<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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-28120
LEXINGTON B & L FINANCIAL CORP.
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(Exact name of small business issuer as specified in its charter)
<TABLE>
<S> <C>
Missouri 43-173955
- ------------------------------------------------- ------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
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)
</TABLE>
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
----- -----
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
-----
The Registrant's revenues for the fiscal year under report were $7.8
million.
As of December 20, 1999, there were issued and outstanding 909,783 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 on the nonaffiliates
of the Registrant on December 20, 1999 was $11,486,000 (909,783 shares at
$12.625 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, 1999 ("Annual Report") (Parts I and II).
2. Portions of Definitive Proxy Statement for the 2000 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 Bancshares' common stock were converted into
$.92 in cash plus .0851 of a 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 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 one-to-four family mortgages for sale
into 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 surrounding 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.
-1-
<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
$62.1 million at September 30, 1999, representing 58.2% of consolidated total
assets. The Company's mortgage banking subsidiary originates mortgage loans for
sale into the secondary market. Such loans are classified on the Consolidated
Statement of Financial Position as "Loans held-for-sale" and at September 30,
1999 totalled $467,000.
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,
--------------- --------------- ---------------
1999 1998 1997
---- ---- ----
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................................. $39,439 62.93% $42,037 66.84% $39,348 85.37%
Commercial real estate and
multi-family...................................... 5,703 9.10% 3,690 5.87% 1,553 3.37%
Land............................................... 1,115 1.78% 653 1.04% 536 1.16%
Construction....................................... 1,176 1.87% 626 0.99% 1,101 2.39%
------- ------- ------- ------- ------- -------
Total mortgage loans.............................. 47,433 75.68% 47,006 74.74% 42,538 92.29%
Commercial loans................................... 2,815 4.49% 4,042 6.42% - 0.00%
Agriculture loans.................................. 3,225 5.15% 3,171 5.04% - 0.00%
Consumer and other loans
Home equity........................................ 676 1.08% 790 1.26% 608 1.32%
Loans on savings deposits.......................... 2,457 3.92% 1,986 3.16% 1,101 2.39%
Automobile loans................................... 4,811 7.68% 4,968 7.90% 1,446 3.13%
Other.............................................. 1,255 2.00% 933 1.48% 401 0.87%
------- ------- ------- ------- ------- -------
Total consumer and other loans.................... 9,199 14.68% 8,677 13.80% 3,556 7.71%
------- ------- ------- ------- ------- -------
Total loans....................................... 62,672 100.00% 62,896 100.00% 46,094 100.00%
======= ======= =======
Add Deferred loan fees............................. 53 18 15
Less Allowance for possible loan losses............ 599 599 221
------- ------- -------
Loans receivable, net.............................. $62,126 $62,315 $45,888
======= ======= =======
</TABLE>
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The following table sets forth at September 30, 1999 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 at their
contractual maturity date. Loan balances do not include undisbursed loan
proceeds, unearned discounts, and allowance for loan losses.
<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................ $ 864 $2,890 $2,924 $8,144 $ 8,288 $16,329 $39,439
Commercial real estate
and multi-family............. 995 731 56 687 2,319 915 5,703
Land.......................... - 18 147 112 267 571 1,115
Construction.................. 1,176 - - - - - 1,176
------- ------ ------ ------ ------- ------- -------
Total mortgage loans......... 3,035 3,639 3,127 8,943 10,874 17,815 47,433
Commercial loans.............. 2,227 475 83 30 - - 2,815
Agriculture................... 1,649 1,176 400 - - - 3,225
Consumer and other loans 3,300 3,541 1,786 394 166 12 9,199
------- ------ ------ ------ ------- ------- -------
Total loans.................. $10,211 $8,831 $5,396 $9,367 $11,040 $17,827 $62,672
======= ====== ====== ====== ======= ======= =======
</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>
Floating or
Fixed- Adjustable
Rates Rates
------ -----------
(In Thousands)
<S> <C> <C>
Mortgage loans:
One-to-four family.......................................... $ 8,721 $29,855
Commercial real estate and multi-family..................... 915 3,793
Land........................................................ - 1,115
Construction................................................ - -
------- -------
Total mortgage loans....................................... 9,636 34,763
Commercial loans............................................. 258 329
Agriculture loans............................................ 490 1,086
Consumer and other loans..................................... 5,899 -
------- -------
Total...................................................... $16,283 $36,178
======= =======
</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
-3-
<PAGE>
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.
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, 1999, the initial interest rate on ARM loans
offered by the Bank ranged from 7.00% to 8.50% 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
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 Bank 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.
-4-
<PAGE>
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.
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,
1999, income property loans aggregated $5.7 million, or 9.10% of the gross loan
portfolio.
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, 1999, construction loans totalled $1.2 million,
or 1.87% 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.
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<PAGE>
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.
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, 1999, the land loan portfolio
totalled $1.1 million, or 1.78% 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, 1999, the agricultural loan
portfolio totalled $3.2 million or 5.15% 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 10-year term and
a 10-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 agriculture 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.
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<PAGE>
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.
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 acquisition 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, 1999, the
Company's consumer loans totalled approximately $9.2 million, or 14.7% 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.
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.
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<PAGE>
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,
1999, the Company's total gross loan originations were $30.0 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
except for loans originated by the mortgage banking subsidiary. During the year
ended September 30, 1999, the mortgage banking subsidiary originated $4.7
million of loans held-for-sale, and sold $4.2 million into the secondary market.
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, 1999, $2.0 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, 1999, the Company purchased $559,000 of one- to
four-family loans.
The following table shows loans originated, purchased, sold and repaid
during the periods indicated.
<TABLE>
<CAPTION>
Years Ended September 30,
---------------------------------------------------
1999 1998 1997
---------------- ---------------- ---------------
<S> <C> <C> <C>
(In Thousands)
Total loans at beginning of period....... $ 62,896 $ 46,094 $45,569
-------- -------- -------
Loans acquired from Lafayette
County Bank on 10/1/98.......................... - 16,544 -
Loans originated:
One- to four-family............................ 8,231 8,457 7,273
Commercial real estate and multi-family... 3,324 2,962 365
Land............................................. 540 189 219
Construction.................................. 3,298 700 1,219
-------- -------- -------
Total mortgage loans originated................ 15,393 12,308 9,076
Commercial loans................................. 3,430 3,702 -
Agriculture loans.............................. 3,429 3,095 -
Consumer and other loans......................... 7,785 8,959 517
-------- -------- -------
Total loans originated......................... 30,037 28,064 9,593
Loans purchased:
One- to four-family ............................. 559 - 209
Commercial real estate and multi-family... - - 318
-------- -------- -------
Total loans purchased................... 559 - 527
Loans sold:
Commercial real estate...................... - (119) -
Principal repayments........................ (30,761) (27,626) (9,586)
Loans charged off.......................... (59) (61) (9)
-------- -------- -------
Net loan activity............................... (224) 16,802 525
-------- -------- -------
At end of period:
Total gross loans........................... $ 62,672 $ 62,896 $46,094
======== ======== =======
</TABLE>
-8-
<PAGE>
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 $2.3 million at September 30, 1999, $1.5
million of which were for variable rate loans. See Note M of Notes to
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.
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,
a 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
Bank mails an additional 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 deficiency 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.
-9-
<PAGE>
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>
1999 1998 1997
--------- --------- ---------
Percentage Percentage Percentage
Principal of Gross Principal of Gross Principal of Gross
(Dollars in Thousands) Balance Loans Balance Loans Balance Loans
--------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Loans delinquent for:
30-59 days..................................... $1,453 2.32% $ 623 0.99% $ 939 2.04%
60-89 days.................................. 741 1.18% 649 1.03% 328 0.71%
------ ---- ------ ---- ------ ----
$2,194 3.50% $1,272 2.02% $1,267 2.75%
====== ==== ====== ==== ====== ====
</TABLE>
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, 1999, there
were loans totalling $5,000 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,
-------------------------------------------------
1999 1998 1997
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Loans accounted for on a non-accrual basis:
Loans 90 days or more past due:
Residential real estate...................... $ 377 $ 248 $ 334
Commercial real estate....................... -- 143 --
Commercial loans............................. -- 15 --
Consumer and other loans..................... 20 118 60
Loans 30 to 89 days past due:
Residential real estate...................... 21 -- --
Consumer..................................... 7 -- --
-------------- ---------- ----------
Total non-accrual loans....................... 425 524 394
Real estate owned............................. 32 -- --
-------------- ---------- ----------
Total non-performing assets $ 457 $ 524 $ 394
============== ========== ==========
Total non-performing loans to net loans 0.68% 0.84% 0.86%
===== ===== =====
Total non-performing loans to total assets 0.40% 0.56% 0.67%
===== ===== =====
Total non-performing assests to total assets 0.43% 0.56% 0.67%
===== ===== =====
</TABLE>
At September 30, 1999, 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.
-10-
<PAGE>
The amount of interest collected in cash and included in the results of
operations on non-accruing loans for the year ended September 30, 1999 amounted
to approximately $12,000, before such loans were placed on non-accrual status.
Had such non-accruing loans been current in accordance with their original
terms, an additional $21,000 of interest income would have been recorded for the
year ended September 30, 1999.
Foreclosed Real Estate. See Note A of Notes to the Consolidated Financial
Statements for a discussion of the Bank's procedures for accounting for
foreclosed real estate. The Company had $32,000 of foreclosed real estate at
September 30, 1999.
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 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,
---------------------------
1999 1998 1997
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Loss..................................... $ -- $ 26 $ 15
Doubtful................................. 7 15 --
Substandard assets....................... 1,111 926 350
Special mention.......................... 587 460 151
------- ------- -----
Total classified assets............... $ 1,705 $ 1,427 $ 516
======= ======= =====
General loss allowances.................. $ 599 $ 573 $ 206
Specific loss allowances................. -- 26 15
------- ------- -----
Total allowances for loan losses...... $ 599 $ 599 $ 221
======= ======= =====
</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.
-11-
<PAGE>
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 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, 1999, 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.
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.
-12-
<PAGE>
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,
-----------------------------------------------------------
1999 1998 1997
--------------------- ----------------- -----------------
(Dollars in Thousands)
<S> <C> <C> <C>
Allowance at beginning of period.................. $ 599 $ 221 $ 201
Allowance acquired from Lafayette
County Bank...................................... - 391 -
Provision for loan losses......................... 36 26 29
Recoveries........................................ 23 22 -
Charge offs:
Residential real estate.......................... 13 - -
Commerical real estate and
multi-family................................... 19 26 -
Commerical loans................................. - 6 -
Construction..................................... - - -
Consumer ........................................ 27 29 9
------- ------- ------
Total charge-offs.............................. 59 61 9
------- ------- ------
Net charge-offs................................ 36 39 9
------- ------- ------
Balance at end of period.......................... $ 599 $ 599 $ 221
======= ======= ======
Ratio of allowance to total
loans outstanding at the
end of period.................................... 0.95% 0.95% 0.48%
======= ======= ======
Ratio of net charge-offs to
average loans outstanding
during the period................................ 0.06% 0.06% 0.02%
======= ======= ======
Ratio of allowance to
non-accrual loans................................ 140.94% 114.31% 56.10%
======= ======= ======
</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,
-------------------------------------------------------------------------
1999 1998 1997
---------------------- ------------------ -----------------------
% 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
------ -------- ------- -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Real estate mortgage:
One-to-four family....................... $100 62.93% $100 66.84% $ 55 85.37%
Commercial real estate and
multi-family........................... 150 9.10% 125 5.87% 61 3.37%
Land..................................... - 1.78% - 1.04% - 1.16%
Construction............................. - 1.87% - 0.99% - 2.39%
Commercial loans........................... 100 4.49% 100 6.42% - -
Agricultural loans......................... 25 5.15% 25 5.04% - -
Consumer and other loans................... 150 14.68% 150 13.80% 40 7.71%
Unallocated................................ 74 - 99 - 65 -
---- ------ ---- ------ ---- ------
Total allowance for loan losses.......... $599 100.00% $599 100.00% $221 100.00%
==== ====== ==== ====== ==== ======
</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, 1999, B&L Bank's regulatory liquidity of
22.20% 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 Boards of Directors of B & L Bank and Lafayette County Bank have
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.
-14-
<PAGE>
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 Company's credit and interest rate risk, and risk-based capital is
also given consideration during the evaluation.
The Company adopted SFAS No. 115 on October 1, 1993. At September 30, 1999,
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, 1999, 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,
--------------------------------------------
1999 1998 1997
---- ---- ----
Carrying Carrying Carrying
Value Value Value
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Government National
Mortgage Association
("GNMA").................... $ 295 $ 265 $ 290
Fannie Mae.................. 169 224 409
Freddie Mac................. 203 348 970
-------- ---------- ---------
Total.................... $ 667 $ 837 $ 1,669
======== ========== =========
</TABLE>
-15-
<PAGE>
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,
------------------------------------------------------------------------
1999 1998 1997
---- ---- ----
Carrying Percent of Carrying Percent of Carrying Percent of
Value Portfolio Value Portfolio Value Portfolio
------- ---------- -------- ---------- -------- -----------
Investment securities:
U.S. Government and Federal
Agency obligations (1) ..................... $ 27,675 84.63% $ 14,580 84.09% $ 1,709 40.16%
State and local obligations(1) ............. 4,358 13.33% 1,921 11.08% 878 20.63%
Mortgage-backed securities(1) .............. 667 2.04% 837 4.83% 1,669 39.21%
________ _________ _________ ____ _________ _____
Total investment securities................... $ 32,700 100.00% $ 17,338 100.00% $ 4,256 100.00%
======== ========= ========= ====== ========= ======
Capital Stock - FHLB - Des Moines(2) $ 535 $ 520 $ 464
-------- --------- ---------
(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, 1999, 1998 and 1997. 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 6.34% for the fiscal year ended September 30, 1999.
The following table sets forth the maturities of the investment securities portfolio at September 30, 1999.
Book Value Total Investment Securities
-----------------------------------------------------
One Year After One To Over Five To After Book Market
or Less Five Years Ten Years Ten Years Value Value
--------- ------------- ------------ ----------- -------- ----------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Available for sale:
U.S. Government and
Federal Agencies........................... $ 1,000 $ 2,498 $ 4,390 $ -- $ 7,888 $ 7,687
Mortgage-backed Securities................. -- -- 46 622 668 668
--------- ----------- ---------- --------- -------- -----------
Total available for sale.................... 1,000 2,498 4,436 622 8,556 8,355
Held-to-maturity:
U.S. Government and
Federal Agencies........................... 1,398 13,247 4,844 499 19,988 19,395
State and local obligations................ 256 617 531 2,953 4,357 4,306
--------- ----------- ---------- --------- -------- -----------
Total held-to-maturity....................... 1,654 13,864 5,375 3,452 24,345 23,701
--------- ----------- ---------- --------- -------- -----------
Total investment securities.................. $ 2,654 $ 16,362 $ 9,811 $ 4,074 $ 32,901 $ 32,056
========= =========== ========== ========= ======== ===========
Weighted average yield....................... 6.73% 5.86% 6.38% 5.97% 6.10%
==== ==== ==== ==== ====
</TABLE>
-16-
<PAGE>
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, 1999, 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, 1999.
<TABLE>
<CAPTION>
Percentage
of Total
Balance Deposits
--------- -----------
<S> <C> <C>
Checking and Savings Deposits
-----------------------------
Demand non-interest bearing........................ $ 5,396 6.34%
NOW Accounts....................................... 8,373 9.83%
Money market accounts.............................. 8,017 9.42%
Passbook savings accounts.......................... 6,577 7.72%
--------- ----
26,363 33.31%
Certificates of Deposits
------------------------
With balances of less than $100,000............... 49,202 57.78%
With balances in excess of $100,000............... 7,585 8.91%
--------- ----
56,787 66.69%
--------- -----
Total Deposits.................................... $ 85,150 100.00%
</TABLE>
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,
1999.
<TABLE>
<CAPTION>
Maturity Period Amount
- --------------------------------------- -------------
(In Thousands)
<S> <C>
Three months or less............................. $ 1,635
Over three through six months.................... 1,008
Over six through twelve months................... 1,472
Over twelve months............................... 3,470
-------------
Total..................................... $ 7,585
=============
</TABLE>
-17-
<PAGE>
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,
-------------------------------------------------------------------------------------
1999 1998 1997
---- ---- ----
Percent Percent Percent
of Increase of Increase of
Amount Total (Decrease) Amount Total (Decrease) Amount Total
---------- ------- ----------- --------- ------- ----------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest bearing................... $ 5,396 6.57% $ 738 $ 4,658 6.07% $ 3,971 $ 687 1.61%
NOW checking........................... 8,373 10.19% 2,453 5,920 7.71% 4,848 1,072 2.51%
Regular savings accounts(1)............ 6,366 7.75% 38 6,328 8.24% 2,447 3,881 9.09%
Money Market deposits.................. 5,228 6.36% (1,442) 6,670 8.69% 4,255 2,415 5.66%
----------- ---- ----------- --------- ---- ----------- -------- ----
25,363 30.87% 1,787 23,576 30.71% 15,521 8,055 18.87%
Fixed-rate certificates which mature(1)
Within 1 year........................ 33,524 40.81% 4,614 28,910 37.66% 9,487 19,423 45.49%
After 1 year, but before 2 years..... 14,925 18.17% 4,892 10,033 13.07% 4,703 5,330 12.48%
After 2 years, but before 5 years..... 8,191 9.97% (5,343) 13,534 17.63% 3,994 9,540 22.35%
Certificates maturing thereafter...... 147 0.18% (564) 711 0.93% 365 346 0.81%
----------- ---- ----------- --------- ---- ----------- -------- ----
56,787 69.13% 3,599 53,188 69.29% 18,549 34,639 81.13%
----------- ----- ----------- --------- ----- ----------- -------- -----
Total......................... $ 82,150 100.00% $ 5,386 $ 76,764 100.00% $ 34,070 $42,694 100.00%
============ ====== ---------- ========= ====== =========== ======== ======
</TABLE>
(1) Included in savings accounts and certificate balances were individual
retirement account ("IRA") balances of $6,649,000, $6,199,000 and
$3,780,000 at September 30, 1999, 1998 and 1997, 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,
-------------------------------------------
1999 1998 1997
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
3.00 - 3.99%................................. $ 551 $ 667 $ 22
4.00 - 4.99%................................. 9,426 403 229
5.00 - 5.99%................................. 32,953 36,786 22,909
6.00 - 6.99%................................. 7,800 8,988 5,362
7.00 - 7.99%................................. 2,012 2,416 2,381
8.00 - 8.99%................................. 4,045 3,906 3,736
9.00% and over............................... -- 22 --
-------- ------- ----------
Total................................ $ 56,787 $53,188 $ 34,639
======== ======= ==========
</TABLE>
-18-
<PAGE>
The following table sets forth the amount and maturities of time deposits at
September 30, 1999.
<TABLE>
<CAPTION>
Percent
Amount Due of Total
Less Than 1-2 2-3 3-4 After Certificates
One Year Years Years Years 4 Years Total Accounts
--------- ----- ----- ----- ------- ----- --------
In Thousands
<S> <C> <C> <C> <C> <C> <C> <C>
3.00 - 3.99%................. $ 551 $ -- $ -- $ -- $ -- $ 551 $ 0.97%
4.00 - 4.99%................. 9,426 -- -- -- -- 9,426 16.60%
5.00 - 5.99%................. 20,965 7,303 2,228 980 1,477 32,953 58.03%
6.00 - 6.99%................. 1,989 2,380 1,283 1,372 776 7,800 13.74%
7.00 - 7.99%................. 593 1,197 29 19 174 2,012 3.54%
8.00 - 8.99%................. -- 4,045 -- -- -- 4,045 7.12%
--------- -------- ------- ------- ------- -------- --------
$ 33,524 $ 14,925 $ 3,540 $ 2,371 $ 2,427 $ 56,787 100.00%
========= ======== ======= ======= ======= ======== ========
</TABLE>
Deposit Activities. The following table sets forth the deposit activities
of the Company for the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------
1999 1998 1997
---- ---- ----
In Thousands
<S> <C> <C> <C>
Beginning balance....................... $ 76,764 $ 42,694 $ 42,237
Deposits acquired in the acquisition
of Lafayette County Bank............... -- 31,355 --
Net Deposits (withdrawals) before
interest credited...................... 4,075 (777) (1,220)
Interest credited....................... 4,311 3,492 1,677
-------- -------- --------
Net increase (decrease) in Deposits..... 8,386 34,070 457
-------- -------- --------
Ending balance.......................... $ 85,150 $ 76,764 $ 42,694
======== ======== ========
</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.
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<PAGE>
The Company had average advances totalling $4.3 million during the year
ended September 30, 1999. The following table sets forth the amount and
maturity of advances at September 30, 1999 and 1998:
<TABLE>
<CAPTION>
Interest Original At September 30, Maturity
-------------------
Advance Date Rate Amount 1999 1998 Date
--------- -------- ---- ---- --------
<S> <C> <C> <C> <C> <C>
March 15, 1994 6.30% $ 35,000 $ -- $ 35,000 March 15, 1999
March 15, 1994 6.50% 35,000 35,000 35,000 March 15, 2000
March 15, 1994 6.70% 35,000 35,000 35,000 March 15, 2001
March 15, 1994 6.80% 35,000 35,000 35,000 March 15, 2002
October 20, 1998 5.47% 650,000 623,690 -- Due monthly
through
October 21, 2013
December 2, 1998 5.25% 2,000,000 1,932,886 -- Due monthly
through
December 2, 1013
December 15, 1998 4.76% 2,500,000 2,500,000 -- December 15, 2008
---------- -------- Callable
quarterly
beginning
December 15, 2003
$5,161,576 $140,000
========== ========
</TABLE>
For the year ended September 30, 1997, the Company 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.
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<PAGE>
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, 1999. 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 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 Bank's 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.
During 1999 SAIF members were 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 were charged an assessment to help
pay interest on the FICO bonds at a rate of approximately .013%. After January
1, 2000 the assessment will be the same for all insured deposits.
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.
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<PAGE>
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 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, 1999, 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. Most recently the agencies have issued
guidelines regarding Year 2000 computer compliance. 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
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<PAGE>
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.
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, 1999, B&L Bank was in compliance with the QTL test. The Gramm-
Leach-Bliley Financial Modernization Act of 1999 has abolished a number of the
QTL restrictions including FHLB stock purchase requirements.
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 4% core capital or leverage ratio,
defined as the ratio of core capital to adjusted total assets (3% for
institutions that receive the highest CAMELS examination rating). Core capital
is defined to include common stockholders' equity, non-cumulative 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.
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<PAGE>
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 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 require most banks to meet a "Tier 1" leverage capital
ratio of at least 4% of total assets (3% for banks with the highest CAMELS
examination rating). 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. Based on the definitions contained in the FDIC's capital
regulations, Lafayette County Bank had a Tier 1 leverage capital ratio of 6.80%
as of September 30, 1999.
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 discussed above under the
4% 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
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<PAGE>
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.
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 limitations
upon all capital distributions by a savings institution, including cash
dividends, payments to repurchase its shares and payments to shareholders of
another institution is a cash-out merger. The rule effective through the first
quarter of 1999 established three tiers of institutions based primarily on an
institution's capital level. A Tier I institution exceeded all capital
requirements before and after a proposed capital distribution and has not been
advised by the OTS that it needs more than normal supervision. A Tier I
institution could, after first giving notice to but without obtaining approval
of the OTS, make capital distributions during the calendar year equal to the
greater of 100% of its net earnings to date during the calendar year plus the
amount that would have reduced by one-half the excess capital over its capital
requirements at the beginning of the calendar year, or 75% of its net income for
the previous four quarters. Any additional capital distributons required prior
regulatory approval.
Effective April 1, 1999, OTS capital regulations changed. Before the new
regulation, an application to and the prior approval of the OTS is required
before any capital distribution if the institution does not meet the criteria
for "expedited treatment" of applications under OTS regulations (generally,
compliance with all capital requirements and examination ratings in one of two
top categories), the total capital distributions for the calendar year exceed
net income for that year plus the amount of retained net income for the
preceding two years, the institution would be undercapitalized following the
distribution or the distribution would otherwise be contrary to a statue,
regulation or agreement with OTS. If an association's capital fell below its
regulatory requirements or if the OTS notified it that it was in need of more
than normal supervision, the association's ability to make capital distributions
could be restricted. In addition, the OTS could prohibit a proposed capital
distribution, which would otherwise be permitted by the regulation if the OTS
determines that the distribution would be an unsafe or unsound practice.
Neither bank would be permitted to make a capital distribution which would make
it "undercapitalized" within the meaning of the prompt corrective action
regulations. See "Federal Regulation - Prompt Corrective Actions".
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, 1999, B&L Bank's regulatory limit on loans to
one borrower was $1.2 million. At September 30, 1999, B&L Bank's largest
aggregate amount of loans to one borrower was $1.2 million.
Under Missouri law, 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, 1999, Lafayette County Bank's lending limit to any
one borrower was $780,000. At September 30, 1999, the largest aggregate amount
of loans to one borrower, less any government guarantees, was $432,000.
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
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<PAGE>
corporation subsidiaries to engage in certain pre-approved activities. 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 as principal 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.
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.
Transactions with Affiliates. Banks and savings associations must comply
with Sections 23A and 23B of the Federal Reserve Act relative to transactions
with affiliates. A holding company, its subsidiaries and any other company
under common control are considered affiliates of the subsidiary depository
institutions under the HOLA. Generally, Sections 23A and 23B: (i) limit the
extent to which the insured instituion 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 institution 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
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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 proceduce to be followed.
The OTS regulations, with certain minor variances, apply Regulation O to savings
institutions.
Federal Reserve System. The Federal Reserve Board regulations requires
banks and savings institutions to maintain non-interest earnings reserves
against their transaction accounts, primarily NOW and regular checking accounts.
The regulations generally require that reserves be maintained against aggregate
transaction accounts as follows: for accounts aggregating $46.5 million or less,
subject to adjustment by the Federal Reserve Board the reserve requirement is
3%; and for accounts aggregating greater than $46.5 million, the reserve
requirement is $1.395 million plus 10%, subject to adjustment by the Federal
Reserve Board between 8% and 14%, against that portion of total transaction
accounts in excess of $46.5 million. The first $4.9 million of otherwise
reservable balances, as adjusted by the Federal Reserve Board, are exempted from
the 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 an institution,
to assess the institution's record in meeting the credit needs of the community
serviced by the institution, including low and moderate income neighborhoods.
The regulatory agency's assessment of the instituion's record is made available
to the public. Further, such assessment is required of any institution 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. The Gramm-Leach-Bliley Act of 1999 extended the frequency of CRA
examinations to every five years for institutions with an "outstanding" rating
and every four years with a "satisfactory" rating.
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 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
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<PAGE>
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
opted 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 are permitted only if the law
of the state in which the branch is located permits such acquisitions.
Interstate mergers and branch acquisitions are also 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.
Financial Modernization. On November 12, 1999, the Gramm-Leach-Bliley
Financial Modernization Act of 1999 was enacted. The Legislation eliminates may
Federal and State law barriers to affiliations among banks and other financial
services providers. The legislation, is expected to take effect in Mach, 2000
establishes a statutory framework pursuant to which full affiliations can occur
between banks and securities firms, insurance companies, and other financial
companies. The legislation provides some degree of flexibility in structuring
these new affiliations, although certain activities may only be conducted
through a holding company structure. The legislation preserves the role of the
Board of Governors of the Federal Reserve System as the umbrella supervisor for
holding companies, but incorporates a system of functional regulation pursuant
to which the various Federal and State financial supervisors will continue to
regulate the activities traditionally within their jurisdictions. The
legislation specifies that banks may not participate in the new affiliations
unless the banks are well-capitalized and well-managed or if any bank affiliate
had received a less than "satisfactory" Reinvestment Act of 1977 rating as of
its most recent examination.
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 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
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<PAGE>
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 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 Banks' 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 Banks 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 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
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<PAGE>
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
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 B&L 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%. 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 Banks 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 Banks will not file a consolidated tax return, except that if
the Company or the Banks 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 the
Company'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.
There have not been any audits of either B & L Bank's or Lafayette County
Bank's Missouri tax returns by Missouri tax authorities during the past five
years.
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<PAGE>
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,
1999, 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, 1999, the Company had 25 full-time and 9 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, 1999:
<TABLE>
<CAPTION>
Name Age(1) Position
- ---- ------ --------
<S> <C> <C>
Erwin Oetting, Jr. 59 President and Chief Executive Officer
E. Steva Vialle 48 Executive Vice President, Chief Operating Officer, and Secretary
William J. Huhmann 60 Senior Vice President and Chief Financial Officer
Mark D. Summerlin 39 Senior Vice President
Terry L. Thompson 46 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. 59 President and Chief Executive Officer
E. Steva Vialle 48 Executive Vice President, Chief Operating Officer and Secretary
Kathryn M. Swafford 37 Vice President and Treasurer
Mark D. Summerlin 39 Vice President
Lafayette County Bank:
William J. Huhmann 60 Chairman and Chief Financial Officer
Terry L. Thompson 46 President and Chief Executive Officer
Carol Summerlin 59 Senior Vice President and Cashier
Kirk Craven 37 Vice President
- ----------
(1) As of September 30, 1999.
</TABLE>
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 CPAs and the Missouri Society of
CPAs.
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.
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, Missouri, 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, 1999, the net book value of the Company's
premises and equipment (land, building and improvements, furniture and
equipment) was $1.2 million.
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, 1999.
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.
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<PAGE>
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,
1999 and 1998*
Consolidated Statements of Stockholders' Equity for the Years Ended
September 30, 1999, 1998 and 1997*
Consolidated Statements of Income for the Years Ended
September 30, 1999, 1998 and 1997*
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1999, 1998 and 1997*
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 1--
Election of Directors" contained in the Company'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" under "Proposal 1 -- 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 "Stock Ownership" 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 1 -- Election of
Directors" and "Stock Ownership" 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 1 -- Election of Directors" and "Stock
Ownership" of the Proxy Statement.
Item 12. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information set forth under the section captioned "Transactions with
Management" 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) Amended and Restated 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 1999 Annual Meeting of Stockholders.
**** Incorporated by Reference to the Registrant's Current Report on Form 8-K
filed on November 12, 1999.
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the quarter ended September
30, 1999.
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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 21, 1999 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.
SIGNATURES TITLE DATE
- ---------- ----- ----
/s/ Erwin Oetting, Jr. President, Chief Executive Officer December 21, 1999
- ----------------------- and Director (Principal Executive
Erwin Oetting, Jr. Officer)
/s/ E. Steva Vialle Executive Vice President, Chief December 22, 1999
- -------------------- Operating Officer, Secretary
E. Steva Vialle and Director
/s/ William J. Huhmann Senior Vice President and Chief December 21, 1999
- ----------------------- Financial Officer (Principal
William J. Huhmann Financial and Accounting Officer)
/s/ Steve Oliaro Director December 22, 1999
- -----------------
Steve Oliaro
/s/ Norman Vialle Director December 22, 1999
- ------------------
Norman Vialle
/s/ Charles R. Wilcoxon Director December 21, 1999
- ------------------------
Charles R. Wilcoxon
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<PAGE>
EXHIBIT 13
1999 Annual Report
Lexington B & L Financial Corp.
<PAGE>
Lexington B & L Financial Corp.
1999 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 Statements Of Financial Condition......................................... 15
Consolidated Statements Of Stockholders' Equity........................................ 16
Consolidated Statements Of Income...................................................... 18
Consolidated Statements Of Cash Flows.................................................. 19
Notes To Consolidated Financial Statements............................................. 21
Directors And Officers................................................................. 39
Corporate Information.................................................................. 40
Stockholder Information................................................................ 41
</TABLE>
<PAGE>
LETTER TO STOCKHOLDERS
President's Message
To Our Stockholders:
On behalf of the Board of Directors, Officers and Employees of Lexington B & L
Financial Corp. and its wholly-owned subsidiaries, B & L Bank, Lafayette County
Bank and B & L Mortgage, Inc., we are pleased to present our Forth Annual Report
to the stockholders.
Earnings for the year ended September 30, 1999, were $660,000, or $0.72 per
diluted share. Our return on average assets for the year ended September 30,
1999, was 0.63%, while our return on average equity was 4.20%. We paid a $0.15
per share semiannual dividend in January and July this year.
Generally speaking, small cap bank stocks receded in 1999. In response to the
downswing in the market, the Company instituted its fourth stock buy back plan,
pursuant to which it repurchased 94,500 shares of the Company's stock. This
reflects management's continuing commitment to the Company's stockholders to
maximize stock value.
We are excited about some changes that we have implemented to further expand the
services that the Company's subsidiaries provide their customers. In December
1998, the newly formed mortgage banking subsidiary opened its door and in the
spring, B & L Bank put its first ATM on line in Lexington. The ATM can be used
by both B & L Bank and Lafayette County Bank customers and has thus far been
very popular with both. The Company is currently contemplating whether to
expand its AMT network. The Company continues to review all options available
to it to maximize the banks' services and increase the Company's revenues.
The last few months of the fiscal year were concentrated on ensuring that our
computer systems were Year 2000 compliant. We are confident that the New Year
will be brought in without material incident.
The Company is committed to being a community-oriented financial institution
that furnishes affordable services and products to the citizens of Lexington and
its surrounding communities.
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 in 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. On October 1, 1997, the Company acquired 100% of the outstanding
stock of Lafayette County Bank ("LCB"). The acquisition was accounted for
utilizing the purchase method of accounting. During November 1998, the Company
formed a mortgage banking subsidiary, B & L Mortgage, Inc. ("MTG"). MTG has
been originating residential mortgages for resale in the secondary mortgage
market. At September 30, 1999, the Company had total consolidated assets of
$106.7 million and consolidated stockholders' equity of $15.1 million.
The Company is not engaged in any significant business activity other than
holding the stock of B&L, LCB and MTG. Accordingly, the information set forth in
this report, including financial statements and related data, applies primarily
to the operations of its two banking subsidiaries and mortgage banking
subsidiary.
B&L is a federal stock savings bank, originally organized in 1887. B&L is
regulated by the Office of Thrift Supervision ("OTS"). LCB is a Missouri state
chartered bank regulated by the Missouri Division of Finance and the Federal
Deposit Insurance Corporation ("FDIC"). The deposits of B&L and LCB are insured
up to applicable limits by 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, 1999, there were approximately 568
stockholders of record and 932,785 shares of common stock outstanding (including
unreleased Employee Stock Ownership Plan ("ESOP") shares of 66,453 and unvested
Management Recognition and Development Plan ("MRDP") shares of 30,360).
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, 1999 and 1998. This information was
provided by the Nasdaq Stock Market.
<TABLE>
<CAPTION>
Fiscal 1999 Fiscal 1998
------------------------------ ------------------------------
High Low Dividends High Low Dividends
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
First Quarter $13.000 $11.000 --- $17.750 $16.000 ---
Second Quarter $12.125 $10.375 $0.15 $17.750 $16.125 $0.15
Third Quarter $11.750 $10.625 --- $17.250 $15.688 ---
Fourth Quarter $13.500 $11.125 $0.15 $16.375 $13.000 $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,
----------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- -------
(Dollars in Thousands)
SELECTED FINANCIAL CONDITION DATA:
<S> <C> <C> <C> <C> <C>
Total assets $106,693 $93,761 $58,789 $61,670 $49,981
Loans receivable, net 62,126 62,315 45,888 45,348 41,111
Investment securities 32,700 17,338 4,256 8,342 4,171
Cash and interest-bearing deposits(1) 6,091 8,985 6,843 6,268 3,583
FHLB stock 535 520 464 464 455
Deposits 85,150 76,764 42,694 42,237 42,401
Stockholders' equity, substantially 15,110 15,593 15,652 18,762 7,195
restricted
Year Ended September 30,
----------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- -------
(Dollars in Thousands, Except Per Share Amounts)
SELECTED OPERATING DATA:
Interest income $ 7,337 $ 6,997 $ 4,597 $ 4,073 $ 3,611
Interest expense 4,282 3,776 2,298 2,333 2,003
-------- ------- ------- ------- -------
Net interest income 3,055 3,221 2,299 1,740 1,608
Provision for loan losses 37 26 29 10 33
-------- ------- ------- ------- -------
Net interest income after 3,018 3,195 2,270 1,730 1,575
provision for loan losses
Noninterest income 403 305 84 99 ---
Noninterest expense 2,438 2,483 1,218 1,144 704
-------- ------- ------- ------- -------
Income before income taxes 983 1,017 1,136 685 871
Income taxes 323 358 390 224 300
-------- ------- ------- ------- -------
Net income $ 660 $ 659 $ 746 $ 461 $ 571
======== ======= ======= ======= =======
Basic income per share $ 0.74 $ 0.68 $ 0.70 $ 0.40 *
======== ======= ======= =======
Diluted income per share $ 0.72 $ 0.66 $ 0.69 $ 0.40 *
======== ======= ======= =======
Dividends per share $ 0.30 $ 0.30 $ 0.15 $ --- *
======== ======= ======= =======
</TABLE>
-3-
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended September 30,
----------------------------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
KEY OPERATING RATIOS:
Performance Ratios:
Return on average assets (net income
divided by average assets) 0.63% 0.70% 1.24% 0.84% 1.17%
Return on average equity (net income
divided by average equity) 4.20 4.00 4.23 4.24 8.36
Interest rate spread (difference
between average yield on interest-
earning assets and average cost of
interest-bearing liabilities) 2.26 2.63 2.40 2.22 2.75
Net interest margin (net interest
income as a percentage of average
interest-earning assets) 3.10 3.64 3.93 3.25 3.38
Noninterest expense to assets 2.29 2.65 2.07 1.86 1.40
Average interest-earning assets to
interest-bearing liabilities 119 124 139 124 115
Dividend payout ratio (dividends paid
divided by net income per share-basic) 40.54 44.12 21.43 --- *
Asset Quality Ratios:
Allowance for loan losses to total
loans receivable at end of period 0.96 0.95 0.48 0.44 0.49
Net charge offs to average outstanding
loans receivable during the period 0.06 0.06 0.02 0.02 0.02
Non-performing assets to total assets (2) 0.43 0.56 0.67 1.26 1.15
Capital Ratios:
Equity to total assets at end of
period (3) 14.16 16.63 26.63 30.42 14.39
Average equity to average assets 15.08 17.58 29.24 19.73 14.00
</TABLE>
<TABLE>
At September 30,
------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
OTHER DATA:
Number of:
Loans outstanding 3,053 3,095 1,595 1,616 1,600
Deposit accounts 10,659 10,449 4,487 4,573 4,660
Full-service offices 4 4 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, 1999, 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, 1999 and 1998. The Company commenced operations in June
1996 with the mutual-to-stock conversion of B&L.
<TABLE>
<CAPTION>
Fiscal 1999 Quarter Ended
---------------------------------------------------------------------
September 30 June 30 March 31 December 31
---------------------------------------------------------------------
(Dollars in Thousands, Except Per Share Data)
<S> <C> <C> <C> <C>
Interest income $1,890 $1,850 $1,855 $1,742
Interest expense 1,094 1,102 1,086 1,000
------ ------ ------ ------
Net interest income 796 748 769 742
Provision for loan losses 11 --- 13 13
------ ------ ------ ------
Net interest income after provision
for loan losses 785 748 756 729
Noninterest income 53 142 123 85
Noninterest expense 504 656 683 595
------ ------ ------ ------
Income before income taxes 334 234 196 219
Income taxes 90 86 72 75
------ ------ ------ ------
Net income $ 244 $ 148 $ 124 $ 144
====== ====== ====== ======
Basic income per share $ 0.28 $ 0.16 $ 0.14 $ 0.16
====== ====== ====== ======
Diluted income per share $ 0.26 $ 0.16 $ 0.14 $ 0.16
====== ====== ====== ======
</TABLE>
<TABLE>
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
====== ====== ====== ======
</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 mortgages, 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 at September 30, 1999, the percent of change in market value
of stockholders' equity given various changes in interest rates.
<TABLE>
<CAPTION>
Basis
Point ("bp") Net Portfolio Value
Change ------------------------------------
in Rates $ Amount $ Change % Change
------------ -------- -------- --------
<S> <C> <C> <C>
+300 bp $ 9,311 $(3,116) (25)%
+200 bp 10,508 (1,919) (15)
+100 bp 11,565 (862) (7)
0 bp 12,427 0 ---
-100 bp 13,124 697 6
-200 bp 13,901 1,474 12
-300 bp 14,758 2,331 19
</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 on 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, 1999 and 1998
- ----------------------------------------------------------------
Total assets increased to $106.7 million at September 30, 1999, from $93.8
million at September 30, 1998. The increase results primarily from an increase
in deposits and advances from the FHLB. Deposits increased $8.4 million and
advances from the FHLB increased $5.0 million. The increase in deposits was
primarily from an increase in public deposits and retail certificates of
deposits. The majority of the new funds were invested into securities and
interest bearing deposits which increased $12.5 million over September 30, 1998.
Equity decreased to $15.1 million at September 30, 1999 ,from $15.6 million in
1998, primarily from the purchase of treasury stock. For the year ended
September 30, 1999, the Company acquired 75,900 shares of its outstanding common
stock at a cost of $976,000.
Comparison of Operating Results for the Year Ended September 30, 1999 and 1998
- ------------------------------------------------------------------------------
Net Income. For the year ended September 30, 1999, net income increased to
$660,000 over the $659,000 reported last year. The increase resulted primarily
from higher noninterest income and lower noninterest expenses. Increased
noninterest income can be attributed to mortgage banking fees amounting to
$76,000 from the newly formed Mortgage Banking Subsidiary and from a $19,000
increase in insurance commissions. The decrease in noninterest expense can be
attributed to lower Management Recognition and Development Plan ("MRDP")
expense.
Net Interest Income. Net interest income decreased 5.2%, to $3.1 million for
the year ended September 30, 1999, from $3.2 million for the year ended
September 30, 1998. Total interest income increased $340,000 to $7.3 million in
1999 from $7.0 million in 1998, primarily as a result of higher volume of
interest-earning assets. Average interest-earning assets for the year ended
September 30, 1999, increased $10.1 million to $98.7 million from $88.6 million
for the year ended September 30, 1998.
-7-
<PAGE>
The interest rate spread decreased 37 basis points to 2.27% for the year ended
September 30, 1999, from 2.63% last year. The net interest margin decreased from
3.64% last year to 3.10% for the year ended September 30, 1999. The decrease in
the net interest spread and the net interest margin can be attributed to the
change in the mix of earning assets. The investment in securities increased
from 27% last year to 36% of earning assets during the year ended September 30,
1999. The yield and interest spread on securities is lower than the yield on
other earning assets. The increase in securities was the result of match
funding an increase in short-term public deposits. The average cost of
interest-bearing liabilities was 5.17% for the year ended September 30, 1999
compared to 5.27% last year. The decrease in the cost of funds can be
attributed to the general decline in interest rates during first nine months of
the Company's fiscal year ending September 30, 1999.
Provision for Loan Losses. The provision for loan losses was $37,000 for the
year ended September 30, 1999, as compared to $26,000 for the year ended
September 30, 1998 and the allowance for loan losses of $599,000 remained
unchanged from a year ago. Loan losses for 1999 totaled $59,000 compared to
$61,000 last year. Net loan charge-offs for 1999 amounted to $37,000 compared
to $39,000 in 1998, or .06% of average outstanding loans for both years.
Noninterest Income. Noninterest income increased $99,000 to $403,000 for the
year ended September 30, 1999, primarily resulting from an $81,000 increase in
service charges and other fees, a $19,000 increase in net insurance commissions
and a $5,000 increase in gain on sale of investments. Included in the increase
from service charges and other fees was $76,000 of mortgage banking fees earned
in 1999. Partially offsetting these increases was a larger loss from foreclosed
real estate which increased $6,000.
Noninterest Expense. Noninterest expense decreased $45,000 to $2.4 million for
the year ended September 30, 1999, from $2.5 million for the year ended
September 30, 1998. The decrease can primarily be attributed to a $74,000
decrease in employee compensation and benefits and a $8,000 decrease in
professional and consulting fees. The decrease in employee compensation and
benefits can be attributed to a $129,000 decrease in the MRDP expense, which for
1999 totaled $173,000, compared to $302,000 last year. The increase in
occupancy cost can be attributed to operating facilities of the new mortgage
banking subsidiary. Increased data processing expense resulted from Year 2000
cost and implementation costs of data processing software.
Income Taxes. The provision for income taxes decreased to $323,000 for the year
ended September 30, 1999, from $358,000 for the year ended September 30, 1998,
due to increased tax-exempt interest income on state and municipal security
holdings.
Comparison of Operating Results for the Year 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 noninterest 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.
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.
-8-
<PAGE>
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 in 1997. 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.
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,
-----------------------------------------------------------------------------------------------
1999 1998 1997
-----------------------------------------------------------------------------------------------
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 $ 62,023 $5,275 8.50% $62,958 $5,469 8.69% $45,109 $3,792 8.41%
Investment securities
and other interest-
bearing deposits 35,397 2,003 5.66 23,793 1,427 6.00 13,402 805 6.01
Federal funds sold 1,243 59 4.75 1,857 101 5.44 --- --- ---
-------- ------ ------- ------ ------- ------
Total interest-earning
assets 98,663 7,337 7.44 88,608 6,997 7.90 58,511 4,597 7.86
Noninterest-earning assets 5,628 5,092 1,887
-------- ------- -------
Total assets $104,291 $93,700 $60,398
======== ======= =======
Interest-bearing liabilities:
NOW, money market and
passbook accounts 22,902 818 3.57 $19,463 668 3.43 $ 7,303 201 2.75
Certificates of deposit 55,264 3,205 5.80 51,459 3,045 5.92 34,763 2,096 6.03
-------- ------ ------- ------ ------- ------
Total deposits 78,166 4,023 5.15 70,922 3,713 5.24 42,066 2,297 5.46
FHLB advances 4,280 225 5.26 307 19 6.19 --- --- ---
Notes payable 341 34 9.97 449 44 9.80 --- --- ---
-------- ------ ------- ------ ------- ------
Total interest-bearing
liabilities 82,787 4,282 5.17 71,678 3,776 5.27 42,066 2,297 5.46
------ ------ ------
Noninterest-bearing
liabilities 5,773 5,550 670
-------- ------- -------
Total liabilities 88,560 77,228 42,736
Stockholders' equity 15,731 16,472 17,662
-------- ------- -------
Total liabilities and
stockholders' equity $104,291 $93,700 $60,398
======== ======= =======
Net interest income $3,055 $3,221 $2,300
====== ====== ======
Interest rate spread 2.27% 2.63% 2.40%
==== ==== ====
Net interest margin 3.10% 3.64% 3.93%
==== ==== ====
Ratio of average interest-
earning assets to average
interest-bearing
liabilities 119% 124% 139%
==== ==== ====
</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) 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>
Year Ended September 30,
----------------------------------------------------------------------------
1999 Compared to 1998 1998 Compared to 1997
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) $(113) $(81) $(194) $1,546 $131 $1,677
Investment securities and
other interest-bearing
deposits (85) 661 576 623 (1) 622
Federal funds sold (12) (30) (42) 51 50 101
----- ---- ----- ------ ---- ------
Total net change in
income on
interest-earning assets (210) 550 340 2,220 180 2,400
Interest-bearing
liabilities:
NOW, money market and 28 122 150 406 61 467
passbook accounts
Certificates of deposit (62) 222 160 989 (40) 949
FHLB advances (3) 209 206 10 9 19
Notes payable 1 (11) (10) 22 22 44
----- ---- ----- ------ ---- ------
Total net change in expense
on interest-bearing
liabilities (36) 542 506 1,427 52 1,479
----- ---- ----- ------ ---- ------
Net change in net
interest income $(174) $ 8 $(166) $ 793 $128 $ 921
===== ==== ===== ====== ==== ======
- ---------------
</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 customer's 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, 1999, the
Company and its subsidiaries held $4.7 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, 1999, the Company had commitments to
originate loans aggregating approximately $2.3 million. As of September 30,
1999, certificates of deposit amounted to $56.8 million, or 66.7% of total
deposits, including $33.5 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, 1999, was $391,000. Net income of $660,000, adjusted for non-cash
charges, largely accounted for the net cash provided by operating activities.
Net cash used by investing activities was $15.3 million. The largest component
of cash used by investing activities was the increase in the purchase of
investment securities. Net cash provided by financing activities was $12.1
million. The largest component of cash provided by financing activities was the
increase in deposits and FHLB advances.
At September 30, 1999, the Company's total stockholders' equity totaled $15.1
million or 14.2% of total assets compared to $15.6 million or 16.6% at September
30, 1998. The decrease can be attributed to the repurchase of the Company's
common stock, which during the year ended September 30, 1998, amounted to
$976,000. 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, which were satisfied at September 30, 1999. See Note J 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
- ---------
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, planning, renovation and testing phases of
its Year 2000 plan. The Company's comprehensive Year 2000 plan addresses all
computer functions, such as those data processing applications processed in-
house and those performed by third parties, and other non-computer functions,
such as building facilities and security systems, to ensure they will be
operational when Year 2000 arrives.
As of September 30, 1999, the renovation, testing and certification as "2000
compliant" of all in-house mission-critical applications and applications
processed by third parties has been completed. The Company has developed
remediation contingency plans and business resumption plans specific to the Year
2000 issues. Remediation 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.
Contingency plans include the printing of all customer account records to paper
plus downloading of all bank and customer records to disk prior to the close of
business December 31, 1999. Procedures are in place to continue operations via
personal compuer utilizing data downloaded to disk, should mission-critical
hardware or software fail. These plans have been tested and are being reviewed
on an ongoing process.
The Company estimated that its total cost for Year 2000 remediation will be
approximately $131,000. Expenditures to date total approximately $119,000.
Cost for hardware and software upgrades are the largest components of the total
costs. Personnel cost for the Company's employees and outside proxy testing cost
and other costs are included in the estimate of Year 2000 remediation. Year
2000 expenditures are expensed as incurred. Year 2000 costs incurred to date
have not had a material adverse impact on operations of the Company and no
additional significant costs are anticipated.
Impact of New Accounting Standards
- ----------------------------------
See Note A of the Notes to the Consolidated Financial Statements.
-13-
<PAGE>
[MH&C LETTERHEAD]
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, 1999 and
1998, and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the three years in the period ended September 30,
1999. 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 the Company at
September 30, 1999 and 1998, and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 1999, in
conformity with generally accepted accounting principles.
/s/ Moore, Horton & Carlson, P.C.
Mexico, Missouri
November 29, 1999
-14-
<PAGE>
Lexington B & L Financial Corp.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
September 30
1999 1998
-----------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 1,872,199 $ 1,890,207
Interest-bearing deposits 4,218,661 7,094,355
Investment securities--Note B
Available-for-sale, at fair value 8,354,070 2,372,971
Held-to-maturity (fair value of 24,345,763 14,965,028
$23,700,980 and $15,188,915,
respectively)
Federal funds sold 518,000 975,000
Stock in FHLB of Des Moines 534,900 520,300
Loans held for sale 467,144 ---
Loans receivable--Note C 62,125,817 62,315,180
Accrued interest receivable--Note D 1,025,068 746,514
Premises and equipment--Note E 1,180,159 956,272
Foreclosed real estate 32,000 ---
Cost in excess of net assets acquired 937,266 1,011,488
Other assets 1,081,807 913,414
------------ -----------
TOTAL ASSETS $106,692,854 $93,760,729
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits--Note F $ 85,150,252 $76,763,896
Advances from borrowers for property
taxes and insurance 181,925 166,209
Advances from FHLB--Note G 5,161,576 140,000
Notes payable--Note H 273,219 368,219
Other liabilities 815,587 729,128
------------ -----------
TOTAL LIABILITIES 91,582,559 78,167,452
Commitments and contingencies--Note M
Stockholders' Equity--Notes I, J, K
and N
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 12,276,979 12,260,818
Retained earnings - substantially
restricted 8,904,935 8,547,489
Accumulated other comprehensive
income (133,218) 22,843
Unearned ESOP shares (664,522) (766,762)
Unearned MRDP shares (181,410) (354,223)
Treasury stock at cost (332,215 and
256,315 shares, respectively) (5,105,119) (4,129,538)
------------ -----------
TOTAL STOCKHOLDERS'
EQUITY 15,110,295 15,593,277
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $106,692,854 $93,760,729
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
-15-
<PAGE>
Lexington B & L Financial Corp.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended September 30, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Accumulated
Additional Other Unearned Unearned Total
Common Paid-In Retained Comprehensive ESOP MRDP Treasury Stockholders'
Stock Capital Earnings Income (Loss) Shares Shares Stock Equity
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1996 $12,650 $12,071,392 $7,649,330 $ (163) $(971,240) $ --- $ --- $18,761,969
Comprehensive income:
Net income --- --- 746,456 --- --- --- --- 746,456
Other comprehensive
income (loss) -
unrealized gain on
securities
available-for-sale,
net of reclassification
adjustments for amounts
included in net income,
net of taxes of $14,699 --- --- --- 29,369 --- --- --- 29,369
------- ----------- ---------- ------- --------- -------- --------- ----------
Total comprehensive income --- --- 746,456 29,369 --- --- --- 775,825
------- ----------- ---------- ------- --------- -------- --------- ----------
Repurchase of common stock --- --- --- --- --- --- (3,979,479) (3,979,479)
Adoption of MRDP--Note K --- --- --- --- --- (773,789) 773,789 ---
Release of ESOP shares --- 44,040 --- --- 102,238 --- --- 146,278
Release of MRDP shares --- --- --- --- --- 117,788 --- 117,788
Dividends paid
($.15 per share) --- --- (170,775) --- --- --- --- (170,775)
------- ----------- ---------- ------- --------- -------- --------- ----------
BALANCE AT SEPTEMBER 30, 1997 12,650 12,115,432 8,225,011 29,206 (869,002) (656,001) (3,205,690) 15,651,606
Comprehensive income:
Net income --- --- 658,706 --- --- --- --- 658,706
Other comprehensive
income (loss) -
unrealized loss on
securities
available-for-sale,
net of reclassification
adjustments for amounts
included in net income,
net of tax benefit
of $3,183 --- --- --- (6,363) --- --- --- (6,363)
------- ----------- ---------- ------- --------- -------- ---------- ----------
Total comprehensive income --- --- 658,706 (6,363) --- --- --- 652,343
------- ----------- ---------- ------- --------- -------- ---------- ----------
Repurchase of common stock --- --- --- --- --- --- (2,389,541) (2,389,541)
Release of ESOP shares --- 63,884 --- --- 102,240 --- --- 166,124
Release of MRDP shares --- --- --- --- --- 301,778 --- 301,778
Acquisition of LCB --- 81,502 --- --- --- --- 1,465,693 1,547,195
Dividends paid
($.30 per share) --- --- (336,228) --- --- --- --- (336,228)
------- ----------- ---------- ------- --------- -------- ---------- ----------
BALANCE AT SEPTEMBER 30, 1998 12,650 12,260,818 8,547,489 22,843 (766,762) (354,223) (4,129,538) 15,593,277
</TABLE>
-16-
<PAGE>
Lexington B & L Financial Corp.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - Cont'd
Years ended September 30, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Accumulated
Additional Other Unearned Unearned Total
Common Paid-In Retained Comprehensive ESOP MRDP Treasury Stockholders'
Stock Capital Earnings Income (Loss) Shares Shares Stock Equity
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Comprehensive income:
Net income --- --- 660,051 --- --- --- --- 660,051
Other comprehensive
income (loss) -
unrealized loss on
securities
available-for-sale,
net of reclassification
adjustments for amounts
included in net income,
net of tax benefit
of $80,647 --- --- --- (156,061) --- --- --- (156,061)
------- ----------- ---------- ------------- --------- --------- ----------- -----------
Total comprehensive income --- --- 660,051 (156,061) --- --- --- 503,990
------- ----------- ---------- ------------- --------- --------- ----------- -----------
Repurchase of common stock --- --- --- --- --- --- (975,581) (975,581)
Release of ESOP shares --- 16,161 --- --- 102,240 --- --- 118,401
Release of MRDP shares --- --- --- --- --- 172,813 --- 172,813
Dividends paid
($.30 per share) --- --- (302,605) --- --- --- --- (302,605)
------- ----------- ---------- ------------- --------- --------- ----------- -----------
BALANCE AT
SEPTEMBER 30, 1999 $12,650 $12,276,979 $8,904,935 $(133,218) $(664,522) $(181,410) $(5,105,119) $15,110,295
======= =========== ========== ============= ========= ========= =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
-17-
<PAGE>
Lexington B & L Financial Corp.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended September 30
1999 1998 1997
-------------------------------------
Interest Income
<S> <C> <C> <C>
Mortgage loans $3,857,030 $4,067,412 $3,513,711
Other loans 1,418,028 1,400,962 278,094
Investment securities and 2,002,566 1,427,533 805,439
interest-bearing deposits
Federal funds sold 59,629 101,173 ---
---------- ---------- ----------
Total Interest Income 7,337,253 6,997,080 4,597,244
Interest Expense
Deposits 4,023,320 3,712,727 2,297,735
Advances from FHLB 224,660 19,320 ---
Notes payable 34,730 44,006 ---
---------- ---------- ----------
Total Interest Expense 4,282,710 3,776,053 2,297,735
---------- ---------- ----------
Net Interest Income 3,054,543 3,221,027 2,299,509
Provision for Loan Losses 36,707 25,673 29,190
---------- ---------- ----------
Net Interest Income After
Provision for Loan Losses 3,017,836 3,195,354 2,270,319
Noninterest Income
Service charges and other fees 279,724 198,265 29,023
Commissions, net 65,427 46,072 16,994
Loss from foreclosed real estate (11,449) (5,935) (25)
Gain on sale of investments 7,742 2,437 4,407
Other 61,679 63,774 33,370
---------- ---------- ----------
Total Noninterest Income 403,123 304,613 83,769
Noninterest Expense
Employee compensation and benefits 1,458,933 1,533,049 712,655
Occupancy costs 206,562 184,636 60,523
Advertising 34,075 37,343 12,642
Data processing 122,398 100,258 55,068
Federal insurance premium 30,690 30,950 41,828
Professional and consulting fees 147,362 155,341 156,332
Amortization of intangible assets
arising from acquisitions 74,222 74,222 ---
Other 363,666 367,462 178,584
---------- ---------- ----------
Total Noninterest Expense 2,437,908 2,483,261 1,217,632
---------- ---------- ----------
INCOME BEFORE INCOME TAXES 983,051 1,016,706 1,136,456
Income Taxes--Note I 323,000 358,000 390,000
---------- ---------- ----------
NET INCOME $ 660,051 $ 658,706 $ 746,456
========== ========== ==========
Basic Income per share $ 0.74 $ 0.68 $ 0.70
========== ========== ==========
Diluted Income per share $ 0.72 $ 0.66 $ 0.70
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
-18-
<PAGE>
Lexington B & L Financial Corp.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended September 30
1999 1998 1997
-----------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 660,051 $ 658,706 $ 746,456
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization 93,154 91,367 27,394
Amortization of premiums and discounts (12,649) (33,363) (18,953)
Amortization of deferred loan fees 3,443 1,797 845
Provision for salary continuation
plan costs 79,566 74,682 59,432
Amortization of cost in excess of
net assets acquired 74,222 74,222 ---
Loss on sales of foreclosed real
estate --- 5,935 ---
Gain on available-for-sale securities --- --- (4,407)
Gain on held-to-maturity securities (7,742) (2,437) ---
Provisions for loan losses 36,707 25,673 29,190
Provision for deferred income tax
(benefit) (58,000) (131,500) 34,000
Originations of loans held for sale (4,701,875) --- ---
Proceeds from sale of loans held
for sale 4,234,731 --- ---
ESOP shares released 118,401 166,125 146,278
Amortization of MRDP 172,813 301,778 117,788
Changes to assets and liabilities
increasing (decreasing) cash flows
Accrued interest receivable (278,554) (464,115) 19,298
Other assets (29,746) 374,975 (140,238)
Other liabilities 6,893 92,474 (348,612)
------------ ------------ -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 391,415 1,236,319 668,471
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities/sales of
securities available-for-sale 1,769,118 901,185 2,833,796
Proceeds from maturities/calls of
securities held-to-maturity 9,365,652 12,501,350 ---
Proceeds from maturity of certificates
of deposit --- --- 2,500,000
Net decrease in federal funds sold 457,000 1,100,000 ---
Proceeds from redemption (purchase) of
FHLB stock (14,600) 57,700 ---
Loans originated, net of repayments 658,171 (341,486) (28,799)
Proceeds from sales of foreclosed real
estate 17,708 18,564 10,903
Purchase of securities
available-for-sale (7,969,831) (1,393,967) (1,205,046)
Purchase of securities held-to-maturity (18,743,090) (11,522,177) ---
Purchase of loans (558,666) --- (536,843)
Cash paid in the acquisition of LCB. --- (1,235,223) ---
Cash acquired in acquisition of LCB --- 1,540,826 ---
Purchase of premises and equipment (317,041) (287,627) (5,710)
------------ ------------ -----------
NET CASH PROVIDED BY
(USED IN) INVESTING ACTIVITIES (15,335,579) 1,339,145 3,568,301
</TABLE>
- 19-
<PAGE>
Lexington B & L Financial Corp.
CONSOLIDATED STATEMENTS OF CASH FLOWS - Cont'd
<TABLE>
<CAPTION>
Year ended September 30
1999 1998 1997
-------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
<S> <C> <C> <C>
Net increase in deposits 8,386,356 2,714,409 457,489
Net increase (decrease) in advances
from borrowers for property
taxes and insurance 15,716 (2,711) 6,260
Payments on notes payable (95,000) (220,000) ---
Advance from FHLB
Borrowings 6,050,000 --- ---
Repayments (1,028,424) (200,000) ---
Payment of dividends (302,605) (336,228) (170,775)
Purchase of treasury stock (975,581) (2,389,541) (3,979,479)
----------- ----------- -----------
NET CASH PROVIDED BY
(USED IN) FINANCING ACTIVITIES 12,050,462 (434,071) (3,686,505)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH (2,893,702) 2,141,393 550,267
Cash and due from banks, beginning of year 8,984,562 6,843,169 6,292,902
----------- ----------- -----------
CASH AND DUE FROM BANKS, END OF YEAR $ 6,090,860 $ 8,984,562 $ 6,843,169
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid for
Interest $ 4,247,161 $ 3,764,309 $ 2,319,244
=========== =========== ===========
Income taxes $ 453,823 $ 371,027 $ 293,560
=========== =========== ===========
Noncash investing and financing
activities are as follows
Loans to facilitate sales of real estate $ 36,000 $ --- $ ---
=========== ========== ===========
Foreclosed real estate acquired by
foreclosure or deed in lieu of foreclosure $ 113,004 $ --- $ 10,903
=========== ========== ===========
Allocation of MRDP shares of common stock $ --- $ --- $ 773,789
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
- 20-
<PAGE>
Lexington B & L Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying reporting policies and practices of the Company and its
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 County Bank ("LCB"), in a transaction
accounted for as a purchase.
During November 1998, the Company formed a wholly-owned subsidiary, B & L
Mortgage, Inc. ("MTG"), to originate and sell loans primarily in the secondary
market. MTG currently retains no servicing rights on loans originated.
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, LCB and MTG, 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 a method which approximates the interest method over
the period to expected 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 Held for Sale: Mortgage loans originated and held for sale are carried at
- -------------------
the lower of cost or market on an aggregate basis. All loans held for sale were
originated by MTG and are committed for sale at the time of origination. MTG
recognizes no gain or loss on the sale of these loans and receives a
predetermined fee for the origination. Sales are made without recourse and no
rights are retained on loans sold to others.
-21-
<PAGE>
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Cont'd
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 a method which approximates
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 and land. The adjustable-rate mortgage is the
Company's primary loan investment.
Mortgage loans are generally placed on nonaccrual status when principal or
interest is delinquent for 90 days or more. Interest income on loans is
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.
Management applies its normal loan review procedures in determining when a loan
is impaired. All nonaccrual loans are considered impaired, except those
classified as small-balance homogeneous loans which are collectively evaluated
for impairmentc. The Company considers all one-to four-family residential
mortgage loans, residential construction loans, and all consumer and other loans
to be smaller homogeneous loans. Impaired loans are assessed individually and
impairment identified 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. Management has elected to continue to use its
existing nonaccrual methods for recognizing interest income on impaired loans.
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 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.
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.
-22-
<PAGE>
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Cont'd
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: The Company has adopted SFAS No. 130, Reporting of
- ------------------------
Comprehensive Income and SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information for the year ended September 30, 1999. SFAS
No. 130 requires the Company to classify items of other comprehensive income by
their nature in the consolidated financial statements. The Company has displayed
the accumulated balance of other comprehensive income separately in the equity
section of the consolidated financial statements. SFAS No. 131 establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements. The Company has one
reportable operating segment.
In June 1998, the Financial Accounting Standards Board ("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 and for hedging activities.
Under SFAS No. 133, entities are required to carry all derivative instruments in
the statement of financial position at fair value.
The FASB has deferred implementation of SFAS No. 133 to fiscal years beginning
after June 15, 2000. The Company does not expect the statement to have a
significant effect on the consolidated financial statements.
-23-
<PAGE>
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Cont'd
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. Management does not expect that this standard will significantly effect
the Company's financial statements.
Reclassification: Certain amounts in the prior periods consolidated financial
- ----------------
statements have been reclassified to conform with the current year presentation.
NOTE B--INVESTMENT SECURITIES
<TABLE>
<CAPTION>
Gross Unrealized
Amortized ------------------ Fair
Cost Gains Losses Value
-----------------------------------------------
<S> <C> <C> <C> <C>
September 30, 1999:
Available-for-sale
U.S. Government and Federal
agency obligations $ 7,888,180 $ 4,000 $205,236 $ 7,686,944
Mortgage-backed securities 668,330 7,089 8,293 667,126
----------- -------- -------- -----------
$ 8,556,510 $ 11,089 $213,529 $ 8,354,070
=========== ======== ======== ===========
Held-to-maturity
U.S. Government and Federal
agency obligations $19,988,048 $ 4,795 $597,647 $19,395,196
State and local obligations 4,357,715 103,241 155,172 4,305,784
----------- -------- -------- -----------
$24,345,763 $108,036 $752,819 $23,700,980
=========== ======== ======== ===========
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
=========== ======== ======== ===========
</TABLE>
The scheduled contractual maturities of debt securities at September 30, 1999,
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 $ 1,654,414 $ 1,659,540 $1,000,000 $1,004,000
After one year through five years 13,863,585 13,484,641 2,498,083 2,440,762
After five years through ten years 5,374,289 5,213,496 4,435,970 4,289,072
After ten years 3,453,475 3,343,303 622,457 620,236
----------- ----------- ---------- ----------
$24,345,763 $23,700,980 $8,556,510 $8,354,070
=========== =========== ========== ==========
</TABLE>
-24-
<PAGE>
NOTE B--INVESTMENT SECURITIES - Cont'd
Securities held-to-maturity were called for redemption for total proceeds of
$2,180,000 and $1,471,350, resulting in a gross realized gain of $7,742 and
$2,437 in 1999 and 1998 respectively.
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 $11,886,933 and $6,721,413 and fair value of
$11,336,772 and $6,761,893 at September 30, 1999 and 1998, respectively.
NOTE C--LOANS RECEIVABLE
Loans receivable consist of the following at September 30:
<TABLE>
<CAPTION>
1999 1998
------------------------------
<S> <C> <C>
Mortgage loans:
One- to four-family residences $39,438,952 $42,036,419
Multi-family residential 865,939 198,959
Commercial 4,837,556 3,490,814
Construction 1,175,564 626,516
Land 1,114,963 653,301
----------- -----------
47,432,974 47,006,009
Consumer and other loans:
Commercial 2,815,300 4,042,363
Agricultural 3,224,414 3,171,623
Home equity 676,118 789,719
Loans on savings 2,457,390 1,986,038
Automobile 4,810,853 4,967,647
Other 1,254,606 933,001
----------- -----------
15,238,681 15,890,391
----------- -----------
62,671,655 62,896,400
Net deferred loan-origination fees 53,371 17,907
Allowance for loan losses (599,209) (599,127)
----------- -----------
$62,125,817 $62,315,180
=========== ===========
</TABLE>
At September 30, 1999 and 1998, the Company serviced loans amounting to $125,904
and $133,450, respectively, for the benefit of others. Also, the Company had
loans serviced by others amounting to $2,004,285 and $1,954,891 at September 30,
1999 and 1998, respectively.
-25-
<PAGE>
NOTE C--LOANS RECEIVABLE - Cont'd
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
1999 1998
---------------------------
<S> <C> <C>
Balance, beginning of year $ 420,190 $ 237,405
Added through purchase of LCB --- 306,909
Originations 131,171 59,177
Payments (138,718) (183,301)
--------- ---------
BALANCE, END OF YEAR $ 412,643 $ 420,190
========= =========
Activity in the allowance for loan
losses is as follows:
Year ended September 30
1999 1998 1997
----------------------------------
<S> <C> <C> <C>
Balance, beginning of year $599,127 $ 221,000 $ 201,000
Added through purchase of LCB --- 391,385 ---
Provision for loan losses 36,707 25,673 29,190
Charge-offs, net of recoveries (36,625) (38,931) (9,190)
-------- --------- ---------
BALANCE, END OF YEAR $599,209 $ 599,127 $ 221,000
======== ========= =========
</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, 1999 and 1998, was $21,920 and $281,887,
respectively. The average recorded investment in impaired loans during the year
ended September 30, 1999 and 1998, was $110,167 and $125,565, respectively. The
amount of interest included in interest income on such loans for the year ended
September 30, 1999 and 1998, amounted to approximately $10,000 and $38,300,
respectively.
NOTE D--ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consist of the following at September 30:
<TABLE>
<CAPTION>
1999 1998
----------------------
<S> <C> <C>
Loans $ 562,710 $536,791
Investment securities and interest
bearing deposits 462,358 209,723
---------- --------
$1,025,068 $746,514
========== ========
</TABLE>
-26-
<PAGE>
NOTE E-PREMISES AND EQUIPMENT
Premises and equipment consists of the following at September 30:
<TABLE>
<CAPTION>
1999 1998
------------------------
<S> <C> <C>
Land $ 541,394 $ 400,385
Building and improvements 875,990 862,740
Furniture and equipment 943,085 780,302
---------- ----------
2,360,469 2,043,427
Less accumulated depreciation and
amortization 1,180,310 1,087,155
---------- ----------
$1,180,159 $ 956,272
========== ==========
</TABLE>
NOTE F--DEPOSITS
Deposit account balances are summarized as follow at September 30:
<TABLE>
<CAPTION>
1999 1998
---------------------------------------------
Amount % Amount %
---------------------------------------------
<S> <C> <C> <C> <C>
Noninterest-bearing $ 5,395,991 6.4% $ 4,657,889 6.1%
NOW 8,373,349 9.8 5,920,352 7.7
Money Market 8,016,583 9.4 6,669,963 8.7
Passbook savings 6,576,908 7.7 6,327,509 8.2
----------- ----- --------- ----
28,362,831 33.3 23,575,713 30.7
Certificates of deposit:
3.00 to 3.99% 551,453 0.7 667,378 0.9
4.00 to 4.99% 9,426,040 11.1 403,073 0.5
5.00 to 5.99% 32,953,018 38.7 36,786,245 47.9
6.00 to 6.99% 7,800,186 9.1 8,987,419 11.7
7.00 to 7.99% 2,011,813 2.4 2,416,307 3.2
8.00 to 8.99% 4,044,911 4.7 3,905,701 5.1
9.00 to 9.99% --- --- 22,060 ---
----------- ----- ---------- ----
56,787,421 66.7 53,188,183 69.3
----------- ----- ---------- ----
$85,150,252 100.0% $76,763,896 100.0%
=========== ===== =========== ======
Weighted Average Interest Rates 4.66% 4.94%
===== =====
</TABLE>
The aggregate amount of certificates of deposit with a minimum denomination of
$100,000 was approximately $7,584,967 and $6,464,307 at September 30, 1999 and
1998, respectively. Deposits over $100,000 are not federally insured.
The Company had deposits of approximately $2,131,000 and $2,417,000 for its
directors and officers at September 30, 1999 and 1998, respectively.
-27-
<PAGE>
NOTE F--DEPOSITS - Cont'd
At September 30, 1999, contractual maturities of certificate accounts are as
follows:
<TABLE>
<CAPTION>
Stated
Interest Rate 2000 2001 2002 2003 2004 After
- -------------- --------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
3.00 to 3.99% $ 551,453 $ --- $ --- $ --- $ --- $ ---
4.00 to 4.99% 9,426,040 --- --- --- --- ---
5.00 to 5.99% 20,965,006 7,302,745 2,228,241 980,145 1,431,082 45,799
6.00 to 6.99% 1,989,165 2,379,657 1,283,609 1,371,862 774,893 1,000
7.00 to 7.99% 592,652 1,197,547 28,627 18,869 74,118 100,000
8.00 to 8.99% --- 4,044,911 --- --- --- ---
----------- ----------- ---------- ---------- ---------- ----------
$33,524,316 $14,924,860 $3,540,477 $2,370,876 $2,280,093 $ 146,799
=========== =========== ========== ========== ========== ==========
</TABLE>
Interest expense on deposits are as follows:
<TABLE>
<CAPTION>
Year ended September 30
1999 1998 1997
----------------------------------------
<S> <C> <C> <C>
Now, Money Market and Passbook savings accounts $ 818,220 $ 667,482 $ 200,987
Certificate accounts 3,205,100 3,045,245 2,096,748
----------- ------------ ------------
$ 4,023,320 $ 3,712,727 $ 2,297,735
=========== ============ ============
</TABLE>
NOTE G--ADVANCES FROM FEDERAL HOME LOAN BANK OF DES MOINES
Advances from FHLB consist of the following at September 30:
<TABLE>
<CAPTION>
1999 1998
-------------------------
<S> <C> <C>
5.30% fixed rate, due on or before
March 15, 1999 $ --- $ 35,000
6.50% fixed rate, due on or before
March 15, 2000 35,000 35,000
6.70% fixed rate, due on or before
March 15, 2001 35,000 35,000
6.80% fixed rate, due on or before
March 15, 2002 35,000 35,000
5.25% fixed rate, due in monthly
installments over a period of fifteen
years through December 2, 2013 1,932,886 ---
4.76% fixed rate, final maturity date
of December 15, 2008, callable
quarterly beginning December 15, 2003 2,500,000 ---
5.47% fixed rate, due in monthly
installments over a period of fifteen
years through October 21, 2013,
callable quarterly beginning
October 21, 2003 623,690 ---
---------- --------
$5,161,576 $140,000
========== ========
</TABLE>
-28-
<PAGE>
NOTE G--ADVANCES FROM FEDERAL HOME LOAN BANK OF DES MOINES - Cont'd
Scheduled maturities of FHLB advances are as follows:
<TABLE>
<CAPTION>
Year ending
September 30 Amount
-----------------------------------
<S> <C>
2000 $ 158,930
2001 165,666
2002 172,766
2003 145,254
2004 153,149
Thereafter 4,365,811
----------
$5,161,576
==========
</TABLE>
The advances are collateralized by a blanket pledge agreement with FHLB under
which the Company can draw advances of unspecified amounts. The Company must
hold an unencumbered portfolio of one- to four-family residential mortgages with
a book value of not less than 170% of the indebtedness. The Company also has
pledged Federal agency securities with an amortized cost value of $1,054,143 and
a fair value of $1,025,390. The advance agreements include certain prepayment
privileges that generally include penalty provisions if prepaid before certain
specified dates.
NOTE H--NOTES PAYABLE
Notes payable at September 30, 1999 and 1998, were acquired in the purchase of
LCB. The notes are unsecured, bear interest at the rate of 10% and are payable
to the previous owners of LCB. 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.
NOTE I--INCOME TAXES
<TABLE>
<CAPTION>
Components of income tax expense (benefit) are as follows:
Year ended September 30
1999 1998 1997
-----------------------------------
<S> <C> <C> <C>
Current $381,000 $ 484,400 $356,000
Deferred (benefit) (58,000) (126,400) 34,000
-------- --------- --------
$323,000 $ 358,000 $390,000
======== ========= ========
</TABLE>
During 1996, the Small Business Job Protection Act (the "Act) was signed into
law. The Act eliminated the percentage of taxable income bad debt deductions
for thrift institutions for tax years beginning after December 31, 1995. The
Act provides that bad debt reserves accumulated prior to 1988 be exempt from
recapture. Bad debt reserves accumulated after 1987 are subject to recapture
over a six year period. B&L has provided for deferred income taxes for the
reserve recapture after 1987; therefore the impact of this legislation will not
have a material effect on B&L's financial statements.
Prior to the enactment of the Act, B&L accumulated approximaely $2,000.000 for
which no deferred income tax liability has been recognized. This amount
represents an allocation of income to bad debt deductions for income tax
purposes only. If any of this amount is used other than to absorb loan losses
(which is not anticipated), the amount will be subject to income tax at the
current corporate rates.
-29-
<PAGE>
NOTE I--INCOME TAXES - Cont'd
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
1999 1998 1997
-----------------------------------------------------------------------
Amount % Amount % Amount %
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income tax expense at statutory rate $334,237 34.0% $345,680 34.0% $386,395 34.0%
Increase (decrease) in taxes resulting from:
Officers life insurance (9,420) (1.0) (9,655) (0.9) (8,087) (0.7)
Tax exempt income, net of related
expenses (61,891) (6.3) (41,346) (4.1) (24,281) (2.1)
Amortization of intangible assets
arising from acquisitions 25,235 2.6 25,235 2.5 --- ---
State income tax, net of federal
benefit 36,300 3.7 39,804 3.9 35,640 3.1
Other, net (1,461) (0.1) (1,718) (0.2) 333 ---
-------- -------- -------- ------ -------- ------
$323,000 32.9% $358,000 35.2% $390,000 34.3%
======== ======== ======== ====== ======== ======
</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>
1999 1998
----------------------
<S> <C> <C>
Deferred tax assets
Allowance for loan losses $167,100 $159,500
MRDP compensation expense 119,000 96,500
Deferred compensation 91,600 62,700
Unrealized loss on
available-for-sale securities 59,222 ---
Capital loss 663 ---
Deferred tax liabilities
Depreciation (40,400) (38,500)
FHLB stock dividend (58,300) (58,500)
Unrealized gain on
available-for-sale securities --- (11,462)
-------- --------
NET DEFERRED TAX ASSET $338,885 $210,238
======== ========
</TABLE>
NOTE J--REGULATORY CAPITAL REQUIREMENTS
The Company's subsidiary banks are subject to various regulatory capital
requirements administered by OTS and FDIC. Failure to meet the capital
requirements can initiate certain mandatory and discretionary actions by
regulators that could have a material effect on the Company's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Company's subsidiary banks must meet capital
guidelines that involve quantitative measures of assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting practices.
Capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings and other factors.
Quantitative measures established by regulations to ensure capital adequacy
require the Company's subsidiary banks to maintain minimum amounts and ratios,
as set forth in the table below of Total Risk-Based Capital to Risk-Weighted
Assets and Tier 1 Capital to Risk-Weighted Assets, Tier 1 Capital to Adjusted
Assets (the leverage ratio), and Tangible Capital to Adjusted Assets.
-30-
<PAGE>
NOTE J--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> <C> <C>
As of September 30, 1999
B & L Bank
Total Risk-Based Capital $ 7,617 22.86% > $2,665 8.00% > $3,332 10.00%
--- ---
(to Risk Weighted
Assets)
Tier 1 Capital 7,396 22.20 > 1,333 4.00 > 3,724 6.00
--- ---
(to Risk Weighted
Assets)
Tier 1 Capital 7,396 11.92 > 1,862 3.00 > 3,103 5.00
--- ---
(to Adjusted Assets)
Tangible Capital 7,396 11.92 > 931 1.50 N/A N/A
---
(to Adjusted Assets)
Lafayette County Bank
Total Risk-Based Capital $ 3,294 14.79% > $1,781 8.00% > $2,227 10.00%
--- ---
(to Risk Weighted
Assets)
Tier 1 Capital 3,015 13.54 > 891 4.00 > 2,659 6.00
--- ---
(to Risk Weighted
Assets)
Tier 1 Capital 3,015 6.80 > 1,722 4.00 > 2,215 5.00
--- ---
(to Adjusted Assets)
Tangible Capital 3,015 6.80 > 665 1.50 N/A N/A
---
(to Adjusted Assets)
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 6.00
--- ---
(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)
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)
</TABLE>
Management believes that as of September 30, 1999 and 1998, the Company's
banking subsidiaries meet all capital requirements to which they are subject.
-31-
<PAGE>
NOTE K--EMPLOYEE BENEFITS
B&L is a participating employer in a multi-employer plan trustees pension plan
that covers and provides defined benefits to substantially all full-time
employees 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, $36,000, and $35,500 was recognized for
the years ended September 30, 1999, 1998 and 1997, 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, subject to internal revenue code
limitations.
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, 1999, 1998
and 1997, was $79,566, $74,682, and $50,605, respectively.
In connection with the conversion from mutual to stock form, B&L established an
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. 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, 1999, 1998 and 1997, was $95,399, $140,054, and $131,709,
respectively. The fair value of unreleased shares based on market price of the
Company's stock at September 30, 1999 and 1998 was $822,356, and $996,797,
respectively.
The number of ESOP shares are summarized as follows at September 30:
<TABLE>
<CAPTION>
1999 1998
-------------------
<S> <C> <C>
Allocated shares 34,747 24,524
Unreleased shares 66,453 76,676
------- -------
101,200 101,200
======= =======
</TABLE>
-32-
<PAGE>
NOTE K--EMPLOYEE BENEFITS - Cont'd
The Board of Directors adopted and the shareholders subsequently approved an
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 $172,813, $301,778
and $117,788 in 1999, 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.
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, 1999.
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,
$88,453 and $13,465 or $0.07, $0.05 and $0.01 per share for the year ended
September 30, 1999, 1998 and 1997, respectively.
Following is a summary of the fair values of options granted using the Black-
Scholes option-pricing model for the years ended September 30, 1999, 1998 and
1997:
<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 1999
and 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.
-33-
<PAGE>
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
1999 1998 1997
-------------------------------
<S> <C> <C> <C>
Weighted average common shares
outstanding 896,545 965,088 1,064,532
Stock options and MRDP 17,704 27,388 3,374
------- ------- ---------
914,249 992,476 1,067,906
======= ======= =========
</TABLE>
NOTE M--FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK, CONCENTRATIONS OF
CREDIT RISK AND CONTINGENCIES
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, 1999 and 1998, the Company was committed to originate loans
aggregating approximately $2,323,000 and $1,340,900, respectively. Fixed loan
commitments at September 30, 1999 and 1998, amounted to approximately $838,000
and $219,000 with interest rates ranging from 7.5% to 12.0% and 8.00% to 12.00%,
respectively. The Company also has outstanding letters of credit in the amount
of $37,000 and $30,500 at September 30, 1999 and 1998, respectively.
At September 30, 1999 and 1998, the Company had amounts on deposit at banks and
federal agencies in excess of federally insured limits of approximately
$5,179,000 and $7,482,000, respectively.
In addition, the Company from time to time becomes a defendant in certain claims
and legal actions arising in the ordinary course of business. At September 30,
1999, there were no such claims and legal actions.
NOTE N--CONVERSION TO STOCK OWNERSHIP
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 B&L 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. The company was also authorized to issue 500,000 shares
of $.01 par value preferred stock. At September 30, 1999, no shares of
preferred stock had been issued.
-34-
<PAGE>
NOTE N--CONVERSION TO STOCK OWNERSHIP - Cont'd
As part of the conversion, B&L established a liquidation account for the benefit
of eligible depositors who continue to maintain their deposit accounts in B&L
after conversion. In the unlikely event of a complete liquidation of B&L, and
only in such event, each eligible depositor will be entitled to receive a
liquidation distribution from the liquidation account in the proportionate
amount of the then-current adjusted balance for deposit accounts held before
distribution may be made with respect to B&L's capital stock. B&L may not
declare or pay a cash dividend to the Company on, or repurchase any of its
capital stock if the effect thereof would cause the retained earnings of B&L to
be reduced below the amount required for the liquidation account. Except for
such restrictions, the existence of the liquidation account does not restrict
the use or application of retained earnings.
B&L may not declare or pay cash dividends on or repurchase any of its shares of
common stock, if the effect would cause stockholders' equity to be reduced below
applicable regulatory capital maintenance requirements or if such declaration
and payment would otherwise violate regulatory requirements.
NOTE O--FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures about Fair Values of Financial Instruments, 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 Company.
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 interest-bearing deposits: 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.
Federal funds sold: The carrying value approximates fair value.
Stock in FHLB: This stock is a restricted asset and its carrying value is a
reasonable estimate of fair value.
Loans held for sale: The carrying value approximates fair value based on
sales commitments at the time of originition.
Loans receivable: The fair value of first mortgage loans is estimated by
using discounted cash flow analyses, using interest rates currently offered
by the Company 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.
Transaction deposits: Transaction deposits, payable on demand or with
maturities of 90 days or less, have a fair value equal to book value.
-35-
<PAGE>
NOTE O--FAIR VALUE OF FINANCIAL INSTRUMENTS - Cont'd
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.
Advances from FHLB: The fair value is estimated by discounting the future
cash flows using interest rates currently offered by the FHLB for advances
with similar maturities.
Notes payable: 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 Company'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, 1999 and 1998, are as follows:
<TABLE>
<CAPTION>
1999 1998
---------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
ASSETS
Cash $ 1,872 $ 1,872 $ 1,890 $ 1,890
Interest-bearing deposits 4,219 4,219 7,094 7,094
Investment securities
available-for-sale 8,354 8,354 2,373 2,373
Investment securities
held-to-maturity 24,346 23,700 14,965 15,189
Federal funds sold 518 518 975 975
Stock in FHLB 535 535 520 520
Loans held for sale 467 467 --- ---
Loans receivable 62,126 64,316 62,315 62,680
Accrued interest receivable 1,025 1,025 747 747
LIABILITIES
Transaction accounts 28,363 28,363 23,576 23,576
Certificates of deposit 56,787 56,738 53,188 54,851
Advances from borrowers for taxes
and insurance 182 182 166 166
Advances from FHLB 5,162 5,054 140 147
Notes payable 273 273 368 368
</TABLE>
-36-
<PAGE>
NOTE P--CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
The following condensed balance sheets, 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 SHEETS
September 30
1999 1998
------------------------
ASSETS
<S> <C> <C>
Cash $ 2,574,247 $ 579,353
ESOP note receivable 746,867 830,498
Investment in subsidiaries:
B & L Bank 7,381,549 10,562,209
Lafayette County Bank 4,061,513 3,830,270
B & L Mortgage, Inc. 503,328 ---
Other 145,132 183,143
----------- -----------
TOTAL ASSETS $15,412,636 $15,985,473
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses $ 29,123 $ 23,978
Notes payable 273,219 368,219
Stockholders' equity 15,110,294 15,593,276
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $15,412,636 $15,985,473
=========== ===========
CONDENSED STATEMENTS OF INCOME
Year ended September 30
1999 1998 1997
----------- ----------- -----------
Income
Dividends from subsidiary $ 3,700,000 $ 2,300,000 $ 1,500,000
Interest 100,919 91,009 268,678
Gain on sale of investments --- --- 4,407
----------- ----------- -----------
3,800,919 2,391,009 1,773,085
Expenses
MRDP 172,813 301,778 117,788
Interest 34,730 44,005 ---
Professional fees 71,414 96,956 119,194
Other 24,482 29,567 28,189
----------- ----------- -----------
303,439 472,306 265,171
----------- ----------- -----------
Income before equity in undistributed
earnings of subsidiaries and income
taxes 3,497,480 1,918,703 1,507,914
Decrease in undistributed equity of
subsidiaries (2,908,429) (1,389,497) (758,458)
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 589,051 529,206 749,456
Income taxes (benefit) (71,000) (129,500) 3,000
----------- ----------- -----------
NET INCOME $ 660,051 $ 658,706 $ 746,456
=========== =========== ===========
</TABLE>
-37-
<PAGE>
NOTE P--CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS - Cont'd
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended September 30
1999 1998 1997
---------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 660,051 $ 658,706 $ 746,456
Adjustments to reconcile net income
to net cash provided from
operating activities:
Decrease in undistributed equity
of subsidiaries 2,908,429 1,389,497 758,458
Amortization of MRDP 172,813 301,778 117,788
Increase (decrease) in other
assets and liabilities 43,157 (142,907) (211,966)
----------- ----------- ----------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 3,784,450 2,207,074 1,410,736
Cash flow from investing activities
Purchase of certificates of deposit --- --- (1,500,017)
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 LCB --- (1,235,223) ---
Cash acquired in acquisition of LCB --- 9,105 ---
Investment in subsidiary (500,000) --- ---
----------- ----------- -----------
NET CASH PROVIDED BY
(USED IN) INVESTING ACTIVITIES (500,000) (1,226,118) 5,027,382
Cash flows from financing activities
Principal payments on notes payable (95,000) (220,000) ---
Principal collected from ESOP 83,631 77,074 71,030
Dividends paid (302,606) (336,228) (170,775)
Purchase of treasury stock (975,581) (2,389,541) (3,979,479)
----------- ----------- -----------
NET CASH USED IN
FINANCING ACTIVITIES (1,289,556) (2,868,695) (4,079,224)
----------- ----------- -----------
NET INCREASE (DECREASE)
IN CASH AND CASH EQUIVALENTS 1,994,894 (1,887,739) 2,358,894
Cash, beginning of year 579,353 2,467,092 108,198
----------- ----------- -----------
CASH, END OF YEAR $ 2,574,247 $ 579,353 $ 2,467,092
=========== =========== ===========
</TABLE>
-38-
<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 Executive Vice-President, Chief
Operating Officer and Secretary Operating Officer and Secretary
William J. Huhmann Steve Oliano
Senior Vice-President and President
Chief Financial Officer Baker Memorials, Inc.
Mark D. Summerlin Norman Vialle
Senior Vice-President Retired Businessman
Terry L. Thompson Charles R. Wilcoxon
Vice-President Retired Businessman
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 President and Chief Executive Officer
Carol Summerlin Alfred Block
Senior Vice President Farmer
Kirk Craven Ranie Thompson
Vice President Retired Businessman
William C. LaHue, M.D.
Doctor
-39-
<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 & Hamilton, LLC
LAFAYETTE COUNTY BANK Lexington, Missouri
MAIN OFFICE SPECIAL COUNSEL
545 South Highway 13 Muldoon, Murphy & Faucette LLP
Lexington, Missouri 64067 Washington, D.C.
BRANCH LOCATIONS
558 Highway 224
Wellington, Missouri 64097
Second and Highway 3
Callao, Missouri 63534
-40-
<PAGE>
STOCKHOLDER INFORMATION
ANNUAL MEETING
The Annual Meeting of Stockholders will be held at the office of B & L Bank, 919
Franklin Avenue, Lexington, Missouri, on Wednesday, January 26, 2000 at 10:00
a.m., local 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).
-41-
<PAGE>
EXHIBIT 21
Subsidiaries of the Registrant
<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
B & L Mortgage, Inc. 100% Missouri
- --------------------
(a) The operations of the Company's subsidiaries are included in the Company's
consolidated financial statements.
</TABLE>
<PAGE>
EXHIBIT 23
Consent of Independent Auditor
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
The 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 November 29, 1999, 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, 1999.
/s/ MOORE, HORTON & CARLSON, P.C.
Mexico, Missouri
December 27, 1999
<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, 1999 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> Dollars
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 1,872
<INT-BEARING-DEPOSITS> 4,219
<FED-FUNDS-SOLD> 518
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 8,354
<INVESTMENTS-CARRYING> 24,346
<INVESTMENTS-MARKET> 23,701
<LOANS> 63,192
<ALLOWANCE> 599
<TOTAL-ASSETS> 106,693
<DEPOSITS> 85,150
<SHORT-TERM> 254
<LIABILITIES-OTHER> 816
<LONG-TERM> 5,181
0
0
<COMMON> 13
<OTHER-SE> 15,097
<TOTAL-LIABILITIES-AND-EQUITY> 106,693
<INTEREST-LOAN> 5,275
<INTEREST-INVEST> 2,003
<INTEREST-OTHER> 59
<INTEREST-TOTAL> 7,337
<INTEREST-DEPOSIT> 4,023
<INTEREST-EXPENSE> 4,283
<INTEREST-INCOME-NET> 3,055
<LOAN-LOSSES> 36
<SECURITIES-GAINS> 8
<EXPENSE-OTHER> 2,438
<INCOME-PRETAX> 983
<INCOME-PRE-EXTRAORDINARY> 983
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 660
<EPS-BASIC> .74
<EPS-DILUTED> .72
<YIELD-ACTUAL> 3.10
<LOANS-NON> 457
<LOANS-PAST> 5
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,118
<ALLOWANCE-OPEN> 599
<CHARGE-OFFS> 59
<RECOVERIES> 23
<ALLOWANCE-CLOSE> 599
<ALLOWANCE-DOMESTIC> 525
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 74
</TABLE>
