reserve recapture for the 1996 and
1997 tax years if the institution's lending activity for those years is equal to
or greater than the institutions average mortgage lending activity for the six
taxable years preceding 1996 adjusted for inflation. For this purpose, only home
purchase or home improvement loans are included and the institution can elect to
have the tax years with the highest and lowest lending activity removed from the
average calculation. If an institution is permitted to postpone the reserve
recapture, it must begin its six year recapture no later than the 1998 tax year.
The unrecaptured
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<PAGE>
base year reserves will not be subject to recapture as long as the institution
continues to carry on the business of banking. In addition, the balance of the
pre-1988 bad debt reserves continues to be subject to provisions of present law
referred to below that require recapture of the pre-1988 bad debt reserve in the
case of certain excess distributions to shareholders.
DISTRIBUTIONS. To the extent that B&L Bank makes "nondividend
distributions" to the Company, such distributions will be considered to result
in distributions from the balance of its bad debt reserve as of December 31,
1987 (or a lesser amount if B&L Bank's loan portfolio decreased since
December 31, 1987) and then from the supplemental reserve for losses on loans
("Excess Distributions"), and an amount based on the Excess Distributions will
be included in B&L Bank's taxable income. Nondividend distributions include
distributions in excess of B&L Bank's current and accumulated earnings and
profits, distributions in redemption of stock and distributions in partial or
complete liquidation. However, dividends paid out of B&L Bank's current or
accumulated earnings and profits, as calculated for federal income tax purposes,
will not be considered to result in a distribution from B&L Bank's bad debt
reserve. The amount of additional taxable income created from an Excess
Distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, if, after the
Conversion, B&L Bank makes a "nondividend distribution," then approximately one
and one-half times the Excess Distribution would be includable in gross income
for federal income tax purposes, assuming a 34% corporate income tax rate
(exclusive of state and local taxes). See "REGULATION" for limits on the payment
of dividends by the Bank. B&L Bank does not intend to pay dividends that would
result in a recapture of any portion of its tax bad debt reserve.
CORPORATE ALTERNATIVE MINIMUM TAX. The Code imposes a tax on alternative
minimum taxable income ("AMTI") at a rate of 20%. The excess of the tax bad
debt reserve deduction using the percentage of taxable income method over the
deduction that would have been allowable under the experience method is treated
as a preference item for purposes of computing the AMTI. In addition, only 90%
of AMTI can be offset by net operating loss carryovers. AMTI is increased by an
amount equal to 75% of the amount by which the Company's adjusted current
earnings exceeds its AMTI (determined without regard to this preference and
prior to reduction for net operating losses). For taxable years beginning after
December 31, 1986, and before January 1, 1996, an environmental tax of 0.12% of
the excess of AMTI (with certain modification) over $2.0 million is imposed on
corporations, including the Company, whether or not an Alternative Minimum Tax
is paid.
DIVIDENDS-RECEIVED DEDUCTION. The Company may exclude from its income 100%
of dividends received from the Bank as a member of the same affiliated group of
corporations. The corporate dividends-received deduction is generally 70% in
the case of dividends received from unaffiliated corporations with which the
Company and the Bank will not file a consolidated tax return, except that if the
Company or the Bank owns more than 20% of the stock of a corporation
distributing a dividend, then 80% of any dividends received may be deducted.
AUDITS. There have not been any Internal Revenue Service audits of B&L
Bank's or Lafayette County Bank's Federal income tax returns during the past
five years.
STATE TAXATION
MISSOURI TAXATION. Missouri-based institutions, such as B&L Bank and
Lafayette County Bank, are subject to a special financial institutions tax,
based on net income without regard to net operating loss carryforwards, at the
rate of 7% of net income. This tax is in lieu of certain other state taxes on
financial institutions, on their property, capital or income, except taxes on
tangible personal property owned by B&L Bank or Lafayette County Bank and held
for lease or rental to others and on real estate, contributions paid pursuant to
the Unemployment Compensation Law of Missouri, social security taxes, sales
taxes and use taxes. In addition, B&L Bank and Lafayette County Bank are
entitled to credit against this tax all taxes paid to the State of Missouri or
any political subdivision, except taxes on tangible personal property owned and
held for lease or rental to others and on real estate, contributions paid
pursuant to the Unemployment Compensation Law of Missouri, social security
taxes, sales and use taxes, and taxes imposed by the Missouri Financial
Institutions Tax Law. Missouri-based financial institutions are not subject to
the regular corporate income tax.
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<PAGE>
There have not been any audits of the Bank's Missouri tax returns by
Missouri tax authorities during the past five years.
As a Missouri-chartered corporation, the Company is subject to annual
franchise and income taxes imposed by the State of Missouri. Franchise taxes
are assessed at a rate of 1/20 of 1% of the par value of outstanding shares and
surplus. Income taxes are assessed at a rate of 6.25% of federal taxable income
derived from Missouri sources.
For additional information regarding taxation, see Note H of Notes to
Consolidated Financial Statements contained in the Annual Report.
COMPETITION
Due to the proximity of Lexington to the Kansas City metropolitan area, the
Company operates in an extremely competitive market for the attraction of
savings deposits (its primary source of lendable funds) and in the origination
of loans. Historically, its most direct competition for savings deposits has
come from commercial banks and thrift institutions operating in its market area.
Some of these commercial banks are subsidiaries of large regional holding
companies having vastly greater resources at their disposal. At September 30,
1998, there were 11 commercial banks, including Lafayette County Bank, and no
other thrift institutions in Lafayette County. Particularly in times of high
market interest rates, the Company has faced competition for investors' funds
from short-term money market securities and corporate and U.S. Government
securities. The Company competes for loan originations with mortgage bankers,
thrift institutions, credit unions and commercial banks. Such competition for
deposits and loans may limit the Company's future growth and earnings prospects.
PERSONNEL
As of September 30, 1998, the Company had 27 full-time and 6 part-time
employees. The employees are not represented by a collective bargaining unit.
The Company believes its relationship with its employees is good.
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<PAGE>
EXECUTIVE OFFICERS
The following table sets forth certain information regarding the executive
officers of the Company as of September 30, 1998.
<TABLE>
<CAPTION>
Name Age(1) Position
- ---- ------ --------
<S> <C> <C>
Erwin Oetting, Jr. 58 President and Chief Executive Officer
E. Steva Vialle 47 Executive Vice President, Chief Operating Officer, and Secretary
William J. Huhmann 59 Senior Vice President and Chief Financial Officer
Mark D. Summerlin 38 Senior Vice President
Terry L. Thompson 45 Vice President
</TABLE>
The following table sets forth certain information regarding the executive
officers of B&L Bank and Lafayette County Bank
<TABLE>
<CAPTION>
Name Age(1) Position
- ---- ------ --------
<S> <C> <C>
B&L Bank:
Erwin Oetting, Jr. 58 President and Chief Executive Officer
E. Steva Vialle 47 Executive Vice President, Chief Operating Officer and Secretary
Kathryn M. Swafford 36 Vice President and Treasurer
Mark D. Summerlin 38 Vice President
Lafayette County Bank:
William J. Huhmann 59 Chairman and Chief Financial Officer
Terry L. Thompson 45 President and Chief Executive Officer
Donald L. Coen 60 Executive Vice President
Carol Summerlin 58 Senior Vice President and Cashier
Kirk Craven 36 Vice President
</TABLE>
- ------------------------
(1) As of September 30, 1998.
Erwin Oetting, Jr. has been employed as an officer of the B&L Bank since
1960 and has been President and Chief Executive Officer since 1985. He is a
member of the LIDC Authority, the Lexington Housing Authority, the Lexington
Chamber of Commerce, and the Lexington Police Board and a trustee of Wentworth
Military Academy.
E. Steva Vialle has been employed by the B&L Bank since 1984 and has been
Executive Vice President, Chief Operating Officer and Secretary since 1994. He
is a member of the Lexington Industrial Development Corporation, the Lexington
Zoning Board and the Lexington Board of Adjustments.
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<PAGE>
William J. Huhmann has been employed by Lafayette County Bank since
1991 and has been Chairman of the Board and Chief Financial Officer since that
date. He is a member of the American Institute of CPA's and the Missouri
Society of CPA's.
Mark D. Summerlin has been employed by the B&L Bank since 1985. He is a
member of the Rotary Club, the Lexington Park Board, the Chamber of Commerce,
the Knights of Columbus and the Wentworth Country Club Board.
Terry L. Thompson has been employed by Lafayette County Bank since
1989. He is member of the Rotary Club, Lexington R-V School Board and serves
on several committees of the Missouri Bankers Association.
Donald L. Coen has been employed by Lafayette County Bank since 1990.
He is on the Board of Charles Lyons Foundation and the Lexington Historical
Society.
Carol Summerlin has been employed by Lafayette County Bank since 1979.
She is a member of the Lexington Women's Club and the Lexington Chamber of
Commerce.
Kathryn M. Swafford has been employed by B&L Bank since 1984. She is
a member of the Lexington Park Board.
Kirk Craven has been employed by Lafayette County Bank since 1991.
ITEM 2. DESCRIPTION OF PROPERTY
- --------------------------------
B&L Bank owns its main office located at 919 Franklin Avenue, Lexington,
Missouri. The office was opened in 1960 and its size is approximately 3,500
square feet. In addition to Lafayette County Bank's home office located at
Highway 13 and 20th Street, Lexington, Missiouri, it has two other branch
offices located in Wellington and Callao, Missouri. The Lexington office is a
modern banking office constructed in 1982 and contains approximately 8,000
square feet. The branch office in Wellington was constructed around 1920 and
has been remodeled several times and contains approximately 5,000 square feet.
The Callao office was constructed around 1930 and has approximately 4,000 square
feet. All banking offices are owned and have vaults and contain rental safe
deposit boxes. At September 30, 1998, the net book value of the Company's
premises and equipment (land, building and improvements, furniture and
equipment) was $956,000.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
Periodically, there have been various claims and lawsuits involving the
Company, such as claims to enforce liens, condemnation proceedings on properties
on which the Company holds security interests, claims involving the making and
servicing of real property loans and other issues incident to the Company's
business. The Company is not a party to any pending legal proceedings that it
believes would have a material adverse effect on the financial condition or
operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended September 30, 1998.
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<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- ------------------------------------------------------------------
The information contained under the section captioned "Common Stock
Information" on page 2 of the Annual Report to Stockholders ("Annual Report")
is incorporated herein by reference.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- -------------------------------------------------------------------------
RESULTS OF OPERATIONS OR PLAN OF OPERATIONS
-------------------------------------------
The information contained in the section captioned "Management's Discussion
and Analysis of Financial Condition and Results of Operations" beginning on page
6 of the Annual Report is incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS
- ------------------------------
(a) Financial Statements
Independent Auditor's Report*
Consolidated Statements of Financial Condition as of September 30,
1998 and 1997*
Consolidated Statements of Stockholders' Equity for the Years Ended
September 30, 1998, 1997 and 1996*
Consolidated Statements of Income for the Years Ended
September 30, 1998, 1997 and 1996*
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1998, 1997 and 1996*
Notes to the Consolidated Financial Statements*
* Included in the Annual Report attached as Exhibit 13 hereto and
incorporated herein by reference. All schedules have been omitted as the
required information is either inapplicable or included in the Consolidated
Financial Statements or related Notes contained in the Annual Report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- --------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
- -----------------------------------------------------------------------
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
------------------------------------------------
The information contained under the section captioned "Proposal I --
Election of Directors" contained in the Bank's Proxy Statement, and "Part I --
Business -- Personnel -- Executive Officers" of this report, is incorporated
herein by reference. Reference is made to the cover page of this report for
information regarding compliance with Section 16(a) of the Exchange Act.
ITEM 10. EXECUTIVE COMPENSATION
- --------------------------------
The information contained under the sections captioned "Executive
Compensation," "Directors' Compensation" and "Benefits" under "Proposal I --
Election of Directors" in the Proxy Statement is incorporated herein by
reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by reference
to the section captioned "Security Ownership of Certain Beneficial
Owners and Management" of the Proxy Statement.
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<PAGE>
(b) Security Ownership of Management
The information required by this item is incorporated herein by
reference to the sections captioned "Proposal I -- Election of
Directors" and "Security Ownership of Certain Beneficial Owners and
Management" of the Proxy Statement.
(c) Changes in Control
The Company is not aware of any arrangements, including any pledge by
any person of securities of the Company, the operation of which may at
a subsequent date result in a change in control of the Company.
The information required by this item is incorporated herein by reference
to the sections captioned "Proposal I -- Election of Directors" and "Security
Ownership of Certain Beneficial Owners and Management" of the Proxy Statement.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
The information set forth under the section captioned "Proposal I --
Election of Directors -- Certain Transactions with the Bank" in the Proxy
Statement is incorporated herein by reference.
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<PAGE>
PART IV
ITEM 13. EXHIBITS LIST AND REPORTS ON FORM 8-K
- -----------------------------------------------
(a) Exhibits
3(a) Articles of Incorporation of the Registrant*
3(b) Bylaws of the Registrant*
10(a) Employment Agreement with Erwin Oetting, Jr.**
10(b) Employment Agreement with E. Steva Vialle**
10(c) Salary Continuation Agreement with Erwin Oetting, Jr.**
10(d) Salary Continuation Agreement with E. Steva Vialle**
10(e) Severance Agreement with Mark D. Summerlin**
10(f) Severance Agreement with Kathryn M. Swafford**
10(g) 1996 Stock Option Plan***
10(h) Management Recognition and Development Plan***
(13) Annual Report to Stockholders
(21) Subsidiaries of the Registrant
(23) Consent of Independent Auditor
(27) Financial Data Schedule
___________________
* Incorporated by reference to the Registrant's Registration Statement on
Form S-1, filed on February 16, 1996.
** Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the year ended September 30, 1996.
*** Incorporated by reference to the Registrant's Definitive Proxy Statement
for the 1998 Annual Meeting of Stockholders.
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the quarter ended September
30, 1998.
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<PAGE>
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) 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.
LEXINGTON B & L FINANCIAL CORP.
Date: December 24, 1998 By: /s/ Erwin Oetting, Jr.
______________________________________
Erwin Oetting, Jr.
President and Chief Executive Officer
Pursuant to the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ---------- ----- ----
<S> <C> <C>
/s/ Erwin Oetting, Jr. President, Chief Executive Officer December 24, 1998
- ----------------------- and Director (Principal Executive
Erwin Oetting, Jr. Officer)
/s/ E. Steva Vialle Executive Vice President, Chief December 24, 1998
- ----------------------- Operating Officer, Secretary
E. Steva Vialle and Director
/s/ William J. Huhmann Senior Vice President and Chief December 24, 1998
- ----------------------- Financial Officer (Principal
William J. Huhmann Financial and Accounting Officer)
/s/ Steve Oliaro Director December 24, 1998
- -----------------------
Steve Oliaro
/s/ Norman Vialle Director December 24, 1998
- -----------------------
Norman Vialle
/s/ Charles R. Wilcoxon Director December 24, 1998
- -----------------------
Charles R. Wilcoxon
/s/ Glenn H. Twente Director December 24, 1998
- ---------------------
Glenn H. Twente
</TABLE>
<PAGE>
EXHIBIT 13
1998 ANNUAL REPORT
LEXINGTON B & L FINANCIAL CORP.
<PAGE>
LEXINGTON B & L FINANCIAL CORP.
1998 ANNUAL REPORT
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
Letter to Stockholders..................................... 1
Business of the Corporation................................ 2
Common Stock Information................................... 2
Selected Consolidated Financial Information................ 3
Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 6
Independent Auditors' Report............................... 14
Consolidated Financial Statements.......................... 15
Notes to Consolidated Financial Statements................. 20
Directors and Officers..................................... 41
Corporate Information...................................... 42
Stockholders Information................................... 43
</TABLE>
<PAGE>
President's Message
To Our Stockholders:
On behalf of the Board of Directors, Officers and Employees of Lexington B & L
Financial Corp. and it's wholly-owned subsidiaries, B & L Bank and Lafayette
County Bank, we are pleased to present our Third Annual Report as a public
company.
Earnings for the year ended September 30, 1998 were $659,000, or $0.66 per
diluted share. Our return on average assets for the year ended September 30,
1998 was 0.70% while our return on average equity was 4.22%. We paid a $0.15
per share semiannual dividend in January and July this year.
Lexington B & L Financial Corp. stock trades on the Nasdaq (Small Cap) Stock
Market under the symbol LXMO. We began the year at $16.50 per share, reached a
high of $17.75 and closed on September 30, 1998 at $13.00 per share. Like many
smaller financial institutions, we have not yet recovered from this summer's
market down turn that was very hard on small cap bank stocks. During the year
we completed our third stock repurchase program with the repurchase of 112,076
of our outstanding shares. This repurchase was the last under current
regulatory restrictions until June of 1999.
The last few months have been very busy. The first of December, we opened a
mortgage banking office (B & L Mortgage, Inc., a wholly-owned subsidiary of
Lexington B & L Financial Corp.), in Odessa, Mo. The B & L Bank has been working
the last few months on a computer conversion which is scheduled for February
1999. This conversion is intended to help make our system function properly in
the year 2000 and is the first step toward the consolidation of Lafayette County
Bank into the B & L Bank. We expect this consolidation to be completed in the
next two or three years. In the spring of 1999 we plan to bring on line our
first ATM Machine which will be used by both B & L Bank and Lafayette County
Bank.
Our primary focus continues to be directed towards being a community-oriented
financial institution that provides affordable financial services and products
to the citizens of Lexington and surrounding communities. With the commitment of
our dedicated Board of Directors and loyal staff, we look to the future with
confidence.
All of us at Lexington B & L Financial Corp. appreciate your support and look
forward to a long lasting and profitable relationship.
Sincerely,
Erwin Oetting, Jr.
President
-1-
<PAGE>
BUSINESS OF THE CORPORATION
Lexington B & L Financial Corp. ("Company"), a Missouri corporation, was
organized on November 29, 1995, for the purpose of becoming the holding company
for B & L Bank ("B&L"), upon its conversion from a federal mutual savings and
loan association to a federal stock savings bank ("conversion"). The conversion
was completed on June 5, 1996, through the issuance of 1,265,000 shares of
common stock by Lexington at a price of $10.00 per share to certain former
mutual members of B & L Bank and the general public. On October 1, 1997, the
Company acquired 100% of the outstanding stock of Lafayette County Bank ("LCB")
in exchange for 96,111 shares of the Company's common stock and $1,235,223 in
cash. The acquisition was accounted for utilizing the purchase method of
accounting. At September 30, 1998, the Company had total consolidated assets of
$93.8 million and consolidated stockholders' equity of $15.6 million.
The Company is not engaged in any significant business activity other than
holding the stock of B&L and LCB. Accordingly, the information set forth in the
report, including financial statements and related data, applies primarily to
the operations of its two banking subsidiaries.
B&L is a federal stock savings bank, originally organized in 1887. B&L is
regulated by the Office of Thrift Supervision ("OTS"). Its deposits are insured
up to applicable limits by the Savings Association Insurance Fund ("SAIF") of
the Federal Deposit Insurance Corporation ("FDIC"). LCB is a Missouri state
chartered bank regulated by the Missouri Division of Finance and the FDIC. Its
deposits are insured up to applicable limits by the Bank Insurance Fund ("BIF")
of the FDIC. The two banking subsidiaries are members of the Federal Home Loan
Bank ("FHLB") System.
The Company's banking subsidiaries operate as community-oriented financial
institutions devoted to serving the needs of their customers in Lexington,
Missouri and nearby communities. The banking subsidiaries' business consists
primarily of attracting deposits from the general public and using those funds
to originate residential real estate, commercial, agriculture and consumer
loans.
COMMON STOCK INFORMATION
The Company's common stock is traded on the Nasdaq (Small Cap) Stock Market
under the symbol "LXMO". As of September 30, 1998, there were approximately 415
stockholders of record and 1,008,685 shares of common stock outstanding
(including unreleased Employee Stock Ownership Plan ("ESOP") shares of 76,676
and Management Recognition and Development Plan ("MRDP") shares of 40,480).
Dividend payments by the Company are dependent primarily on dividends received
by the Company from its banking subsidiaries. Under federal regulations, the
dollar amount of dividends the banks may pay is dependent upon their capital
position and recent net income. Generally, if they satisfy their regulatory
capital requirements, they may make dividend payments up to the limits
prescribed in the OTS and FDIC regulations. However, B&L may not declare or pay
a dividend on, or repurchase any of, its common stock if the effect thereof
would cause the regulatory capital of the institution to be reduced below the
amount required for the liquidation account which was established in accordance
with OTS regulations. The Company also has certain dividend limitations
applicable under Missouri law which prohibited it from declaring or paying
dividends when its net assets are less than its stated capital or when the
payment of any dividends would reduce its net assets below its stated capital.
The following table sets forth the market price range of the Company's common
stock for the years ended September 30, 1998 and 1997. This information was
provided by the Nasdaq Stock Market.
<TABLE>
<CAPTION>
FISCAL 1998 FISCAL 1997
--------------------------- -----------------------------
HIGH LOW DIVIDENDS HIGH LOW DIVIDENDS
------- ------- --------- ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
First Quarter $17.750 $16.000 --- $13.500 $10.875 ---
Second Quarter $17.750 $16.125 $0.15 $15.750 $12.875 ---
Third Quarter $17.250 $15.688 --- $16.750 $14.125 ---
Fourth Quarter $16.375 $13.000 $0.15 $16.625 $15.500 $0.15
</TABLE>
-2-
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth certain information concerning the consolidated
financial position and results of operations of the Company at and for the dates
indicated. Since the Company had not commenced operations prior to the mutual-
to-stock conversion of B&L in June 1996, the financial information presented for
the periods prior to 1996 is that of B&L only. The consolidated data is derived
in part from, and should be read in conjunction with, the Consolidated Financial
Statements of the Company and its subsidiaries presented herein.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
-----------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(Dollars in Thousands)
SELECTED FINANCIAL CONDITION DATA:
<S> <C> <C> <C> <C> <C>
Total assets...................................... $93,761 $58,789 $61,670 $49,981 $47,727
Loans receivable, net............................. 62,315 45,888 45,348 41,111 39,379
Investment securities............................. 17,338 4,256 8,342 4,171 5,954
Cash and interest-bearing deposits(1)............. 8,985 6,843 6,268 3,583 1,295
FHLB stock........................................ 520 464 464 455 455
Deposits.......................................... 76,764 42,694 42,237 42,401 40,711
Stockholders' equity, substantially restricted.... 15,593 15,652 18,762 7,195 6,598
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(Dollars in Thousands, Except
Per Share Amounts)
SELECTED OPERATING DATA:
<S> <C> <C> <C> <C> <C>
Interest income......................................... $6,997 $4,597 $4,073 $3,611 $3,331
Interest expense........................................ 3,776 2,298 2,333 2,003 1,617
------ ------ ------ ------ ------
Net interest income.................................. 3,221 2,299 1,740 1,608 1,714
Provision for loan losses............................... 26 29 10 33 5
------ ------ ------ ------ ------
Net interest income after provision
for loan losses................................... 3,195 2,270 1,730 1,575 1,709
Noninterest income...................................... 305 84 99 --- 47
Noninterest expense..................................... 2,483 1,218 1,144 704 877
------ ------ ------ ------ ------
Income before income taxes........................... 1,017 1,136 685 871 879
Income taxes............................................ 358 390 224 300 390
------ ------ ------ ------ ------
Net income........................................... $ 659 $ 746 $ 461 $ 571 $ 587
====== ====== ====== ====== ======
Basic income per share.................................. $ 0.68 $ 0.70 $ 0.40 * *
====== ====== ======
Diluted income per share................................ $ 0.66 $ 0.69 $ 0.40 * *
====== ====== ======
Dividends per share..................................... $ 0.30 $ 0.15 $ --- * *
====== ====== ======
</TABLE>
-3-
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED SEPTEMBER 30,
--------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
KEY OPERATING RATIOS:
<S> <C> <C> <C> <C> <C>
PERFORMANCE RATIOS:
Return on average assets (net income divided by
average assets)........................................... .70% 1.24% .84% 1.17% 1.24%
Return on average equity (net income divided by
average equity)........................................... 4.00 4.23 4.24 8.36 9.32
Interest rate spread (difference between average yield
on interest-earning assets and average cost of interest-
bearing liabilities)...................................... 2.63 2.40 2.22 2.75 3.20
Net interest margin (net interest income as a
percentage of average interest-earning assets)............ 3.64 3.93 3.25 3.38 3.69
Noninterest expense to assets.............................. 2.65 2.07 1.86 1.40 1.83
Average interest-earning assets to interest-bearing
liabilities............................................... 124 139 124 115 114
Dividend payout ratio (dividends paid divided by
net income per share)..................................... 44.12 21.43 --- * *
QUALITY RATIOS:
Allowance for loan losses to total loans receivable at
end of period............................................. .95 .48 .44 .49 .45
Net charge offs to average outstanding loans
receivable during the period.............................. .06 .02 .02 .02 ---
Non-performing assets to total assets (2).................. .56 .67 1.26 1.15 .76
CAPITAL RATIOS:
Equity to total assets at end of period (3)................ 16.63 26.63 30.42 14.39 13.83
Average equity to average assets........................... 17.58 29.24 19.73 14.00 13.26
<CAPTION>
AT SEPTEMBER 30,
--------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
OTHER DATA:
<S> <C> <C> <C> <C> <C>
Number of:
Loans outstanding...................................... 3,095 1,595 1,616 1,600 1,581
Deposit accounts....................................... 10,449 4,487 4,573 4,660 4,475
Full-service offices................................... 4 1 1 1 1
</TABLE>
* Operating as a mutual institution
_______________
(1) Includes interest-bearing deposits in other depository institutions.
(2) Non-performing assets include non-accrual loans and other repossessed
assets.
(3) Includes the effect of Statement of Financial Accounting Standards ("SFAS")
No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," at September 30, 1998, 1997 and 1996.
-4-
<PAGE>
SELECTED QUARTERLY FINANCIAL DATA
The following table provides a summary of operations by quarter for the years
ended September 30, 1998 and 1997. The Company commenced operations in June
1996 with the mutual-to-stock conversion of the Bank.
<TABLE>
<CAPTION>
FISCAL 1998 QUARTER ENDED
------------------------------------------------
SEPTEMBER 30 JUNE 30 MARCH 31 DECEMBER 31
------------ -------- ----------- -----------
(Dollars in Thousands, Except Per Share Data)
<S> <C> <C> <C> <C>
Interest income................................ $1,749 $1,750 $1,746 $1,752
Interest expense............................... 967 952 924 933
------ ------ ------ ------
Net interest income............................ 782 798 822 819
Provision for loan losses...................... 6 11 4 5
------ ------ ------ ------
Net interest income after provision
for loan losses............................... 776 787 818 814
Noninterest income............................. 24 99 83 99
Noninterest expense............................ 502 656 699 626
------ ------ ------ ------
Income before income taxes..................... 298 230 202 287
Income taxes................................... 103 73 81 101
------ ------ ------ ------
Net income.................................. $ 195 $ 157 $ 121 $ 186
====== ====== ====== ======
Basic income per share...................... $ 0.21 $ 0.16 $ 0.12 $ 0.19
====== ====== ====== ======
Diluted income per share.................... $ 0.21 $ 0.15 $ 0.12 $ 0.18
====== ====== ====== ======
<CAPTION>
FISCAL 1997 QUARTER ENDED
------------------------------------------------
SEPTEMBER 30 JUNE 30 MARCH 31 DECEMBER 31
------------ -------- ----------- -----------
(Dollars in Thousands, Except Per Share Data)
<S> <C> <C> <C> <C>
Interest income................................ $1,139 $1,155 $1,143 $1,160
Interest expense............................... 557 573 568 600
------ ------ ------ ------
Net interest income............................ 582 582 575 560
Provision for loan losses...................... 8 --- 20 1
------ ------ ------ ------
Net interest income after provision
for loan losses............................... 574 582 555 559
Noninterest income............................. 22 20 22 20
Noninterest expense............................ 367 252 314 258
------ ------ ------ ------
Income before income taxes..................... 229 350 236 321
Income taxes................................... 65 124 85 116
------ ------ ------ ------
Net income.................................. $ 164 $ 226 $ 151 $ 205
====== ====== ====== ======
Basic income per share...................... $ 0.17 $ 0.22 $ 0.13 $ 0.18
====== ====== ====== ======
Diluted income per share.................... $ 0.16 $ 0.22 $ 0.13 $ 0.18
====== ====== ====== ======
</TABLE>
-5-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This report contains certain "forward-looking statements". These forward-
looking statements, which are included in Management's Discussion and Analysis,
describe future plans or strategies and include the Company's expectations of
future financial results. The words "believe", "expect", "anticipate",
"estimate", "project" and similar expressions identify forward-looking
statements. The Company's ability to predict results or the effect of future
plans or strategies is inherently uncertain. Factors which could affect actual
results include interest rate trends, the general economic climate in the
Company's market area and the country as a whole, loan delinquency rates, the
ability of the Company to adequately address Year 2000 issues, and changes in
federal and state regulations. These factors should be considered in evaluating
the forward-looking statements, and undue reliance should not be placed on such
statements.
GENERAL
Management's discussion and analysis of the financial condition and results of
operations is intended to assist in understanding the consolidated financial
condition and results of operations of the Company. The information contained
in this section should be read in conjunction with the Consolidated Financial
Statements and accompanying notes thereto.
OPERATING STRATEGY
- ------------------
The business of the Company consists principally of attracting deposits from the
general public and using such deposits to originate one- to four-family
residential mortgage, commercial, agricultural and consumer loans. The Company
also invests in U.S. Treasury securities, certificates of deposit, U.S. Federal
agency securities, state and local obligations and mortgage-backed securities.
The Company plans to continue to fund its assets primarily with deposits and
FHLB advances.
Operating results are dependent primarily on net interest income, which is the
difference between the income earned on its interest-earning assets, such as
loans and investments, and the cost of interest-bearing liabilities, consisting
primarily of deposits. Operating results are also significantly affected by
general economic and competitive conditions, primarily changes in market
interest rates, governmental legislation and policies concerning monetary and
fiscal affairs and housing, as well as financial institutions and the attendant
actions of the regulatory authorities.
The Company's strategy is to operate as a conservative, well-capitalized,
profitable community-oriented financial institution dedicated to financing home
ownership, commercial, agricultural and consumer needs within the market it
serves and to provide quality service to all customers. The Company believes
that it has successfully implemented its strategy by (i) maintaining strong
capital levels, (ii) maintaining effective control over operating expenses to
attempt to achieve profitability under differing interest rate scenarios, (iii)
limiting interest rate risk, (iv) emphasizing local loan originations, and (v)
emphasizing high-quality customer service with a competitive fee structure.
INTEREST RATE RISK MANAGEMENT
- -----------------------------
In order to reduce the impact on the Company's net interest earnings due to
changes in interest rates, the Company's strategy on interest rate sensitivity
risk is to manage the exposure to potential risks associated with changing
interest rates by maintaining a balance sheet posture where annual net interest
earnings and the market value of portfolio equity are not significantly impacted
by unexpected changes in interest rates.
-6-
<PAGE>
INTEREST RATE SENSITIVITY OF NET PORTFOLIO VALUE
- ------------------------------------------------
The Company manages its interest rate risk by measuring the effect of interest
rate changes on the market value of assets and liabilities and the resulting
changes in the market value of portfolio stockholders' equity. The following
table illustrates the percent of change in market value of stockholders' equity
given various changes in interest rates
<TABLE>
<CAPTION>
BASIS
POINT ("BP")
CHANGE
IN RATES BOARD LIMIT CHANGE IN NPV
---------------- ----------- -------------
<S> <C> <C>
+400 bp (45)% (16)%
+300 bp (25) (10)
+200 bp (20) (6)
+100 bp (10) (2)
0 bp --- ---
-100 bp 8 1
-200 bp 10 2
-300 bp 11 5
-400 bp 20 7
</TABLE>
As with any method of measuring interest rate risk, certain shortcomings are
inherent in the method of analysis presented in the foregoing table. For
example, although certain assets and liabilities may have similar maturities or
periods of repricing, they may react in different degrees to changes in market
interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market rates.
Additionally, certain assets, have features that restrict changes in interest
rates or a short-term basis and over the life of the asset. Furthermore, in the
event of a change in interest rates, expected rates of prepayments on loans and
early withdrawals from certificates could likely deviate significantly from
those assumed in calculating the table. Therefore, the data presented in the
table should not be relied upon as indicative of actual results.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1998 AND 1997
- ----------------------------------------------------------------
Total assets increased to $93.8 million at September 30, 1998, from $58.8
million at September 30, 1997. The increase resulted primarily from the
acquisition of Lafayette County Bank on October 1, 1997. The increase of
$341,000 in loans originated, net of repayments and loans acquired from LCB, was
the result of the increase in loan originations at LCB. Investment securities
decreased $486,000, excluding the securities acquired from LCB. In addition to
the deposits acquired from LCB, deposits increased $2.7 million due to the
strong economy in the Company's trade area. Other liabilities increased from
notes payable and advances from FHLB acquired from LCB. Equity decreased to
$15.6 million at September 30, 1998, from $15.7 million in 1997, primarily
resulting from the purchase of treasury stock
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
- -------------------------------------------------------------------------------
NET INCOME. Net income decreased by $87,000, or 11.7%, to $659,000 for the year
ended September 30, 1998, from $746,000 for the year ended September 30, 1997.
This decrease was primarily due to increased non-interest expenses in 1998 from
the cost of the MRDP. For the year ended September 30, 1998 costs associated
with this plan were $302,000 compared to $118,000 for 1997.
-7-
<PAGE>
NET INTEREST EARNINGS. Net interest earnings increased 40.1%, to $3.2 million
for the year ended September 30, 1998 from $2.3 million for the year ended
September 30, 1997. Total interest income increased $2.4 million to $7.0 million
in 1998 from $4.6 million in 1997, primarily from the acquisition of LCB. The
net interest spread increased to 2.63% from 2.40% in 1997 as a result of higher
yields on the loan portfolio which increased from 8.41% last year to 8.69% in
1998. The net interest margin decreased from 3.93% last year to 3.64% for the
year ended September 30, 1998 as a result of changes in the mix of earning
assets and interest bearing liabilities as a result of the acquisition of LCB.
Interest expense increased $1.5 million to $3.8 million primarily as a result of
interest-bearing liabilities acquired from LCB. The average cost of interest-
bearing liabilities was 5.27% for the year ended September 30, 1998 compared to
5.46% last year. The decrease in the cost of funds can be attributed to lower
cost of funds acquired from LCB and to the general decline in interest rates
during 1998.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $26,000 for the
year ended September 30, 1998, as compared to $29,000 for the year ended
September 30, 1997. Loan losses for 1998 totaled $61,000 compared to $9,000 in
1997. Net loan charge-offs for 1998 amounted to $39,000 compared to $9,000 in
1997, or .06% as compared to .02% of average outstanding loans for 1998 and
1997.
NONINTEREST INCOME. Noninterest income increased $221,000 to $305,000 for the
year ended September 30, 1998, primarily resulting from a $169,000 increase in
service charges and other fees, a $29,000 increase in insurance commissions, and
a $31,000 increase in other income from interchange income on debit cards and
safe deposit charges.
NONINTEREST EXPENSE. Noninterest expense increased $1.3 million to $2.5 million
for the year ended September 30, 1998, from $1.2 million for the year ended
September 30, 1997, primarily due to increases in employee salaries and benefits
of $820,000 occupancy costs of $124,000 and other expenses of $188,000, which
included $74,000 of amortization of costs in excess of net assets acquired on
the acquisition of LCB. The increase in employee salaries and benefits results
primarily from MRDP expense, which for 1998 totaled $302,000 compared to
$118,000 last year. Occupancy costs increased primarily from the three
additional banking locations operated by LCB.
INCOME TAXES. The provision for income taxes decreased from $390,000 for the
year ended September 30, 1997, to $358,000 for the year ended September 30,
1998. The effective tax rate for 1998 increased to 35.2% of income before
taxes compared to 34.3% last year. The increase in the effective tax rate can be
attributed to the non deductible amortization of costs in excess of net assets
acquired in the acquisition of LCB.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996
- -------------------------------------------------------------------------------
NET INCOME. Net income increased by $285,000, or 62.0%, to $746,000 for the
year ended September 30, 1997, from $461,000 for the year ended September 30,
1996. This increase was primarily due to increased earnings in 1997 from the
investing of the conversion proceeds for a full year, net of an increase in
noninterest expenses.
NET INTEREST INCOME. Net interest income increased 32.1%, to $2.3 million for
the year ended September 30, 1997, from $1.7 million for the year ended
September 30, 1996. Total interest income increased $524,000 to $4.6 million in
1997 from $4.1 million in 1996, primarily as a result of the availability of
conversion funds for investment for the full year and, to a lesser extent, an
increase in the average yield of the loan portfolio to 8.41% from 8.13% and an
increase in the average yield of the investment securities and interest-bearing
deposits to 6.01% from 5.86%. Interest expense on deposits decreased $35,000,
or 1.5%, primarily as a result of lower average deposits, offset by an increase
in cost of deposits to 5.46% in 1997 from 5.39% in 1996. Because the Company's
average yield on interest-earning assets rose more than the average rate paid on
interest-bearing liabilities, the Company's net interest spread increased to
2.40% for 1997 compared to 2.22% for the 1996 year.
-8-
<PAGE>
PROVISION FOR LOAN LOSSES. The provision for loan losses was $29,000 for the
year ended September 30, 1997, as compared to $10,000 for the year ended
September 30, 1996. The increase in the provision for loan losses was primarily
attributable to an increase in the allowance for loan losses to reflect the
increase in loans and management's evaluation of the collectibility of the loan
portfolio, including the nature of the portfolio, credit concentrations, trends
in historical loss experience and economic conditions.
NONINTEREST INCOME. Noninterest income decreased $15,000 to $84,000 for the
year ended September 30, 1997, primarily resulting from a $4,000 increase in
service charges and other fees, an $8,000 decrease in net commissions in the
service subsidiary, an $8,000 decrease in net income from sale of foreclosed
real estate, a $4,000 increase in gain on sale of investments and a $7,000
decrease in other income.
NONINTEREST EXPENSE. Noninterest expense increased $73,000 to $1.2 million for
the year ended September 30, 1997, from $1.1 million for the year ended
September 30, 1996, primarily due to increases in employee salaries and benefits
of $242,000, professional and consulting fees of $129,000 and other expenses of
$37,000, offset by a decrease of $336,000 in Federal deposit insurance premiums
because of the approximately $281,000 for the one-time SAIF assessment in 1996
and a reduced premium cost beginning January 1, 1997. The increase in employee
salaries and benefits results primarily from the ESOP plan expense for a full
year in fiscal 1997 and the implementation of the MRDP in June 1997. The
professional and consulting fees increase of $129,000 results from operating as
a public company.
INCOME TAXES. The provision for income taxes increased to $390,000 for the year
ended September 30, 1997, from $224,000 for the year ended September 30, 1996,
due to higher earnings without a corresponding increase in expenses.
YIELDS EARNED AND RATES PAID
- ----------------------------
The earnings of the Company depend largely on the spread between the yield on
interest-earning assets and the cost of interest-bearing liabilities, as well as
the relative size of the Company's interest-earning assets and interest-bearing
liability portfolios.
The following table sets forth, for the periods indicated, information regarding
average balances of assets and liabilities as well as the total dollar amounts
of interest income from average interest-earning assets and interest expense on
average interest-bearing liabilities, resultant yields, interest rate spreads,
net interest margin, and ratio of average interest-earning assets to average
interest-bearing liabilities.
-9-
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------------------------------------------------------------------------
1998 1997 1996
-------------------------------- -------------------------------- -------------------------------
INTEREST INTEREST INTEREST
AVERAGE AND YIELD/ AVERAGE AND YIELD/ AVERAGE AND YIELD/
BALANCE/(1)/ DIVIDENDS COST BALANCE/(1)/ DIVIDENDS COST BALANCE/(1)/ DIVIDENDS COST
------------- ---------- ------ ------------ --------- ------ ------------ --------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets/(2)/:
Loans receivable............. $62,958 $ 5,469 8.69% $45,109 $ 3,792 8.41% $41,201 $3,350 8.13%
Investment securities and
other interest-
bearing deposits............ 23,793 1,427 6.00 13,402 805 6.01 12,329 723 5.86
Federal funds sold........... 1,857 101 5.44 --- --- --- --- --- ---
------- ------- --------- ------- ------- -----
Total interest-earning
assets.................... 88,608 6,997 7.90 58,511 4,597 7.86 53,530 4,073 7.61
Noninterest-earning assets..... 5,092 1,887 1,532
------- ------- -------
Total assets............... $93,700 $60,398 $55,062
======= ======= =======
Interest-bearing liabilities:
Passbook, NOW and money
market accounts............. $19,463 668 3.43 $ 7,303 201 2.75 $ 7,893 223 2.83
Certificates of deposit...... 51,459 3,045 5.92 34,763 2,096 6.03 35,427 2,110 5.96
------- ------- --------- ------- ------- ------
Total deposits............. 70,922 3,713 5.24 42,066 2,297 5.46 43,320 2,333 5.39
FHLB advances................ 307 19 6.19 --- --- --- --- --- ---
Notes payable................ 449 44 9.80 --- --- --- --- --- ---
------- ------- --------- ------- ------- -----
Total interest-bearing
liabilities............... 71,678 3,776 5.27 42,066 2,297 5.46 43,320 2,333 5.39
------- ------- ------
Noninterest-bearing liabilities 5,550 670 878
------ -------
Total liabilities.......... 77,228 42,736 44,198
Stockholders' equity........... 16,472 17,662 10,864
------- ------- -------
Total liabilities and
stockholders' equity...... $93,700 $60,398 $55,062
======= ======= =======
Net interest income............ $ 3,221 $2,300 $1,740
======= ====== =======
Interest rate spread........... 2.63% 2.40% 2.22%
==== ===== =======
Net interest margin............ 3.64% 3.93% 3.25%
==== ====== =======
Ratio of average
interest-earning assets
to average interest-bearing
liabilities.................. 124% 139% 124%
======= ======= =======
</TABLE>
_______________
(1) Average balances for a period are calculated using the average month-end
balance during each period.
(2) Interest-earning assets include non-accrual loans and loans 90 days or more
past due.
-10-
<PAGE>
The following table sets forth the effects of changing rates and volumes on net
interest income of the Company. Information is provided with respect to (i)
effects on interest income attributable to changes in volume (changes in volume
multiplied by prior rate); (ii) effects on interest income attributable to
changes in rate (changes in rate multiplied by prior volume); and (iii) to the
net change. The changes attributed to the combined impact of rate and volume
have been allocated proportionately to the changes due to volume and the changes
due to rate.
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-----------------------------------------------------------
1998 COMPARED TO 1997 1997 COMPARED TO 1996
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
--------------------------- --------------------------
RATE VOLUME NET RATE VOLUME NET
------ ------- ------ ---- ------ ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1)...................... $1,546 $ 131 $1,677 $116 $ 326 $442
Investment securities and other
interest-bearing
deposits................................. 623 (1) 622 18 64 82
Federal funds sold........................ 51 50 101 --- --- ---
------ ------- ------ ---- ------ ----
Total net change in income on
interest-earning assets................ 2,220 180 2,400 134 390 524
Interest-bearing liabilities:
Passbook, NOW and money market accounts... 406 61 467 (6) (16) (22)
Certificates of deposit................... 989 (40) 949 26 (40) (14)
FHLB advances............................. 10 9 19 --- --- ---
Notes payable............................. 22 22 44 --- --- ---
------ ------- ------ ---- ------ ----
Total interest-bearing liabilities........ 1,427 52 1,479 20 (56) (36)
------ ------- ------ ---- ------ ----
Net change in net interest income......... $ 793 $ 128 $ 921 $114 $ 446 $560
====== ======= ====== ==== ====== ====
</TABLE>
- ---------------
(1) For purposes of calculating volume, rate and rate/volume variances, non-
accrual loans are included in the weighted-average balance outstanding.
-11-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's subsidiaries must maintain an adequate level of liquidity to
ensure availability of sufficient funds to support loan growth and deposit
withdrawals, satisfy financial commitments and to take advantage of investment
opportunities.
The primary source of liquidity for the Company's subsidiaries is liability
liquidity, which is the ability to raise new funds and renew maturing
liabilities. Principal sources of liability liquidity are customers deposits
and advances from the FHLB. Asset liquidity is typically provided from the
proceeds from principal and interest payments on loans, investment securities
and net operating income. While scheduled maturities of loans and investment
securities are somewhat predictable source of funds, deposit flows and mortgage
prepayments are greatly influenced by general interest rates, economic
conditions and competition.
Liquid funds necessary for normal daily operations are maintained with the FHLB
of Des Moines and correspondent banks. Excess funds over balances required to
cover bank charges for services, are sold in overnight Federal funds or
transferred to time deposit accounts at the FHLB. At September 30, 1998, the
Company and its subsidiaries held $8.0 million in excess funds in time deposit
accounts at the FHLB and Federal funds sold.
The Company uses its sources of funds primarily to fund loan commitments and to
pay deposits withdrawals. At September 30, 1998, the Company had commitments to
originate loans aggregating approximately $1.3 million. As of September 30,
1998, certificates of deposit amounted to $52.2 million or 69.3% of total
deposits, including $28.9 million which are scheduled to mature in less than one
year. Historically, the Company has been able to retain a significant amount of
its deposits as they mature. The Company believes it has adequate resources to
fund all loan commitments through deposit growth by adjusting the offering rates
of certificates to retain deposits in changing interest rate environments or, if
necessary through, FHLB advances.
Net cash provided by operating activities for the Company during the year ended
September 30, 1998 was $1.2 million. Net income of $659,000, adjusted for non-
cash charges, largely accounted for the net cash provided by operating
activities. Net cash provided by investing activities was $1.3 million. The
largest component of cash provided by investing activities was the decrease in
federal funds sold. Net cash used in financing activities was $434,000. The
largest component using cash from financing activities was the purchase of
treasury stock of $2.4 million.
At September 30, 1998, the Company's total stockholders' equity totaled $15.6
million or 16.6% of total assets compared to $15.7 million or 26.6% at September
30, 1997. The decrease can be attributed to the repurchase of the Company's
common stock, which during the year ended September 30, 1998 amounted to $2.4
million. The Company is not subject to any regulatory capital requirements. B&L
and LCB are subject to certain capital requirements imposed by the OTS and FDIC.
The Company satisfied each of these requirements at September 30, 1998. See
Note I of the Consolidated Financial Statements.
EFFECT OF INFLATION AND CHANGING PRICES
- ---------------------------------------
The consolidated financial statements and related financial data presented
herein have been prepared in accordance with generally accepted accounting
principles which require the measurement of financial position and operating
results in terms of historical dollars, without considering the change in the
relative purchasing power of money over time due to inflation. The primary
impact of inflation on operations of the Company is reflected in increased
operating costs. Unlike most industrial companies, virtually all the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant impact on a financial
institution's performance than do general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the
prices of goods and services.
-12-
<PAGE>
YEAR 2000
- ---------
The Federal Financial Institutions Examination Council requires all insured
financial institutions to complete an inventory of core computer functions and
set priorities for meeting the Year 2000 conversion goals. The Company has
completed the assessment, analysis and planning phases of its Year 2000 plan and
is well into the execution phase. The Company's comprehensive Year 2000 plan
addresses all computer functions, such as those data processing applications
processed in-house and those preformed by third parties, and other non-computer
critical functions, such as building facilities and security systems, to insure
they will be operational when Year 2000 arrives.
As part of the plan, the Company identified those systems and business
applications which are mission critical, that is, systems and business
applications which, if they failed, would render the Company incapable of
performing core business processes. As of September 30, 1998, renovation of such
identified mission-critical applications was estimated to be 90% complete. It is
the goal of the Company to have all in-house mission-critical applications
renovated and substantially tested and certified "2000 compliant" by December
31, 1998. For those mission-critical applications processed by the service
bureau, the goal of the bureau and the Company is to have them certified Year
2000 compliant by March 31, 1999.
In addition to Year 2000 compatibility of all the Company's applications, the
Year 2000 plan addresses the relationship with loan customers, vendors and
service providers, and whether the failure of any of these parties to address
Year 2000 issues could result in significant disruptions of business and costs
to the Company. The Company has assessed such relationships which are
considered to be material and no loss reserves were considered necessary. Also,
all customers with whom the Company exchanges electronic data have received
notification of Year 2000-related date format impacts and testing of the
interface of such electronic data into our systems is scheduled to be completed
by December 31, 1998.
The Company is developing remediation contingency plans and business resumption
plans specific to the Year 2000 issues. Redemediation contingency plans address
the actions to be taken if mission-critical systems fail to handle the year 2000
date.
Business resumption contingency plans address the actions that would be taken if
core business processes and critical business functions cannot be carried out in
the normal manner upon entering the next century due to system or supplier
failure. These plans are scheduled to be completed on or before June 30, 1999.
The review of these plans will be an ongoing process throughout 1999.
The Company estimates that its total costs for Year 2000 remediation will be
approximately $131,000. Expenditures to date total approximately $57,000. Cost
for hardware and software upgrade are the largest components of the total
estimated costs. Personnel cost for the Company's own employees and outside
proxy testing cost are other costs included in the estimate of Year 2000
remediation. Year 2000 expenditures are expended as incurred. It is not
expected that Year 2000 costs or activities will have a material adverse impact
on operations of the Company.
IMPACT OF NEW ACCOUNTING STANDARDS
- ----------------------------------
See Note A of the Notes to the Consolidated Financial Statements.
-13-
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Lexington B & L Financial Corp.
Lexington, Missouri
We have audited the accompanying consolidated statements of financial condition
of Lexington B & L Financial Corp. ("Company") as of September 30, 1998 and
1997, and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the three years in the period ended September 30,
1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated 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 audits 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Lexington B & L
Financial Corp. at September 30, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
September 30, 1998, in conformity with generally accepted accounting principles.
/s/ Moore, Horton & Carlson, P.C.
Mexico, Missouri
December 1, 1998
-14-
<PAGE>
LEXINGTON B & L FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
SEPTEMBER 30
1998 1997
----------- -----------
ASSETS
<S> <C> <C>
Cash and due from banks $ 1,890,207 $ 635,228
Interest-bearing deposits 7,094,355 6,207,941
Investment securities--Note B
Available-for-sale, at fair value 2,372,971 3,377,585
Held-to-maturity (fair value of $15,188,915 and $1,048,925, respectively) 14,965,028 878,312
Federal funds sold 975,000 ---
Stock in Federal Home Loan Bank of Des Moines ("FHLB") 520,300 464,300
Loans receivable--Note C 62,315,180 45,888,308
Premises and equipment--Note D 956,272 359,502
Cost in excess of net assets acquired 1,011,488 ---
Other assets 1,659,928 977,535
----------- -----------
TOTAL ASSETS $93,760,729 $58,788,711
=========== ===========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Liabilities
Deposits--Note E $76,763,896 $42,694,282
Advances from borrowers for property taxes and insurance 166,209 168,920
Advances from FHLB--Note F 140,000 ---
Notes payable--Note G 368,219 ---
Other liabilities 729,128 273,903
----------- -----------
TOTAL LIABILITIES 78,167,452 43,137,105
<CAPTION>
Commitments and contingencies--Note M
<S> <C> <C>
Stockholders' Equity--Notes I, J and K
Preferred stock, $.01 par value; 500,000 shares authorized, none issued --- ---
Common stock, $.01 par value; 8,000,000 shares authorized, 1,265,000
shares issued and outstanding 12,650 12,650
Additional paid-in capital 12,260,818 12,115,432
Retained earnings - substantially restricted 8,547,489 8,225,011
Unearned ESOP shares (766,762) (869,002)
Unearned MRDP shares (354,223) (656,001)
Treasury stock, at cost (256,315 and 206,500 shares of
common stock, respectively) (4,129,538) (3,205,690)
Unrealized gain (loss) on securities available-for-sale 22,843 29,206
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 15,593,277 15,651,606
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $93,760,729 $58,788,711
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
-15-
<PAGE>
LEXINGTON B & L FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
UNREALIZED
ADDITIONAL UNEARNED GAIN (LOSS) UNEARNED TOTAL
COMMON PAID-IN RETAINED ESOP ON MRDP TREASURY STOCKHOLDERS'
STOCK CAPITAL EARNINGS SHARES SECURITIES SHARES STOCK EQUITY
------- ----------- ---------- ----------- ---------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT
SEPTEMBER 30, 1995 $ --- $ --- $7,188,457 $ --- $ 6,186 $ --- $ --- $ 7,194,643
Net income --- --- 460,873 --- --- --- --- 460,873
Net proceeds from
issuance of
common stock--Note O 12,650 12,071,304 --- --- --- --- --- 12,083,954
Common stock issued to
ESOP--Note J --- --- --- (1,012,000) --- --- --- (1,012,000)
Release of ESOP shares --- 88 --- 40,760 --- --- --- 40,848
Change in unrealized
gain (loss)
on securities --- --- --- --- (6,349) --- --- (6,349)
------- ----------- ---------- ----------- ------- --------- ----------- -----------
BALANCE AT
SEPTEMBER 30, 1996 12,650 12,071,392 7,649,330 (971,240) (163) --- --- 18,761,969
Net income --- --- 746,456 --- --- --- --- 746,456
Release of ESOP shares --- 44,040 --- 102,238 --- --- --- 146,278
Change in unrealized
gain (loss)
on securities --- --- --- --- 29,369 --- --- 29,369
Repurchase of common stock --- --- --- --- --- --- (3,979,479) (3,979,479)
Adoption of MRDP--Note J --- --- --- --- --- (773,789) 773,789 ---
Amortization of MRDP --- --- --- --- --- 117,788 --- 117,788
Dividends paid
($.15 per share) --- --- (170,775) --- --- --- --- (170,775)
------- ----------- ---------- ----------- ------- --------- ----------- -----------
BALANCE AT
SEPTEMBER 30, 1997 12,650 12,115,432 8,225,011 (869,002) 29,206 (656,001) (3,205,690) 15,651,606
Net income --- --- 658,706 --- --- --- --- 658,706
Release of ESOP shares --- 63,884 --- 102,240 --- --- --- 166,124
Change in unrealized
gain (loss)
on securities --- --- --- --- (6,363) --- --- (6,363)
Repurchase of common stock --- --- --- --- --- --- (2,389,541) (2,389,541)
Acquisition of Lafayette
County Bank --- 81,502 --- --- --- --- 1,465,693 1,547,195
Amortization of MRDP --- --- --- --- --- 301,778 --- 301,778
Dividends paid
($.30 per share) --- --- (336,228) --- --- --- --- (336,228)
------- ----------- ---------- ----------- ------- --------- ----------- -----------
BALANCE AT
SEPTEMBER 30, 1998 $12,650 $12,260,818 $8,547,489 $ (766,762) $22,843 $(354,223) $(4,129,538) $15,593,277
======== =========== ========== =========== ======= ========= =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
-16-
<PAGE>
LEXINGTON B & L FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
INTEREST INCOME
Mortgage loans $4,067,412 $3,513,711 $3,140,193
Other loans 1,400,962 278,094 210,256
Investment securities and interest-bearing deposits 1,427,533 805,439 722,827
Federal funds sold 101,173 --- ---
---------- ---------- ----------
Total interest income 6,997,080 4,597,244 4,073,276
INTEREST EXPENSE
Deposits 3,712,727 2,297,735 2,332,708
Advances from FHLB 19,320 --- ---
Notes payable 44,005 --- ---
---------- ---------- ----------
Total interest expense 3,776,053 2,297,727 2,332,708
---------- ---------- ----------
Net interest earnings 3,221,027 2,299,506 1,740,568
PROVISION FOR LOAN LOSSES 25,673 29,190 10,013
---------- ---------- ----------
Net Interest Income After Provision for Loan Losses 3,195,354 2,270,319 1,730,555
NONINTEREST INCOME
Service charges and other fees 198,265 29,023 24,342
Commissions, net 46,072 16,994 25,960
Income (loss) from foreclosed real estate (5,935) (25) 8,490
Gain (loss) on sale of investments 2,437 4,407 (175)
Other 63,774 33,370 40,203
---------- ---------- ----------
Total Noninterest Income 304,613 83,769 98,820
NONINTEREST EXPENSE
Employee compensation and benefits 1,533,049 712,655 470,209
Occupancy costs 184,636 60,523 58,453
Advertising 37,343 12,642 10,545
Data processing 100,258 55,068 58,142
Federal insurance premium 30,950 41,828 378,003
Professional and consulting fees 155,341 156,332 27,240
Amortization of intangible assets arising from acquisitions 74,222 --- ---
Other 367,462 178,584 141,910
---------- ---------- ----------
Total Noninterest Expense 2,483,261 1,217,632 1,144,502
---------- ---------- ----------
INCOME BEFORE INCOME TAXES 1,016,706 1,136,456 684,873
INCOME TAXES--Note H 358,000 390,000 224,000
---------- ---------- ----------
NET INCOME $ 658,706 $ 746,456 $ 460,873
========== ========== ==========
BASIC INCOME PER SHARE $.68 $.70 N/A
========== ========== ==========
DILUTED INCOME PER SHARE $.66 $.70 N/A
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
-17-
<PAGE>
LEXINGTON B & L FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
1998 1997 1996
------------- ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 658,706 $ 746,456 $ 460,873
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 91,367 27,394 27,589
Amortization of premiums and discounts (33,363) (18,953) (57,278)
Amortization of deferred loan fees 1,797 845 ---
Provision for salary continuation plan costs 74,682 59,432 30,289
Amortization of cost in excess of net assets acquired 74,222 --- ---
Loss (gain) on sales of foreclosed real estate 5,935 --- (8,490)
Loss on sales of securities available-for-sale --- (4,407) ---
Loss (gain) on securities held-to-maturity called (2,437) --- 175
Provisions for loan losses 25,673 29,190 10,013
Provision for deferred income taxes (131,500) 34,000 (95,000)
Stock and patronage dividends --- --- (9,100)
Proceeds for past patronage dividends --- --- 25,368
ESOP shares released 166,125 146,278 40,848
Amortization of MRDP 301,778 117,788 ---
Changes to assets and liabilities increasing (decreasing) cash flows
Other assets (89,140) (120,940) (206,344)
Other liabilities 92,474 (348,612) 365,222
------------ ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,236,319 668,471 584,165
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities/sales of securities available-for-sale 901,185 2,833,796 438,777
Proceeds from maturity/call of securities held-to-maturity 12,501,350 --- 43,459
Proceeds from maturity of certificates of deposit --- 2,500,000 ---
Net decrease in federal funds sold 1,100,000 --- ---
Proceeds from redemption of FHLB stock 57,700 --- ---
Loans originated, net of repayments (341,486) (28,799) (436,345)
Proceeds from sales of foreclosed real estate 18,564 10,903 40,570
Purchase of certificates of deposits --- --- (2,500,000)
Purchase of securities available-for-sale (1,393,967) (1,205,046) (2,000,625)
Purchase of securities held-to-maturity (11,522,177) --- (105,000)
Purchase of loans --- (536,843) (3,814,934)
Purchase of life insurance to fund salary continuation plan --- --- (460,000)
Cash paid in the acquisition of Lafayette Bancshares, Inc. (1,235,223) --- ---
Cash acquired in acquisition of Lafayette Bancshares, Inc. 1,540,826 --- ---
Purchase of premises and equipment (287,627) (5,710) (556)
------------ ----------- -----------
NET CASH PROVIDED BY
(USED IN) INVESTING ACTIVITIES 1,339,145 3,568,301 (8,794,654)
</TABLE>
-18-
<PAGE>
LEXINGTON B & L FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONT'D
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits $ 2,714,409 $ 457,489 $ (164,490)
Net increase (decrease) in advances from borrowers for property
taxes and insurance (2,711) 6,260 (11,534)
Principal payments on notes payable (220,000) --- ---
Principal payments on FHLB advances (200,000) --- ---
Proceeds from sale of common stock --- --- 12,083,954
Loan to ESOP --- --- (1,012,000)
Payment of dividends (336,228) (170,775) ---
Purchase of treasury stock (2,389,541) (3,979,479) ---
----------- ----------- -----------
NET CASH PROVIDED BY
(USED IN) FINANCING ACTIVITIES (434,071) (3,686,505) 10,895,930
----------- ----------- -----------
NET INCREASE IN CASH 2,141,393 550,267 2,685,441
Cash and cash equivalents, beginning of year 6,843,169 6,292,902 3,607,461
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 8,984,562 $ 6,843,169 $ 6,292,902
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid for
Interest on deposits $ 3,697,300 $ 2,319,244 $ 2,368,816
=========== =========== ===========
Income tax $ 371,027 $ 293,560 $ 275,302
=========== =========== ===========
Noncash investing and financing activities are as follows
Loans to facilitate sales of real estate $ --- $ --- $ 26,587
=========== =========== ===========
Foreclosed real estate acquired by foreclosure or deed in lieu
of foreclosure $ --- $ 10,903 $ 30,785
=========== =========== ===========
Stock and patronage dividends $ --- $ --- $ 9,100
=========== =========== ===========
Allocation of MRDP shares of common stock $ --- $ 773,789 $ ---
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
-19-
<PAGE>
LEXINGTON B & L FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996 AND 1995
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying reporting policies and practices of Lexington B & L Financial
Corp. (the "Company") and subsidiaries conform to generally accepted accounting
principles ("GAAP") and to prevailing practices within the thrift and banking
industries. A summary of the more significant accounting policies follows:
NATURE OF OPERATIONS: The Company, a Missouri corporation, was incorporated in
- --------------------
November 1995, for the purpose of becoming the holding company of B & L Bank
("B&L"). On June 5, 1996, B&L converted from mutual to stock form of ownership
and the Company completed its initial public offering and acquired all of the
outstanding capital stock of B&L. On October 1, 1997, the Company acquired 100%
of the outstanding stock of Lafayette Bancshares, Inc., owner of Lafayette
County Bank ("LCB") in a transaction accounted for as a purchase.
The Company provides a variety of financial services to individual and corporate
customers including checking, money market and savings accounts and certificates
of deposit. Its primary lending products are one- to four-family residential
mortgage, commercial, agriculture and consumer loans.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
- ---------------------------
accounts of the Company and its wholly-owned subsidiaries, B&L and LCB, and a
wholly-owned subsidiary of B&L, whose activities consist principally of selling
mortgage redemption insurance to B&L's customers. Significant intercompany
balances and transactions have been eliminated in consolidation.
INVESTMENT SECURITIES: Investment securities are classified as held to
- ---------------------
maturity, which are recorded at amortized cost, or available-for-sale, which are
recorded at fair value. Unrealized holding gains and losses, net of the related
tax effect, on available-for-sale securities are excluded from earnings and are
reported as a separate component of stockholders' equity until realized, in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 115,
Accounting for Certain Investments in Debt and Equity Securities.
Mortgage-backed securities represent participating interests in pools of long-
term first mortgage loans originated and serviced by issuers of the securities.
These securities are reported at fair value.
Gains or losses on sales of securities are recognized in operations at the time
of sale and are determined by the difference between the net sale proceeds and
the cost of the securities using the specific identification method, adjusted
for any unamortized premiums or discounts. Premiums or discounts are amortized
or accreted to income using the interest method over the period to maturity.
STOCK IN FEDERAL HOME LOAN BANK OF DES MOINES: Stock in the FHLB is stated at
- ---------------------------------------------
cost and the amount of stock held is determined by regulation. No ready market
exists for such stock and it has no quoted market value.
LOANS RECEIVABLE: Loans receivable are carried at unpaid principal balances,
- ----------------
less allowance for loan losses. Loan origination and commitment fees and
certain direct loan origination costs are deferred and amortized to interest
income over the contractual life of the loan using the interest method.
The Company's real estate loan portfolio consists primarily of long-term loans
secured by first trust deeds on single-family residences, other residential
property, commercial property, personal property and land. The adjustable-rate
mortgage is the Company's primary loan investment.
-20-
<PAGE>
LEXINGTON B & L FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONT'D
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONT'D
Loans are generally placed on nonaccrual status when principal or interest is
delinquent for 90 days or more. Uncollectible interest on loans is charged off
or an allowance established by a charge to income equal to all interest
previously accrued and interest is subsequently recognized only to the extent
cash payments are received until delinquent interest is paid in full and in
management's judgement, the borrower's ability to make periodic interest and
principal payments is back to normal in which case the loan is returned to
accrual status. Interest on consumer loans continues to accrue even if the loan
is 90 days or more past due and is reversed when management determines the
interest to be uncollectible.
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 amount of the allowance is based on
management's evaluation of the collectibility of the loan portfolio, including
the nature of the portfolio, credit concentrations, trends in historical loss
experience, specific impaired loans and economic conditions. Allowances for
impaired loans are generally determined based on collateral values or the
present value of estimated cash flows. The allowance is increased by a
provision for loan losses, which is charged to expense, and reduced by charge-
offs, net of recoveries.
IMPAIRED LOANS: The Company adopted SFAS No. 114, Accounting by Creditors for
- --------------
Impairment of a Loan and SFAS No. 118, Accounting by Creditors for Impairment of
a Loan - Income Recognition and Disclosures, an amendment of SFAS No. 114,
effective October 1, 1995. These statements address the accounting by creditors
for impairment of certain loans. They apply to all creditors and to all loans,
uncollateralized as well as collateralized, except for large groups of small-
balance homogeneous loans that are collectively evaluated for impairment, loans
measured at fair value or at lower of cost or fair value, leases, and debt
securities. The Company considers all one- to four-family residential mortgage
loans, construction loans, and all consumer loans to be smaller homogeneous
loans.
The Company assesses loans individually and identifies impairment when the
accrual of interest has been discontinued, loans have been restructured or
management has serious doubts about the future collectibility of principal and
interest, even though the loans are currently performing. Factors considered in
determining impairment include, but are not limited to, expected future cash
flow, the financial condition of the borrower and current economic conditions.
The Company measures each impaired loan based on the fair value of its
collateral and charges off those loans or portions of loans deemed
uncollectible.
PREMISES AND EQUIPMENT: Premises and equipment have been stated at cost less
- ----------------------
accumulated depreciation and amortization. Depreciation and amortization are
computed generally on a straight-line basis over the estimated useful lives of
the respective assets, which range from five to forty years.
FORECLOSED REAL ESTATE: Real estate acquired in settlement of loans is carried
- ----------------------
at the lower of the balance of the related loan at the time of foreclosure or
fair value less the estimated costs to sell the asset. Costs of holding
foreclosed property are charged to expense in the current period, except for
significant property improvements which are capitalized to the extent that
carrying value does not exceed estimated fair market value.
COST IN EXCESS OF NET ASSETS ACQUIRED: Amounts paid for newly acquired
- -------------------------------------
subsidiaries in excess of the fair value of the net assets are recorded as an
asset and are being amortized on a straight-line basis over fifteen years.
-21-
<PAGE>
LEXINGTON B & L FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONT'D
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONT'D
INCOME TAXES: Deferred tax assets and liabilities are recognized for the future
- ------------
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective income
tax bases. As changes in tax law or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes.
STATEMENTS OF CASH FLOWS: For purposes of the cash flows, cash and amounts due
- ------------------------
from depository institutions and interest-bearing deposits in other banks with a
maturity of three months or less at date of purchase are considered cash
equivalents.
RISKS AND UNCERTAINTIES: The Company is a community-oriented financial
- -----------------------
institution which provides traditional financial services within the areas it
serves. The Company is engaged primarily in the business of attracting deposits
from the general public and using these funds to originate one- to four-family
residential mortgage, commercial, agriculture and consumer loans located
primarily in Lafayette and Macon Counties, Missouri. Accordingly, the ultimate
collectibility of the Company's loan portfolio is dependent upon market
conditions in that area. This geographic concentration is considered in
management's establishment of the allowance for loan losses.
The consolidated financial statements have been prepared in conformity with
GAAP. In preparing the consolidated financial statements, management is
required to make estimates and assumptions which affect the reported amounts of
assets and liabilities as of the balance sheet dates and income and expenses for
the periods covered. Actual results could differ significantly from these
estimates and assumptions.
In the normal course of its business, the Company encounters two significant
types of risk: economic and regulatory. There are three main components of
economic risk: interest rate risk, credit risk and market risk. The Company is
subject to interest rate risk to the degree that its interest-bearing
liabilities mature or reprice more or less rapidly, or on a different basis,
than its interest-earning assets. Credit risk is the risk of default on the
Company's loan portfolio that results from the borrower's inability or
unwillingness to make contractually required payments. Market risk results from
changes in the value of assets and liabilities which may impact, favorably or
unfavorably, the realizability of those assets and liabilities held by the
Company.
The Company is subject to the regulations of various government agencies. These
regulations can and do change significantly from period to period. The Company
also undergoes periodic examinations by the regulatory agencies, which may
subject it to further changes with respect to asset valuations, amounts of
required loss allowances and operating restrictions resulting from the
regulators' judgements based on information available to them at the time of
their examination.
NET INCOME PER SHARE: Basic income per share is based upon the weighted average
- ---------------------
number of common shares outstanding during the periods presented. Diluted
income per share include the effects of all dilutive potential common shares
outstanding during each period. Income per share for all periods presented
conform to SFAS No. 128.
NEW ACCOUNTING STANDARDS: In June 1997, the Financial Accounting Standards
- ------------------------
Board ("FASB") issued SFAS No. 130, Reporting of Comprehensive Income and SFAS
No. 131, Disclosures about Segments of an Enterprise and Related Information.
SFAS No. 130 establishes standards for reporting and display of comprehensive
income in a full set of general purpose financial statements. An enterprise
shall continue to display an amount for net income but will also
-22-
<PAGE>
LEXINGTON B & L FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONT'D
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONT'D
be required to display other comprehensive income, which includes other changes
in equity. SFAS No. 131 establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements. It also establishes standards for related disclosures about
products and services, geographic areas and major customers.
In February 1998, the FASB issued SFAS No. 132, Employers' Disclosures about
Pensions and Other Postretirement Benefits, to revise present disclosure
requirements applicable to those benefits. Although the standard does not
change the measurement or recognition requirements for postretirement benefit
plans, it standardizes the disclosure requirements; requires additional
information on changes in benefit obligations and fair values of plan assets;
and eliminates certain present disclosure requirements.
SFAS Nos. 130, 131 and 132 are effective for fiscal years beginning after
December 15, 1997 and, accordingly, will be adopted by the Association in the
year ending September 30, 1999. Management does not expect that these standards
will significantly affect the Association's financial reporting.
In June 1998, the FASB issued SFAS No. 133 Accounting for Derivative Instruments
and Hedging Activities. SFAS No. 133 standardizes the accounting for Derivative
instruments, including certain derivative instruments embedded in other
contracts, Under SFAS No. 133, entities are required to carry all derivative
instruments in the statement of financial position at fair value. The
accounting for changes in the fair value (i.e. gains or losses) of a derivative
instrument depends on whether it has been designated and qualifies as part of a
hedging relationship and, if so, on the reason for holding it. If certain
conditions are met, entities may elect to designate a derivative instrument as a
hedge of exposures to changes in fair values, cash flows or foreign currencies.
If the hedged exposure is a fair value exposure, the gain or loss on the
derivative instrument is recognized in earnings in the period of change together
with the offsetting loss or gain on the hedged item attributable to the risk
being hedged. If the hedged exposure is a cash flow exposure, the effective
portion of the gain or loss on the derivative instrument is reported initially
as a component of the other comprehensive income (outside earnings) and
subsequently reclassified into earnings when the forecasted transaction affects
earnings. Any amounts excluded from the assessment of hedge effectiveness as
well as the ineffective portion of the gain or loss is reported in earnings
immediately. Accounting for foreign currency hedges is similar to the
accounting for fair value and cash flow hedges. If the derivative instrument is
not designated as a hedge, the gain or loss is recognized in earnings in the
period of change.
SFAS No. 133 is effective for the financial statements issued for periods
beginning after June 15, 1999. The Association is currently evaluating the
effects of SFAS No. 133.
In October 1998, the FASB issued SFAS No. 134, Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage-Banking Enterprise. SFAS 134 amended SFAS No. 65, Accounting for
Certain Mortgage Banking Activities and No. 115, Accounting for Certain
Investments in Debt and Equity Securities for years beginning after December 15,
1998. The Company currently conducts no mortgage-banking activities.
RECLASSIFICATION: Certain amounts in the 1997 and 1996 consolidated financial
- ----------------
statements have been reclassified to conform with the 1998 presentation.
-23-
<PAGE>
LEXINGTON B & L FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONT'D
NOTE B--INVESTMENT SECURITIES
<TABLE>
<CAPTION>
AMORTIZED GROSS UNREALIZED FAIR
------------------------
COST GAINS LOSSES VALUE
----------- ---------------- ------ -----------
<S> <C> <C> <C> <C>
September 30, 1998
Available-for-sale
U.S. Government and Federal agency obligations $ 1,522,383 $ 13,533 $ --- $ 1,535,916
Mortgage-backed securities 816,321 21,450 716 837,055
----------- -------- ------ -----------
$ 2,338,704 $ 34,983 $ 716 $ 2,372,971
=========== ======== ====== ===========
Held-to-maturity
U.S. Government and Federal agency obligations $13,044,506 $ 55,202 $6,634 $13,093,074
State and local obligations 1,920,522 177,348 2,029 2,095,841
----------- -------- ------ -----------
$14,965,028 $232,550 $8,663 $15,188,915
=========== ======== ====== ===========
September 30, 1997
Available-for-sale
U.S. Government and Federal agency obligations $ 1,705,327 $ 10,191 $6,973 1,708,545
Mortgage-backed securities 1,628,444 43,056 2,460 1,669,040
----------- -------- ------ -----------
$ 3,333,771 $ 53,247 $9,433 $ 3,377,585
=========== ======== ====== ===========
Held-to-maturity
State and local obligations $ 878,312 $170,613 $ --- $ 1,048,925
=========== ======== ====== ===========
</TABLE>
The scheduled contractual maturities of debt securities at September 30, 1998,
are shown below. Expected maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations without call
or prepayment penalties.
<TABLE>
<CAPTION>
HELD-TO-MATURITY AVAILABLE-FOR-SALE
------------------------------------ ----------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---------------- ------------------ ---------- ----------
<S> <C> <C> <C> <C>
Amounts maturing:
One year or less $ 3,184,172 $ 3,191 346 $ 81,470 $ 81,331
After one year through five years 10,329,149 10,383,239 --- ---
After five years through ten years 878,829 953,964 1,347,167 1,360,643
After ten years 572,878 660,366 910,067 930,997
----------- ----------- ---------- ----------
$14,965,028 $15,188,915 $2,338,704 $2,372,971
=========== =========== ========== ==========
</TABLE>
During 1998 and 1996, securities held-to-maturity were called for redemption for
total proceeds of $1,471,350 and $43,812, respectively, resulting in a gross
realized gain of $2,437 in 1998 and a gross realized loss of $175 in 1996.
During 1997, securities available-for-sale sold for total proceeds of $2,004,750
resulting in a gross realized gain of $4,407.
Investment securities were pledged to secure deposits as required or permitted
by law, with an amortized cost of $6,721,413 and fair value of $6,761,893 at
September 30, 1998.
-24-
<PAGE>
LEXINGTON B & L FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONT'D
NOTE C--LOANS RECEIVABLE
Loans receivable consist of the following at September 30:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
Mortgage loans
<S> <C> <C>
One- to four-family residences $42,317,761 $39,720,752
Multi-family residential 198,959 96,746
Commercial 3,490,814 1,456,803
Construction 626,516 1,100,600
Land 653,301 535,841
----------- -----------
47,287,351 42,910,742
Less undisbursed portion of mortgage loans 281,342 373,243
----------- -----------
47,006,009 42,537,499
Consumer and other loans
Commercial 4,042,363 ---
Agricultural 3,171,623 ---
Home equity 789,719 608,490
Loans on savings 1,986,038 1,101,365
Automobile loans 4,967,647 1,446,035
Other 933,001 400,930
----------- -----------
15,890,391 3,556,820
----------- -----------
62,896,400 46,094,319
Net deferred loan-origination fees 17,907 14,989
Allowance for loan losses (599,127) (221,000)
----------- -----------
$62,315,180 $45,888,308
=========== ===========
</TABLE>
At September 30, 1998 and 1997, the Company serviced loans amounting to $133,450
and $-0-, respectively, for the benefit of others. Also, the Company had loans
serviced by others amounting to $1,954,891 and $4,090,051 at September 30, 1998
and 1997, respectively.
In the ordinary course of business, the Company makes loans to its directors and
officers at substantially the same terms prevailing at the time of origination
for comparable transactions with borrowers. The following is a summary of
related party loan activity:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
1998 1997
----------- -------------
<S> <C> <C>
Balance, beginning of period $ 237,405 $208,175
Added through purchase of LCB 306,909 ---
Originations 59,177 46,000
Payments (183,301) (16,770)
--------- --------
BALANCE, END OF PERIOD $ 420,190 $237,405
========= ========
</TABLE>
-25-
<PAGE>
LEXINGTON B & L FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONT'D
NOTE C--LOANS RECEIVABLE - CONT'D
Allowance for loan losses is as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Balance, beginning of period $221,000 $201,000 $201,000
Added through purchase of LCB 391,385 --- ---
Provision for loan losses 25,673 29,190 10,013
Charge-offs, net of recoveries (38,931) (9,190) (10,013)
-------- -------- --------
BALANCE, END OF PERIOD $599,127 $221,000 $201,000
======== ======== ========
</TABLE>
The recorded investment in impaired loans, for which there is no need for a
valuation allowance based upon the measure of the loan's fair value of the
underlying collateral at September 30, 1998 and 1997, was $281,887 and $-0-,
respectively. The average recorded investment in impaired loans during the year
ended September 30, 1998 and 1997, was $125,565 and $36,108, respectively. The
amount of interest included in interest income on such loans for the year ended
September 30, 1998 and 1997, amounted to approximately $38,300 and $11,300,
respectively.
NOTE D--PREMISES AND EQUIPMENT
Premises and equipment consists of the following at September 30:
<TABLE>
<CAPTION>
1998 1997
---------- --------
<S> <C> <C>
Land $ 400,385 $ 48,676
Building and improvements 862,740 515,595
Furniture and equipment 780,302 161,432
---------- --------
2,043,427 725,703
Less accumulated depreciation and amortization 1,087,155 366,201
---------- --------
$ 956,272 $359,502
========== ========
</TABLE>
-26-
<PAGE>
LEXINGTON B & L FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONT'D
NOTE E--DEPOSITS
Deposit account balances are summarized as follow at September 30:
<TABLE>
<CAPTION>
1998 1997
-------------------- -------------------
AMOUNT % AMOUNT %
----------- ------- ----------- ------
<S> <C> <C> <C> <C>
Noninterest-bearing $ 4,657,889 6.1% $ 686,976 1.6%
NOW 5,920,352 7.7 1,072,471 2.5
Money Market 6,669,963 8.7 2,414,694 5.7
Passbook savings 6,327,509 8.2 3,880,715 9.1
----------- ------ ----------- -----
23,575,713 30.7 8,054,856 18.9
Certificates of deposit:
3.00 to 3.99% 667,378 0.9 21,644 ---
4.00 to 4.99% 403,073 0.5 228,492 0.5
5.00 to 5.99% 36,786,245 47.9 22,909,386 53.7
6.00 to 6.99% 8,987,419 11.7 5,362,602 12.6
7.00 to 7.99% 2,416,307 3.2 2,381,205 5.5
8.00 to 8.99% 3,905,701 5.1 3,736,097 8.8
9.00 to 9.99% 22,060 --- --- ---
----------- ------ ----------- -----
53,188,183 69.3 34,639,426 81.1
----------- ------ ----------- -----
$76,763,896 100.00% $42,694,282 100.0%
=========== ====== =========== =====
Weighted Average Interest Rates 4.94% 5.53%
===== =====
</TABLE>
The aggregate amount of certificates of deposit with a minimum denomination of
$100,000 was approximately $6,464,307 and $3,144,000 at September 30, 1998 and
1997, respectively. Deposits over $100,000 are not federally insured.
The Company had deposits of approximately $2,417,000 and $1,063,000 for its
directors and officers at September 30, 1998 and 1997, respectively.
At September 30, 1998, contractual maturities of certificate accounts are as
follows:
<TABLE>
<CAPTION>
STATED YEAR ENDED SEPTEMBER 30
INTEREST RATE 1999 2000 2001 2002 2003 AFTER
- ------------------ ----------- ----------- ----------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
3.00 to 3.99% $ 667,378 $ --- $ --- $ --- $ --- $ ---
4.00 to 4.99% 403,073 --- --- --- --- ---
5.00 to 5.99% 26,116,453 7,359,235 2,611,993 263,613 434,951 541,864
6.00 to 6.99% 1,312,927 2,013,672 2,403,501 1,371,322 1,344,134 150,885
7.00 to 7.99% 387,787 660,068 1,153,711 27,346 18,279 18,230
8.00 to 8.99% --- --- 3,905,701 --- --- ---
9.00 to 9.99% 22,060 --- --- --- --- ---
----------- ----------- ----------- ---------- ---------- --------
$28,909,678 $10,032,975 $10,074,906 $1,662,281 $1,797,364 $710,979
=========== =========== =========== ========== ========== ========
</TABLE>
-27-
<PAGE>
LEXINGTON B & L FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONT'D
NOTE E--DEPOSITS - CONT'D
Interest expense on deposits are as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Passbook, Now and Money Market savings accounts $ 667,482 $ 200,987 $ 223,471
Certificate accounts 3,045,245 2,096,748 2,109,237
---------- ---------- ----------
$3,712,727 $2,297,735 $2,332,708
========== ========== ==========
</TABLE>
NOTE F--ADVANCES FROM FEDERAL HOME LOAN BANK OF DES MOINES
Advances from FHLB, with weighted average interest rates and scheduled
maturities, consist of the following at September 30:
<TABLE>
<CAPTION>
1998 1997
-------- -----
<S> <C> <C>
5.30% due on or before March 15, 1999 $ 35,000 $ ---
6.50% due on or before March 15, 2000 35,000 ---
6.70% due on or before March 15, 2001 35,000 ---
6.80% due on or before March 15, 2002 35,000 ---
-------- -----
$140,000 $ ---
======== =====
</TABLE>
The advances are collateralized by Federal agency securities with a carrying
value of $301,063 and fair value of $303,596. Interest rates are fixed to
maturity and may be prepaid with a penalty based on existing interest rates at
time of prepayment.
NOTE G--NOTES PAYABLE
Notes payable at September 30, 1998, were acquired in the purchase of Lafayette
Banschares, Inc. and originated in the acquisition of Lafayette County Bank on
July 3, 1960. The notes are unsecured, bear interest at the rate of 10% and are
payable to the previous owners of the bank. Principal payments are due in equal
annual installments of $95,000 through July 3, 2001, with the final payment in
the amount of $83,219 due on July 3, 2002.
-28-
<PAGE>
LEXINGTON B & L FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONT'D
NOTE H--INCOME TAXES
Components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
1998 1997 1996
--------- -------- --------
<S> <C> <C> <C>
Current $ 431,500 $356,000 $319,900
Deferred (131,500) 34,000 (95,900)
--------- -------- --------
$ 358,000 $390,000 $224,000
========= ======== ========
</TABLE>
In addition, the Company recorded deferred income tax (benefit) to equity
relating to unrealized gains and losses on investment securities available-for-
sale of ($3,183), $14,699 and ($3,175) for the years ended September 30, 1998,
1997 and 1996, respectively.
The provision for income taxes as shown on the consolidated statements of income
differs from amounts computed by applying the statutory federal income tax rate
of 34% to income before taxes as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
1998 1997 1996
--------------- --------------- ---------------
AMOUNT % AMOUNT % AMOUNT %
-------- ---- -------- ---- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Income tax expense at statutory rate $345,680 34.0% $386,395 34.0% $232,857 34.0%
Increase (decrease) in taxes resulting from:
Officers life insurance (9,655) (.9) (8,087) (.7) --- ---
Tax exempt income, net of related expenses (41,346) (4.1) (24,281) (2.1) (21,573) (3.2)
Amortization of intangible assets arising
from acquisitions 23,235 2.5 --- --- --- ---
State income tax, net of federal benefit 39,804 3.9 35,640 3.1 14,208 2.1
Other, net 1,718 (.2) 333 --- (1,492) (.2)
-------- ---- -------- ---- -------- ----
$358,000 35.2% $390,000 34.3% $224,000 32.7%
======== ==== ======== ==== ======== ====
</TABLE>
Deferred income taxes reflect the impact of "temporary differences" between
amounts of assets and liabilities for financial reporting purposes and such
amounts as measured by tax laws. Temporary differences which give rise to a
significant portion of deferred tax assets and liabilities are as follows at
September 30:
<TABLE>
<CAPTION>
1998 1997
-------- --------
Deferred tax assets
<S> <C> <C>
Allowance for loan losses $159,500 $ 34,700
Excess pension contribution 96,500 43,700
Deferred compensation 62,700 31,500
Deferred tax liabilities
Depreciation (38,500) (32,500)
FHLB of stock dividend (58,500) (57,000)
Unrealized gain on available-for-sale securities (11,462) (14,607)
-------- --------
NET DEFERRED TAX ASSET $210,238 $ 5,793
======== ========
</TABLE>
-29-
<PAGE>
LEXINGTON B & L FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONT'D
NOTE I--REGULATORY CAPITAL REQUIREMENTS
Pursuant to the Financial Institutions Reform Recovery and Enforcement Act
("FIRREA") of 1989, as implemented by a rule promulgated by OTS, saving
institutions are required to have a minimum regulatory tangible capital equal to
1.5% of adjusted total assets, a minimum of 3.0% core/leverage capital ratio,
and a minimum 8% total risk-based capital. FIRREA also restricts investment
activities with respect to noninvestment grade corporate debt and certain other
investments and increases the required ratio of housing-related assets in order
to qualify as a savings institution.
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary, actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank capital amounts and classification are also
subject to qualitative judgement by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to insure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth below) of
total and Tier I capital to risk-weighted assets, and Tier I capital to average
assets (all as defined in the regulations). Management believes, as of
September 30, 1998, that the Bank meets all capital adequacy requirements to
which it is subject.
Based on its regulatory capital ratios at September 30, 1998, the Bank is
categorized as "well capitalized" under the regulatory framework for prompt
corrective action. To be categorized as "well capitalized" the Bank must
maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios
as set forth in the table. The Bank's actual capital amounts and ratios also
presented in the table.
<TABLE>
<CAPTION>
MINIMUM
TO BE WELL
MINIMUM CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
----------------- ----------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 1998
B & L Bank
Total Risk-Based Capital $10,687 35.81% $ 2,387 8.00% $ 2,984 10.00%
(to Risk Weighted Assets)
Tier 1 Capital 10,539 35.32 1,194 4.00 1,790 8.00
(to Risk Weighted Assets)
Tier 1 Capital 10,539 18.73 1,689 3.00 2,814 5.00
(to Adjusted Assets)
Tangible Capital 10,539 18.73 844 1.50 N/A N/A
(to Adjusted Assets)
</TABLE>
-30-
<PAGE>
LEXINGTON B & L FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONT'D
NOTE I--REGULATORY CAPITAL REQUIREMENTS - CONT'D
<TABLE>
<CAPTION>
MINIMUM
TO BE WELL
MINIMUM CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------ ------------------ ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- -------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Lafayette County Bank
Total Risk-Based Capital $ 3,081 14.66% $1,678 8.00% $2,099 10.00%
(to Risk Weighted Assets)
Tier 1 Capital 2,819 13.43 840 4.00 1,260 6.00
(to Risk Weighted Assets)
Tier 1 Capital 2,819 7.47 1,509 4.00 1,886 5.00
(to Adjusted Assets)
Tangible Capital 2,819 7.47 754 1.50 N/A N/A
(to Adjusted Assets)
As of September 30, 1997
B & L Bank
Total Risk-Based Capital $12,242 39.82 $2,460 8.00 $3,075 10.00
(to Risk Weighted Assets)
Tier 1 Capital 12,036 39.15 1,230 4.00 1,845 6.00
(to Risk Weighted Assets)
Tier 1 Capital 12,036 20.55 1,757 3.00 2,929 5.00
(to Adjusted Assets)
Tangible Capital 12,036 20.55 879 1.50 N/A N/A
(to Adjusted Assets)
</TABLE>
NOTE J--BENEFIT PLANS
B&L is a participating employer in a multi-employer plan trusteed pension plan
that covers and provides defined benefits to substantially all full-time
employees of B&L after one year of service. The plan assets exceeded vested
benefits as of June 30, 1997, the date of the most current actuarial valuation.
B&L's portion of the plan assets and accumulated plan benefits has not been
determined. Pension expense of $36,000, $35,500 and $27,224 recognized for the
years ended September 30, 1998, 1997 and 1996, respectively.
B&L also has a 401(k) salary reduction plan for all full-time employees. The
plan is entirely funded by participant contributions. Participants may make
deferrals up to 15% of compensation.
The Company has also entered into salary continuation agreements with four of
its officers. These agreements provide for monthly deferred compensation
payments for a period of 180 months following retirement. The Company has
purchased life insurance policies to fund these agreements. Deferred
compensation charged to operations for the years ended September 30, 1998, 1997
and 1996 was $74,682, $50,605 and $30,289, respectively.
-31-
<PAGE>
LEXINGTON B & L FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONT'D
NOTE J--BENEFIT PLANS - CONT'D
In connection with the conversion from mutual to stock form, B&L established an
employee stock ownership plan ("ESOP") for the benefit of participating
employees. Employees are eligible to participate upon attaining age twenty-one
and completing one year of service.
The ESOP borrowed $1,012,000 from the Company to fund the purchase of 101,200
shares of the Company's common stock. The purchase of shares of the ESOP was
recorded in the consolidated financial statements through a credit to common
stock and additional paid-in capital with a corresponding charge to a contra
equity account for the unreleased shares. The loan is secured solely by the
common stock and is to be repaid in equal quarterly installments of principal
and interest payable through March, 2006 at 8.25%. The intercompany ESOP note
and related interest are eliminated in consolidation.
B&L makes quarterly contributions to the ESOP which are equal to the debt
service less dividends on unallocated ESOP shares used to repay the loan.
Dividends on allocated shares will be paid to participants of the ESOP. The
ESOP shares are pledged as collateral on the ESOP loan. Shares are released
from collateral and allocated to participating employees, based on the
proportion of loan principal and interest repaid and compensation of the
participants. Forfeitures will be reallocated to participants on the same basis
as other contributions in the plan year. Benefits are payable upon a
participant's retirement, death, disability or separation from service.
Effective with the date of the stock conversion the Company adopted Statement of
Position ("SOP") 93-6. As shares are committed to be released from collateral,
the Company reports compensation expense equal to the average fair value of the
shares committed to be released. Dividends on allocated shares will be charged
to stockholders' equity. Dividends on unallocated shares are recorded as a
reduction to the ESOP loan. ESOP expense for the year ended September 30, 1998,
1997 and 1996, was $140,054, $131,709 and $40,848, respectively. The fair value
of unreleased shares based on market price of the Company's stock at September
30, 1998 and 1997 was $996,797 and $1,412,125, respectively.
The number of ESOP shares are summarized as follows at September 30:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Allocated shares 24,524 14,300
Unreleased shares 76,676 86,900
------- -------
101,200 101,200
======= =======
</TABLE>
The Board of Directors adopted (November 27, 1996) and the shareholders
subsequently approved (January 27, 1997) a management recognition and
development plan ("MRDP"). Under the MRDP, common stock of 50,600 shares was
awarded to certain directors, officers and employees of the Company and B&L.
The award will not require any payment by the recipients and will vest over five
years beginning one year after the date of the award (June 11, 1997).
Amortization of the award resulted in a charge to compensation and benefit
expense of $301,778 and $117,788 in 1998 and 1997, respectively.
The Company has entered into three year employment agreements with certain
members of management. Under the agreements, The Company will pay the members
their initial base salaries which may be increased at the discretion of the
Board of Directors. Additionally, the agreements provide for severance payments
if employment is terminated following a change in control. These payments will
be equal to 2.99 times their average annual compensation paid during the five
years immediately preceding the change in control.
-32-
<PAGE>
LEXINGTON B & L FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONT'D
NOTE K--STOCK OPTION PLAN
The Company has authorized and the shareholders have approved the adoption of a
stock option plan. Under the stock option plan, options to acquire 126,500
shares of the Company's stock may be granted to certain officers, directors and
employees of the Company and B&L. The options will enable the recipient to
purchase stock at an exercise price equal to the fair market value of the stock
at the date of grant. On June 11, 1997 the Company granted options for 101,200
shares for $15.125 per share. The options will vest over the five years
following the date of grant and are exercisable for up to 10 years. No options
have been exercised at September 30, 1998.
The Company adopted SFAS No. 123, Accounting for Stock-Based Compensation, which
permits entities to recognize, as expense over the vesting period, the fair
value of all stock-based awards on the date of grant. Alternatively, SFAS No.
123 allows entities to disclose pro forma net income and income per share as if
the fair value-based method defined in SFAS No. 123 has been applied, while
continuing to apply the provisions of Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees, under which
compensation expense is recorded on the date of grant only if the current market
price of the underlying stock exceeds the exercise price.
The Company has elected to apply the recognition provisions of APB Opinion No.
25 and provide the pro forma disclosure provisions of SFAS No. 123. Had
Compensation expense for the Company's incentive and nonstatutory stock options
been determined based upon the fair value of the grant date consistent with the
methodology prescribed under SFAS No. 123, the Company's net earnings and
diluted earnings per share would have been reduced by approximately $88,453 and
$13,465 or $0.05 and $0.01 per share, for the year ended September 30, 1998 and
1997, respectively.
Following is a summary of the fair values of options granted using the Black-
Scholes option-pricing model:
<TABLE>
<S> <C>
Fair value at grant date $6.94
Assumptions:
Dividend yield 1.14%
Volatility 20.27%
Risk-free interest rate 6.10%
Expected life 10 years
</TABLE>
Pro forma net earnings reflect only options granted and vested in fiscal 1998.
Therefore, the full impact of calculating compensation expense for stock options
under SFAS is not reflected in the pro forma net earnings amount presented above
because compensation expense is reflected over the options' vesting period.
NOTE L--INCOME PER SHARE
The shares used in calculation of basic and diluted income per share are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
1998 1997
-----------------------
<S> <C> <C>
Weighted average common shares outstanding 965,088 1,064,532
Stock options 27,388 3,374
------- ---------
992,476 1,067,906
======= =========
</TABLE>
-33-
<PAGE>
LEXINGTON B & L FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONT'D
NOTE M--FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK
The Company is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet customer financing needs. These financial
instruments consist principally of commitments to extend credit. The Company
uses the same credit policies in making commitments and conditional obligations
as it does for on-balance sheet instruments. The Company's exposure to credit
loss in the event of nonperformance by the other party is represented by the
contractual amount of those instruments. The Company does not generally require
collateral or other security on unfunded loan commitments until such time that
loans are funded. Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other termination
clauses. The Company evaluates each customer's creditworthiness on a case-by-
case basis. The amount of collateral obtained, if deemed necessary by the
Company upon extension of credit, is based on management's credit evaluation of
the counterparty. Such collateral consists primarily of residential properties.
At September 30, 1998 and 1997, the Company was committed to originate loans
aggregating approximately $1,340,900 and $1,411,750, respectively. Fixed loan
commitments at September 30, 1998 and 1997, amounted to approximately $219,000
and $370,000 with interest rates ranging from 8.00% to 12.00% and 8.50% to
10.00%, respectively.
At September 30, 1998 and 1997, the Company had amounts on deposit at banks and
federal agencies in excess of federally insured limits of approximately
$7,482,000 and $6,530,000, respectively.
NOTE N--SAVINGS ASSOCIATION INSURANCE FUND ASSESSMENT
On September 30, 1996, the Deposit Insurance Fund Act authorized the Federal
Deposit Insurance Corporation to impose a special one-time assessment on each
depository institution to recapitalize the Savings Association Insurance Fund to
a level commensurate with the Bank Insurance Fund. The special assessment
amounted to $280,592 and is included in federal insurance premiums in the
consolidated statement of income for September 30, 1996.
NOTE O--PLAN OF CONVERSION
On November 15, 1995, the Lexington Building and Loan Association, F.A.
(currently B & L Bank) Board of Directors adopted, and on February 14, 1996,
subsequently amended, a plan ("Plan") to convert from a federally-chartered
mutual savings and loan association to a federally-chartered stock savings bank.
The Plan included the formation of a holding company which acquired all of the
capital stock of the Bank issued upon its conversion from a mutual to stock form
of ownership. In connection with the conversion, which was consummated on June
5, 1996, the Company issued and sold to the public 1,265,000 shares of its
common stock (par value $.01 per share) at a price of $10.00 per share. The
proceeds, net of $566,046 in conversion costs, received by the Company for the
issuance amounted to $12,083,954. Prior to the completion of the conversion,
the Company had no assets or liabilities and did not conduct any business other
than of an organizational nature.
-34-
<PAGE>
LEXINGTON B & L FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONT'D
NOTE O--PLAN OF CONVERSION - CONT'D
At the time of conversion, the Bank established a liquidation account in the
amount equal to the equity of the Bank as of the date of the latest balance
sheet contained in the final prospectus. The liquidation account is maintained
for the benefit of certain eligible account holders who continue to maintain
their accounts at the Bank after the conversion. The liquidation account will be
reduced annually to the extent that eligible account holders have reduced their
qualifying deposits. Subsequent increases will not restore an eligible account
holder's interest in the liquidation account. In the event of a complete
liquidation, each eligible account holder will be entitled to receive a
distribution from the liquidation account proportionate to the current adjusted
qualifying balances for accounts then held.
The Bank may not declare or pay cash dividends on or repurchase any of its
shares of common stock, if the effect would cause stockholder's equity to be
reduced below applicable regulatory capital maintenance requirements or if such
declaration and payment would otherwise violate regulatory requirements.
NOTE P--FAIR VALUE OF FINANCIAL INSTRUMENTS
On October 1, 1995, the Company adopted SFAS No. 107, Disclosures about Fair
Values of Financial Instruments, which requires disclosure of fair value
information about financial instruments, whether or not recognized in the
statement of financial condition. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instruments. SFAS No. 107 excludes certain
financial instruments and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Bank.
The following methods and assumptions were used by the Company in estimating
fair values of financial instruments as disclosed herein.
Cash and due from banks and certificates of deposit: The carrying amounts
of cash and due from depository institutions and certificates of deposit
approximate their fair value.
Investment and mortgage-backed securities: Fair value is determined by
reference to quoted market prices.
Stock in FHLB: This stock is a restricted asset and its carrying value is
a reasonable estimate of fair value.
Loans receivable: The fair value of first mortgage loans is estimated by
using discounted cash flow analyses, using interest rates currently offered
by the Bank for loans with similar terms to borrowers of similar credit
quality. The majority of real estate loans are residential. First
mortgage loans are segregated by fixed and adjustable interest terms. The
fair value of consumer loans is calculated by using the discounted cash
flow based upon the current market for like instruments. Fair values for
impaired loans are estimated using discounted cash flow analyses.
Accrued interest receivable: The carrying value approximates fair value.
-35-
<PAGE>
LEXINGTON B & L FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONT'D
NOTE P--FAIR VALUE OF FINANCIAL INSTRUMENTS - CONT'D
Transaction deposits: Transaction deposits, payable on demand or with
maturities of 90 days or less, have a fair value equal to book value.
Certificates of deposit: The fair value of fixed maturity certificates of
deposit is estimated by discounting the future cash flows using the rates
currently offered for deposits of similar maturities.
Advances from borrowers for taxes and insurance: The book value
approximates fair value.
All other liabilities: The book value approximates fair value.
Off-balance sheet instruments: The fair value of a loan commitment and a
letter of credit is determined based on the fees currently charged to enter
into similar agreements, taking into account the remaining terms of the
agreement and the present creditworthiness of the counterparties. Neither
the fees earned during the year on these instruments nor their value at
year-end are significant to the Bank's consolidated financial position.
Limitations: Fair value estimates are made at a specific point in time,
based on relevant market information and information about the financial
instrument. The valuation techniques employed above involve uncertainties
and are affected by assumptions used and judgements regarding prepayments,
credit risk, discount rates, cash flows and other factors. Changes in
assumptions could significantly affect the reported fair value.
In addition, the fair value estimates are based on existing on and off-balance
sheet financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that are not
considered financial instruments. The fair value estimates do not include the
benefit that results from the low-cost funding provided by the deposit
liabilities compared to the cost of borrowing funds in the market. The amounts
at September 30, 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Cash $ 1,890 $ 1,890 $ 635 $ 635
Interest-bearing deposits 7,094 7,094 6,208 6,208
Investment securities available-for-sale 2,373 2,373 3,378 3,378
Investment securities held-to-maturity 14,965 15,189 878 1,049
Stock in FHLB 520 520 464 464
Loans receivable 62,315 62,680 45,888 45,120
LIABILITIES
Transaction accounts 23,576 23,576 8,055 8,055
Certificates of deposit 53,188 54,851 34,639 34,934
Advances from borrowers for taxes and insurance 166 166 169 169
</TABLE>
-36-
<PAGE>
LEXINGTON B & L FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONT'D
NOTE Q--CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
The following condensed balance sheet and condensed statements of income and
cash flows for Lexington B & L Financial Corp. should be read in conjunction
with the consolidated financial statements and the notes thereto.
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEET
SEPTEMBER 30
1998 1997
----------- -----------
ASSETS
<S> <C> <C>
Cash $ 579,353 $ 2,467,092
ESOP note receivable 830,498 907,572
Investment in subsidiaries:
B & L Bank 10,562,209 12,065,107
Lafayette County Bank 3,830,270 ---
Other 183,143 220,252
----------- -----------
TOTAL ASSETS $15,985,473 $15,660,023
=========== ===========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Accrued expenses $ 23,978 $ 8,417
Notes payable 368,219 ---
Stockholders' equity 15,593,276 15,651,606
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $15,985,473 $15,660,023
=========== ===========
<CAPTION>
CONDENSED STATEMENT OF INCOME
PERIOD FROM
JUNE 5, 1996
YEAR ENDED TO
SEPTEMBER 30 SEPTEMBER 30,
1998 1997 1996
----------- ----------- -------------
INCOME
Dividends from subsidiary $ 2,300,000 $ 1,500,000 $ ---
Interest 91.009 268,678 113,174
Gain on sale of investments --- 4,407 ---
----------- ----------- --------
2,391,009 1,773,085 113,174
EXPENSES
MRDP 301,778 117,788 ---
Interest 44,005 --- ---
Professional fees 96,956 119,194 ---
Other 29,567 28,189 ---
----------- ----------- --------
472,306 265,171 ---
----------- ----------- --------
</TABLE>
-37-
<PAGE>
LEXINGTON B & L FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONT'D
NOTE Q--CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS - CONT'D
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 5, 1996
YEAR ENDED TO
SEPTEMBER 30 SEPTEMBER 30,
1998 1997 1996
-------------- -------------- ------------
<S> <C> <C> <C>
INCOME BEFORE EQUITY IN UNDISTRIBUTED EARNINGS
OF SUBSIDIARIES AND INCOME TAXES 1,918,703 1,507,914 113,174
INCREASE (DECREASE) IN UNDISTRIBUTED EQUITY OF SUBSIDIARIES (1,389,497) (758,458) 103,543
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 529,206 749,456 216,717
INCOME TAXES (BENEFIT) (129,500) 3,000 41,100
----------- ----------- -----------
NET INCOME $ 658,706 $ 746,456 $ 175,617
=========== =========== ===========
<CAPTION>
CONDENSED STATEMENT OF CASH FLOWS
PERIOD FROM
JUNE 5, 1996
YEAR ENDED TO
SEPTEMBER 30 SEPTEMBER 30,
1998 1997 1996
----------- ----------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 658,706 $ 746,456 $ 175,617
Adjustments to reconcile net income to net cash
provided from operating activities:
(Increase) Decrease in undistributed equity of subsidiary 1,389,497 758,458 (103,543)
Amortization of MRDP 301,778 117,788 ---
Other (142,907) (211,966) (26,627)
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,207,074 1,410,736 45,447
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of certificates of deposit --- (1,500,017) (3,000,000)
Purchase of securities available-for-sale --- --- (2,000,624)
Proceeds from and maturities of certificates of deposit --- 4,522,649 ---
Proceeds from sale of securities available-for-sale --- 2,004,750 ---
Cash paid in the acquisition of Lafayette Bancshares, Inc. (1,235,223) --- ---
Cash acquired in acquisition of Lafayette Bancshares, Inc. 9,105 --- ---
Investment in subsidiary --- --- (6,041,977)
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (1,226,118) 5,027,382 (11,042,601)
</TABLE>
-38-
<PAGE>
LEXINGTON B & L FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONT'D
NOTE Q--CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS - CONT'D
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 5, 1996
YEAR ENDED TO
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1996
------------ ------------ --------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from sale of common stock --- --- 12,083,954
Principal payments on notes payable (220,000) --- ---
Loan to ESOP --- --- (1,012,000)
Principal collected from ESOP 77,074 71,030 33,398
Dividends paid (336,228) (170,775) ---
Purchase of treasury stock (2,389,541) (3,979,479) ---
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (2,868,695) (4,079,224) 11,105,352
----------- ----------- -----------
NET INCREASE IN CASH
AND CASH EQUIVALENTS (1,887,739) 2,358,894 108,198
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 2,467,092 108,198 ---
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 579,353 $ 2,467,092 $ 108,198
=========== =========== ===========
NON-CASH INVESTING AND FINANCING ACTIVITIES
Allocation of MRDP shares of common stock --- 773,789 N/A
=========== =========== =============
</TABLE>
-39-
<PAGE>
LEXINGTON B & L FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONT'D
NOTE R--ACQUISITION OF LAFAYETTE COUNTY BANK
On October 1, 1997, the Company acquired 100% of the outstanding stock of
Lafayette County Bank in exchange for 96,111 shares of the Company's stock,
valued at $16.098 per share, $1,235,223 in cash and $195,249 in acquisition
costs. The acquisition was accounted for utilizing the purchase method of
accounting. The cost in excess of the fair value of the net assets acquired is
being amortized on a straight-line basis over fifteen years. The following
discloses the unaudited pro forma results of operations had the Companies been
combined as of October 1, 1996 (Dollars in thousands, except per share amounts):
<TABLE>
<CAPTION>
<S> <C>
Interest income $6,939
Interest expense 3,549
------
Net interest income 3,390
Provision for loan losses 235
------
Net interest income after provision for loan losses 3,155
Noninterest income 328
Noninterest expense 2,158
------
Income before income taxes 1,325
Income taxes 478
------
Net income $ 847
======
Basis income per share $ 0.73
======
Diluted income per share $ 0.73
======
</TABLE>
The following schedule sets forth the assets and liabilities acquired on October
1, 1997, in the acquisition of Lafayette County Bank (Dollars in thousands):
<TABLE>
<CAPTION>
Assets
<S> <C>
Cash $ 1,541
Investments securities, held-to-maturity 13,542
Federal funds sold 2,075
FHLB stock 114
Loans, net 16,151
Premises and equipment 401
Other assets 562
-------
Total assets 34,386
Liabilities
Deposits 31,346
Advances from FHLB 340
Notes payable 588
Other liabilities 206
-------
Total Liabilities 32,480
-------
Net value of assets acquired 1,906
Value of assets exchanged 2,968
-------
Costs in excess of net assets acquired $ 1,062
=======
</TABLE>
-40-
<PAGE>
DIRECTORS AND OFFICERS
OFFICERS: DIRECTORS:
LEXINGTON B & L FINANCIAL CORP. LEXINGTON B & L FINANCIAL CORP.
AND B & L BANK
Erwin Oetting, Jr. Erwin Oetting, Jr.
President and Chief Executive Officer Chairman of the Board
E. Steva Vialle E. Steva Vialle
Executive Vice-President, Chief
Operating Officer and Secretary Steve Oliaro
President
William J. Huhmann Baker Memorials, Inc.
Senior Vice-President and
Chief Financial Officer Norman Vialle
Owner, Maid-Rite Drive In
Mark D. Summerlin
Senior Vice-President Charles R. Wilcoxon
Retired Businessman
Terry L. Thompson
Vice-President Glenn H. Twente
Retired Chiropractor
B & L BANK OFFICERS
Erwin Oetting, Jr. E. Steva Vialle
President and Chief Executive Officer Executive Vice-President, Chief
Operating Officer and Secretary
Kathryn M. Swafford Mark D. Summerlin
Vice-President and Treasurer Vice-President
LAFAYETTE COUNTY BANK
OFFICERS: DIRECTORS:
William J. Huhmann William J. Huhmann
Chairman and Chief Financial Officer Chairman of the Board
Terry L. Thompson Terry L. Thompson
President and Chief Executive Officer
Alfred Block
Donald L. Coen Farmer
Executive Vice President
Ranie Thompson
Carol Summerlin Retired Businessman
Senior Vice President
William C. LaHue, M.D.
Kirk Craven Doctor.
Vice President
-41-
<PAGE>
LAFAYETTE COUNTY BANK - CONT'D
OFFICERS: DIRECTORS:
Betty Teter Norman Rasa
Assistant Vice-President Business / Farmer
Mary Ann Campbell Erwin Oetting, Jr.
Assistant Cashier President, B & L Bank.
Elsie Binder E. Steva Vialle
Assistant Cashier Executive Vice-President, B & L Bank
Vickie Church Steve Oliaro
Assistant Cashier President, Baker Memorials, Inc.
CORPORATE INFORMATION
OFFICES INDEPENDENT AUDITORS
LEXINGTON B & L FINANCIAL CORP. Moore, Horton & Carlson, P.C.
AND B & L BANK Mexico, Missouri
919 Franklin Avenue GENERAL COUNSEL
Lexington, Missouri 64067
Telephone (660) 259-2247 Aull, Sherman, Worthington,
Giorza & Maycock, LLC
LAFAYETTE COUNTY BANK Lexington, Missouri
MAIN OFFICE SPECIAL COUNSEL
545 South Highway 13 Muldoon, Murphy & Faucette
Lexington, Missouri 64067 Washington, D.C.
BRANCH LOCATIONS
558 Highway 224
Wellington, Missouri 64097
Second and Highway 3
Callao, Missouri 63534
-42-
<PAGE>
STOCKHOLDERS INFORMATION
ANNUAL MEETING
The Annual Meeting of Stockholders will be held at the office of B & L Bank, 919
Franklin Avenue, Lexington, Missouri, on Tuesday, January 26, 1999 at 2:00 p.m.,
Central Time.
SHAREHOLDER AND GENERAL INQUIRIES REGISTRAR AND TRANSFER AGENT
E. Steva Vialle Registrar and Transfer Company
B & L Bank 10 Commerce Drive
919 Franklin Street Cranford, New Jersey 07016-3572
Lexington, Missouri 64067 (800) 866-1340
(660) 259-2247
ANNUAL AND OTHER REPORTS
A COPY OF THE FORM 10-KSB AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
WILL BE FURNISHED WITHOUT CHARGE TO STOCKHOLDERS AS OF THE RECORD DATE FOR
VOTING AT THE ANNUAL MEETING OF STOCKHOLDERS UPON WRITTEN REQUEST TO THE
SECRETARY, LEXINGTON B & L FINANCIAL CORP., 919 FRANKLIN AVENUE, LEXINGTON,
MISSOURI 64067. THE COMPANY'S FORM 10-KSB IS ALSO AVAILABLE THROUGH THE SEC'S
WORLD WIDE WEB SITE ON THE INTERNET (HTTP://WWW.SEC.GOV).
-43-
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
<TABLE>
<CAPTION>
Percentage Jurisdiction or
Subsidiaries (a) of Ownership State of Incorporation
- ---------------- ------------- ----------------------
<S> <C> <C>
B & L Bank 100% United States
Lafayette County Bank 100% Missouri
B & L Financial Services, Inc. 100% Missouri
</TABLE>
- -------------------------
(a) The operations of the Company's subsidiaries are included in the Company's
consolidated financial statements.
<PAGE>
[LETTERHEAD OF MOORE, HORTON & CARLSON, P.C. APPEARS HERE]
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
Board of Directors
Lexington B & L Financial Corp.
Lexington, Missouri 64067
We hereby consent to the incorporation by reference in the Registration
Statement of Lexington B & L Financial Corp. on Form S-8 (File No. 333-29807),
of our report dated December 1, 1998, accompanying the consolidated financial
statements incorporated by reference in Lexington B & L Financial Corp.'s Annual
Report on Form 10-KSB for the year ended September 30, 1998.
/s/ Moore, Horton & Carlson, P.C.
Mexico, Missouri
December 24, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED
FINANCIAL STATEMENTS OF LEXINGTON B & L FINANCIAL CORP. FOR THE YEAR ENDED
SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,890
<INT-BEARING-DEPOSITS> 7,094
<FED-FUNDS-SOLD> 975
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 2,373
<INVESTMENTS-CARRYING> 14,965
<INVESTMENTS-MARKET> 15,189
<LOANS> 62,914
<ALLOWANCE> 599
<TOTAL-ASSETS> 93,761
<DEPOSITS> 76,764
<SHORT-TERM> 130
<LIABILITIES-OTHER> 896
<LONG-TERM> 378
0
0
<COMMON> 13
<OTHER-SE> 15,580
<TOTAL-LIABILITIES-AND-EQUITY> 93,761
<INTEREST-LOAN> 5,468
<INTEREST-INVEST> 1,428
<INTEREST-OTHER> 101
<INTEREST-TOTAL> 6,997
<INTEREST-DEPOSIT> 3,713
<INTEREST-EXPENSE> 3,776
<INTEREST-INCOME-NET> 3,221
<LOAN-LOSSES> 26
<SECURITIES-GAINS> 2
<EXPENSE-OTHER> 2,483
<INCOME-PRETAX> 1,017
<INCOME-PRE-EXTRAORDINARY> 1,017
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 659
<EPS-PRIMARY> 0.68
<EPS-DILUTED> 0.66
<YIELD-ACTUAL> 3.69
<LOANS-NON> 524
<LOANS-PAST> 57
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 967
<ALLOWANCE-OPEN> 221
<CHARGE-OFFS> 61
<RECOVERIES> 22
<ALLOWANCE-CLOSE> 599
<ALLOWANCE-DOMESTIC> 500
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 99
</TABLE>
