UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-QSB
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(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ending December 31, 1998
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or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-28120
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Lexington B & L Financial Corp.
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Missouri 43-1739555
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(State or other jurisdiction of I.R.S. (I.R.S. Employer)
Employer Incorporation or organization) Identification No.)
919 Franklin Avenue, Lexington, Mo 64067
- --------------------------------------- -----------------------
(Address of principal executive offices) (Zip Code)
816-259-2247
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(Registrant's telephone number)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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As of February 9, 1999, there were 1,008,645 shares of the Registrant's Common
Stock, $.01 par value per share, outstanding.
Transitional Small Business Disclosure Format
Yes No X
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LEXINGTON B & L FINANCIAL CORP.
FORM 10-QSB
DECEMBER 31, 1998
INDEX PAGE
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PART I - FINANCIAL INFORMATION
- ------------------------------
ITEM 1 - FINANCIAL STATEMENTS (UNAUDITED)
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION 1
CONSOLIDATED STATEMENTS OF INCOME 2
CONSOLIDATED STATEMENTS OF CASH FLOWS 3
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY 4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5-9
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 10-14
PART II - OTHER INFORMATION
- ---------------------------
ITEM 1 - LEGAL PROCEEDINGS 15
ITEM 2 - CHANGES IN SECURITIES 15
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES 15
ITEM 4 - SUBMISSION OF MATTERS TO VOTE OF SECURITY-HOLDERS 15
ITEM 5 - OTHER INFORMATION 15
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 15
SIGNATURES
LEXINGTON B & L FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)
December 31, September 30,
1998 1998
----------------------------
(Unaudited)
ASSETS
Cash and due from banks $ 2,189 $ 1,890
Interest-bearing deposits 11,635 7,095
Investment securities 2,218 2,373
Available-for-sale, at fair value
Held-to-maturity (estimated market value of $19,154
at December 31, 1998 and $15,189 at September 30, 1998) 18,944 14,965
Federal funds sold 2,375 975
Stock in Federal Home Loan Bank of Des Moines ("FHLB") 520 520
Loans receivable (allowance for loan losses of $601 at December 31,
1998 and $599 at September 30, 1998) 60,428 62,315
Premises and equipment 1,011 956
Cost in excess of net assets acquired 993 1,012
Other assets 1,669 1,660
-------- -------
TOTAL ASSETS $101,982 $93,761
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $79,791 $76,764
Advances from borrowers for taxes and insurance 24 166
Advances from FHLB 5,288 140
Notes payable 368 368
Dividend payable 151 ---
Other liabilities 706 730
------- -------
TOTAL LIABILITIES 86,328 78,168
Commitments and contingencies
Stockholders' Equity
Preferred stock, $.01 par value per share; 500,000 shares authorized, none outstanding --- ---
Common stock, $.01 par value per share; 8,000,000 shares authorized,
1,265,000 issued and outstanding at December 31, 1998 and September 30, 1998 13 13
Additional Paid-in capital 12,266 12,261
Retained earnings - substantially restricted 8,540 8,547
Unearned ESOP shares (741) (767)
Unearned MRDP shares (305) (354)
Treasury stock at cost (256,315 shares at December 31, 1998 and September 30, 1998) (4,130) (4,130)
Accumulated other comprehensive income 11 23
-------- -------
TOTAL STOCKHOLDERS' EQUITY 15,654 15,593
-------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $101,982 $93,761
======== =======
See accompanying notes to Consolidated Financial Statements
-1-
LEXINGTON B & L FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
Three Months Ended
December 31,
1998 1997
------------------
(Unaudited)
Interest Income
Mortgage loans $ 958 $1,065
Other loans 370 313
Investment securities and interest-bearing deposits 393 344
Federal funds sold 21 30
------ ------
TOTAL INTEREST INCOME 1,742 1,752
Interest Expense
Deposits 968 916
Advances from FHLB 23 5
Notes payable 9 12
------ ------
TOTAL INTEREST EXPENSE 1,000 933
------ ------
NET INTEREST INCOME 742 819
Provision for Loan Losses 13 5
------ ------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 729 814
Non-interest Income
Service charges and other fees 55 71
Commissions, net 11 14
Income from foreclosed assets --- 1
Gain (loss) on sale of investments 6 (1)
Other 13 14
--- ---
TOTAL NON-INTEREST INCOME 85 99
Non-interest Expense
Employee compensation and benefits 367 411
Occupancy costs 49 41
Advertising 14 11
Data processing 28 26
Federal insurance premiums 8 11
Other 129 126
------ ------
TOTAL NON-INTEREST EXPENSES 595 626
------ ------
INCOME BEFORE INCOME TAXES 219 287
Income Taxes 75 101
------ ------
NET INCOME $ 144 $ 186
====== ======
Basic Earnings Per Share $ 0.16 $ 0.19
====== ======
Diluted Earnings Per Share $ 0.16 $ 0.18
====== ======
See accompanying notes to Consolidated Financial Statements
-2-
LEXINGTON B & L FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Three Months Ended
December 31,
1998 1997
---------------------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 144 $ 186
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization 23 24
Amortization of premiums and discounts (1) (3)
Provisions for loan losses 13 5
Amortization of cost in excess of net assets acquired 19 19
ESOP shares released 30 44
Loss (gain) on called securities held-to-maturity (6) 1
Amortization of MRDP 50 88
Amortization of salary continuation plan costs 19 19
Changes to assets and liabilities increasing (decreasing) cash flows
Accrued interest receivable (15) (12)
Other assets 12 (1)
Other liabilities (43) 41
-------- -------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 245 411
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity/sale of securities available-for-sale 190 246
Proceeds from maturity/call of securities held-to-maturity 5,000 2,819
Purchase of securities available-for-sale (324) ---
Purchase of securities held-to-maturity (8,701) (3,130)
Net (increase) decrease in Federal funds sold (1,400) 675
Loans originated, net of repayments 1,874 (608)
Purchase of premises and equipment (78) (229)
Cash paid in the acquisition of Lafayette Bancshares, Inc. --- (1,235)
Cash acquired in acquisition of Lafayette Bancshares, Inc. --- 1,551
-------- -------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES ( 3,439) 89
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 3,028 89
Net decrease in advances from borrowers for property taxes and insurance (143) (147)
Repayment of note payable --- (125)
Proceeds from FHLB advances 5,150 ---
Repayment of FHLB advances (2) ---
Purchase of treasury stock --- (555)
-------- -------
NET CASH USED IN FINANCING ACTIVITIES 8,033 (738)
-------- -------
NET INCREASE (DECREASE) IN CASH 4,839 (238)
Cash and cash equivalents, beginning of period 8,985 6,818
-------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 13,824 $ 6,580
======== =======
See accompanying notes to Consolidated Financial Statements
-3-
LEXINGTON B & L FINANCIAL CORP
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
Accumulated
Additional Unearned Other Unearned Total
Common Paid-In Retained ESOP Comprehensive MRDP Treasury Stockholders'
Stock Capital Earnings Shares Income Shares Stock Equity
----- ------- -------- ------ ------ ------ ------ ------
(Unaudited)
Balance at September 30, 1997 $ 13 $12,116 $ 8,225 $(869) $ 29 $ (656) $(3,206) $15,652
Net income.............................. --- --- 658 --- --- --- --- 658
Release of ESOP shares.................. --- 64 --- 102 --- --- --- 166
Change in unrealized gain (loss)
on securities......................... --- --- --- --- (6) --- --- (6)
Repurchase of common stock.............. --- --- --- --- --- --- (2,390) (2,390)
Amortization of MRDP.................... --- --- --- --- --- 302 --- 302
Dividend declared ($.30 per share)...... --- --- (336) --- --- --- --- (336)
Record acquisition of Lafayette
County Bank............................ --- 81 --- --- --- --- 1,466 1,547
-------- ------- -------- ----- ----- ------ ------ -----
Balance at September 30, 1998........... 13 12,261 8,547 (767) 23 (354) (4,130) 15,593
Net income.............................. --- --- 144 --- --- --- --- 144
Release of ESOP shares.................. --- 5 --- 26 --- --- --- 31
Change in unrealized gain (loss)
on securities......................... --- --- --- --- (12) --- --- (12)
Repurchase of common stock.............. --- --- --- --- --- --- --- ---
Amortization of MRDP................... --- --- --- --- --- 49 --- 49
Dividend declared ($.15 per share)...... --- --- --- --- --- --- --- (151)
------- ------- -------- ----- ----- ------ -------- ------
Balance at December 31, 1998........... $ 13 $12,266 $ 8,540 $(741) $ 11 $ (305) $(4,130) $15,654
======= ======= ======== ===== ==== ====== ======== =======
See accompanying notes to Consolidated Financial Statements.
-4-
LEXINGTON B & L FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A--Basis of Presentation
- -----------------------------
The consolidated interim financial statements as of December 31, 1998 and for
the period then ended include the accounts of Lexington B & L Financial Corp.
and its wholly-owned subsidiaries, B &L Bank, Lafayette County Bank, and B & L
Mortgage, Inc. and a wholly-owned subsidiary of B&L Bank. This report has been
prepared by Lexington B & L Financial Corp. ("Registrant" or "Company") without
audit. In the opinion of management, all adjustments (consisting only of normal
recurring accruals) necessary for a fair presentation are reflected in the
December 31, 1998, interim financial statements. The results of operations for
the period ended December 31, 1998, are not necessarily indicative of the
operating results that may be expected for the full year. The consolidated
interim financial statements as of December 31, 1998, should be read in
conjunction with the Registrant's audited consolidated financial statements as
of September 30, 1998 and for the year then ended included in the Registrant's
1998 Annual Report to Shareholders. The significant accounting policies
followed in the preparation of the quarterly financial statements are the same
as disclosed in the 1998 Annual Report to Shareholders to which reference is
made.
In November 1998 the Company formed a mortgage banking subsidiary, B & L
Mortgage, Inc., with a capitalization of $500,000. The mortgage banking
subsidiary will operate within the markets served by the Company's subsidiary
banks originating residential mortgages for sale into the secondary mortgage
market.
NOTE B--Allowance for Loan Losses
- ---------------------------------
The following is a summary of the allowance for loan losses (in thousands):
Three Months Ended
December 31,
1998 1997
------ -----
Balance, September 30........................ $ 599 $ 221
Allowance for loan losses of acquired bank.. -- 392
Provision for loan losses................... 13 5
Recoveries on loans charged-off............. 2 3
Charge offs................................. (13) (29)
------ -----
Balance, December 31......................... $ 601 $ 592
====== =====
At December 31, 1998, non-performing assets were $803,000, which was 1.31% of
total loans and .79% of total assets. This balance consisted of $736,000 in
loans not accruing interest and $67,000 in loans past due 90 days or more and
still accruing interest.
NOTE C--Investment Securities
- -----------------------------
Investment securities, consist of the following at December 31, 1998 and
September 30, 1998 (in thousands):
December 31, September 30,
1998 1998
------------ -------------
Available-for-Sale, at fair value:
U.S. Government and federal agency obligations... $ 2,218 $ 2,373
------- -------
Held-to-Maturity, at amortized cost:
U.S. Government and federal agency obligations... $15,935 $13,044
State and municipal obligations.................. 3,009 1,921
------- -------
Total held-to-maturity............... $18,944 $14,965
------- -------
-5-
LEXINGTON B & L FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE D--Earnings Per Share
- --------------------------
Basic EPS is computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding for the period. Diluted
EPS reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
The following table presents the computation of EPS:
Three Months ended
December 31,
1998 1997
------------------
(In thousands, except
per share amounts)
Basic earnings per share:
Income available to common stockholders..................................... $ 144 $ 186
====== ======
Average common shares outstanding........................................... 892 974
====== ======
Basic earnings per share.................................................... $ 0.16 $ 0.19
====== ======
Diluted earnings per share:
Income available to common stockholders..................................... $ 144 $ 186
====== ======
Average common shares outstanding........................................... 892 974
Dilutive potential common shares outstanding due to common stock options and
awards.................................................................. 24 37
------ ------
Average number of common shares and dilutive potential shares
outstanding............................................................. 916 1,011
====== ======
Diluted earnings per
share.................................................................. $ 0.16 $ 0.18
====== ======
NOTE E--Statement of Comprehensive Income
- ------------------------------------------
In June 1997, the FASB issued SFAS No 130 "Reporting Comprehensive Income"
which requires the reporting and display of comprehensive income, defined as the
change in equity (net assets) of a business enterprise from transactions and
other events and circumstances from nonowner sources. This Statement is
effective for fiscal years beginning after December 31, 1997. The adoption of
this Statement did not have an impact on the Company's consolidated financial
position, results of operations or cash flows. The Company's reportable source
of comprehensive income is from the unrealized holding gains (losses) on
available-for-sale securities. The following sets forth the Statement of
Comprehensive Income for the three month periods ending December 31, 1998 and
1997 (in thousands):
Statement of Comprehensive Income
Three Months Ended
-----------------------------------
December 31, December 31,
1998 1997
----- -----
(Unaudited)
Net income $ 144 $186
Other comprehensive income, net of tax:
Unrealized holding gains (losses) arising during the period (12) 11
----- ----
Comprehensive income $ 132 $193
===== ====
-6-
LEXINGTON B & L FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE F--Employee Stock Ownership Plan
- -------------------------------------
In connection with its conversion to stock form, B & L Bank established an ESOP
for the exclusive benefit of participating employees (all salaried employees who
have completed at least 1000 hours of service in a twelve-month period and have
attained the age of 21). The ESOP borrowed funds from the Company in an amount
sufficient to purchase 101,200 shares (8% of the Common Stock issued in the
stock offering). The loan is secured by the shares purchased and will be repaid
by the ESOP with funds from contributions made by B & L Bank, dividends received
by the ESOP and any other earnings on ESOP assets. B & L Bank presently expects
to contribute approximately $149,600, including interest, annually to the ESOP.
Contributions will be applied to repay interest on the loan first, then the
remainder will be applied to principal. The loan is expected to be repaid in
approximately 10 years. Shares purchased with the loan proceeds are held in a
suspense account for allocation among participants as the loan is repaid.
Contributions to the ESOP and shares released from the suspense account are
allocated among participants in proportion to their compensation relative to
total compensation of all active participants. Benefits generally become 25%
vested after each year of credited service beyond one year. Vesting is
accelerated upon retirement, death or disability of the participant.
Forfeitures are returned to B & L Bank or reallocated to other participants to
reduce future funding costs. Benefits may be payable upon retirement, death,
disability or separation from service. Since B & L Bank's annual contributions
are discretionary, benefits payable under the ESOP cannot be estimated.
The Company accounts for its ESOP in accordance with Statement of Position
("SOP") 93-6, Employers' Accounting for Employee Stock Ownership Plans.
Accordingly, the debt of the ESOP is eliminated in consolidation and the shares
pledged as collateral are reported as unearned ESOP shares in the consolidated
statements of financial condition. Contributions to the ESOP shall be
sufficient to pay principal and interest currently due under the loan agreement.
As shares are committed to be released from collateral, the Company reports
compensation expense equal to the average market price of the shares for the
respective period, and the shares become outstanding for earnings per share
computations. Dividends on allocated ESOP shares are recorded as a reduction of
retained earnings; dividends on unallocated ESOP shares are recorded as a
reduction of debt and accrued interest. ESOP compensation expense was $30,235
for the three months ended December 31, 1998 compared to $43,375 for the period
ended December 31, 1997.
A summary of ESOP shares at December 31, 1998 is as follows:
Shares Allocated 24,524
Shares released for allocation 2,556
Unreleased shares 74,120
--------
TOTAL 101,200
========
Fair value of unreleased shares $852,380
========
NOTE G--Management Recognition and Development Plan
- ---------------------------------------------------
The Board of Directors adopted (November 27, 1996) and the shareholders
subsequently approved (January 27, 1997) a management recognition and
development plan ("MRDP"). Under the MRDP, 50,600 shares of common stock were
awarded to certain directors, officers and employees of the Company and the B&L
Bank. 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).
At December 31, 1998 10,120 shares were vested. The Company recognized $49,651
and $88,341 as MRDP compensation expense for the three months ended December 31,
1998 and 1997, respectively. The amortization method used attributes a higher
percentage of compensation cost to earlier years than to the later years of the
service period.
-7-
LEXINGTON B & L FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE H--Stock Options
- ---------------------
The Company has authorized the adoption of a stock option plan. Under the stock
option plan, options to acquire 126,500 shares of the Company's common stock may
be granted to certain officers, directors and employees of the Company or the
Bank. 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 the 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 ten years.
NOTE I--Acquisition
- -------------------
On October 1, 1997, the Company acquired Lafayette Bancshares, Inc., the holding
company for Lafayette County Bank, for $2,587,000 comprised of $1,039,000 in
cash and 96,111 shares of stock valued at $1,548,000. In addition, the Company
acquired the remaining minority interest of Lafayette County Bank for cash
amounting to $196,000. Also, approximately $185,000 of expenses were incurred
in connection with the acquisition. The transaction was accounted for under the
purchase method of accounting, with $1,063,000 recorded as cost in excess of net
assets acquired.
NOTE J--Year 2000
- -----------------
The Federal Financial Institutions Examination Council requires all insured
financial institutions to complete an inventory of core computer functions and
set priorities for meeting the Year 2000 conversion goals. The Company has
completed the assessment, analysis and planning phases of its Year 2000 plan and
is well into the execution phase. The Company's comprehensive Year 2000 plan
addresses all computer functions, such as those data processing applications
processed in-house and those performed by third parties, and other non-computer
critical functions, such as building facilities and security systems, to insure
they will be operational when Year 2000 arrives.
As part of the plan, the Company identified those systems and business
applications which are mission critical, that is, systems and business
applications which, if they failed, would render the Company incapable of
performing core business processes. As of December 31, 1998, renovation of
such identified mission-critical applications processed in house are completed.
For those mission-critical applications processed by the service bureau, the
goal is to have them certified 2000 compliant by March 31, 1999.
In addition to Year 2000 compatibility of all the Company's applications, the
Year 2000 plan addresses the relationship with loan customers, vendors and
service providers, which if the failure of any of these parties to address Year
2000 issues could result in significant disruptions of business and costs to the
Company. The Company has assessed such relationships which are considered to be
material and from the responses received all third-party vendors and service
providers are addressing their Year 2000 readiness. Third-party vendors and
service providers were identified by an analysis of each banking operation
performed.
As a part of the Company's Year 2000 business resumption contingency plan,
provisions have been adopted to follow up on the progress of third-party vendors
and service providers to ascertain their progress in achieving Year 2000
readiness. Such follow up provisions are summarized as follows:
Activating Contingency
Follow up Date Plan - Trigger Date
Third-party vendors:
Mission-critical suppliers of data/software that interfaces
with our mission-critical banking systems June 30, 1999 August 31, 1999
Service providers
Mission-critical providers of utilities i.e. electric
telephone, water and gas June 30, 1999 September 30,1999
If progress is not satisfactory by trigger dates, the contingency plan dictates
the Company is to pursue alternatives.
-8-
LEXINGTON B & L FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE J--Year 2000 Con't
- -----------------------
All compliance certifications received to date have been reviewed and
related software/hardware has been tested in-house to verify Year 2000
readiness. As future certifications are received they will be tested and
verified.
In addition to the analysis of the core banking operations, loan officers
reviewed the potential effect of Year 2000 on the Company's major commercial and
multi-family borrowers. The results of the assessment showed that there was
little or no exposure from any of the Company's large borrowers and no reserves
were considered necessary.
Since all mission-critical software/hardware has been tested, Management's
worst-case Year 2000 scenario is that it would be unable to operate such
software/hardware because of electric or telephone failure. Management's plan to
meet this contingency will be to print out all customer and banking records at
December 31, 1999 and to manually post transactions until such power or
telephone failures are restored.
The Company has not engaged any independent reviews to report on the Company's
Year 2000 exposure. However the Company has used third-party proxy testing of
mission-critical banking systems/hardware. Third-party proxy tests and our own
independent tests on banking processes performed in-house have been completed.
The results of those tests revealed that all mission-critical software/hardware
is Year 2000 compliant. Mission-critical banking processes performed by service
providers is currently being tested by third-party proxy test and is scheduled
to be completed by March 31, 1999.
The Company estimates that its total costs for Year 2000 remediation will be
approximately $131,000. Expenditures to date total approximately $80,000. Cost
for hardware and software upgrade are the largest components of the total
estimated costs. Personnel cost for the Company's own employees and outside
proxy testing cost are included in the estimate of Year 2000 remediation. Year
2000 expenditures are expended as incurred. It is not expected that Year 2000
costs or activities will have a material adverse impact on operations of the
Company.
-9-
LEXINGTON B & L FINANCIAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
- -------
The discussion and analysis included herein covers material changes in results
of operations during the three month periods ended December 31, 1998 and 1997
as well as those material changes in liquidity and capital resources that have
occurred since September 30, 1998.
In November 1998, the Company formed a mortgage banking subsidiary, B & L
Mortgage, Inc. The mortgage banking subsidiary was capitalized with $500,000
and will be originating residential mortgages for resale in the secondary
mortgage market. The operations of the new mortgage subsidiary are included in
the accompanying operating income for the three months ended December 31, 1998.
The following should be read in conjunction with the Company's 1998 Annual
Report to Shareholders, which contains the latest audited financial statements
and notes thereto, together with Management's Discussion and Analysis of
Financial Condition and Results of Operations contained therein. Therefore,
only material changes in financial condition and results of operation are
discussed herein.
Three Months Ended At
------------------ --------------------------
December 31, December 31, September 30,
1998 1997 1998 1998
---- ---- ---- ----
Per Share Data
Basic earnings per share..................................... $ .16 $ .19
Diluted earnings per share................................... .16 .18
Cash dividends............................................... .15 .15
Book value................................................... $15.52 $15.46
Market price (closing price at end of period).................... $11.50 $13.00
Selected Ratios
Loans to deposits............................................ 76.49% 81.96%
Allowance for loan losses to loans............................... .98% .95%
Equity to total assets....................................... 15.35% 16.63%
Return on equity............................................. 3.97% 5.37%
Return on assets............................................. .63% .97%
Efficiency ratio............................................. 69.77% 53.81%
Summary
Consolidated net income for the three month period ended December 31, 1998 was
$144,000; a $42,000 or 22.6% decline from the same period last year. Basic
earnings per share of 16 cents declined 3 cents or 15.8% compared to the same
period ended December 31, 1997. Diluted earnings per share decreased 2 cents
from the 18 cents per share earned for the three month period ended December 31,
1997. The decrease in net income for the first quarter ended December 31, 1998
compared to the same period a year ago was the result of lower net interest
earnings. Offsetting the effect of lower net interest earnings was a reduction
in non-interest expense.
-10-
LEXINGTON B & L FINANCIAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
Net Interest Income
The following table summarizes the changes in net interest income, by major
categories of earning assets and interest bearing liabilities, identifying
changes related to volume and rate. Changes not solely due to volume or rate
changes are allocated pro rata to volume and rate. Management believes this
allocation method, applied on a consistent basis, provides meaningful
comparisons between periods (in thousands):
Analysis of change in net interest income
Three Months Ended Three Months Ended
December 31, 1998 vs 1997 December 31, 1997 vs 1996
---------------------------- -------------------------
Change Due To Change Due To
------------- -------------
Average Average Average Average
Volume Rate Total Volume Rate Total
------ ---- ----- ------- ------- -----
Interest income:
Loans.................................................. $( 24) $( 26) $(50) $385 $ 43 $428
Investment securities & interest bearing deposits...... 73 ( 24) 49 128 6 134
Federal funds sold........................................ 4 ( 13) ( 9) 15 15 30
---- ----- ---- ---- ----- ----
Total interest income............................ 53 ( 63) (10) 528 64 592
Interest expense
Deposits............................................... 29 23 52 372 ( 56) 316
Advances from Federal Home Loan Bank of Des Moines..... 14 4 18 3 2 5
Notes payable.......................................... ( 2) ( 1) ( 3) 6 6 12
---- ----- ---- ---- ----- ----
Total interest expense........................... 41 26 67 381 ( 48) 333
---- ----- ---- ---- ----- ----
Net interest income....................................... $ 12 $( 89) $(77) $147 $ 112 $259
==== ===== ==== ==== ===== ====
Total interest income for the three month period ended December 31, 1998
decreased $10,000 or 0.1%, from the comparable period a year ago. Interest
expense for the three month periods ended December 31, 1998, increased $67,000
or 7.2% over the same period a year ago. The following table provides
summaries of average assets and liabilities and the corresponding average rates
earned/paid (in thousands):
Three Months Ended Three Months Ended
December 31, 1998 December 31, 1997
----------------------------- ---------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
------- ------- -------- ------- ------- --------
Interest Earning Assets
Loans.......................................... $61,959 $1,328 8.50% $63,055 $1,378 8.67%
Investment securities & interest
bearing deposits.............................. 27,281 393 5.72% 22,299 344 6.12%
Federal funds sold............................. 2,074 21 4.02% 1,758 30 6.77%
------- ------ ----- ------- ------ -----
Total Earning Assets/Average Yield.......... 91,314 1,742 7.57% 87,112 1,752 7.98%
Interest Bearing Liabilities
Deposits...................................... 72,481 968 5.30% 70,306 916 5.17%
Advances from FHLB............................ 1,595 23 5.72% 340 5 5.83%
Notes payable................................. 388 9 10.00% 463 12 10.28%
------- ------ ----- ------- ------ -----
Total Interest Bearing
Liabilities/Average Rate................. $74,464 1,000 5.33% $71,109 933 5.21%
------ ------
Net Interest Income............................. $ 742 $ 819
====== =======
Net Interest Spread............................. 2.24% 2.77%
Net Interest Margin............................. 3.22% 3.73%
-11-
LEXINGTON B & L FINANCIAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
Net Interest Income-continued
Net interest income for the three month period ended December 31, 1998 was
$742,000, a 9.4% decrease from the same period last year. The decrease in net
interest income is due primarily to the deployment of excess funds into the
stock repurchase program which reduced investment interest income. Also, the
decrease can be attributed to a narrowing of the net interest spread which
decreased 53 basis points in the quarter ended December 31, 1998 compared with
the comparable period a year ago. The narrower net interest spread can be
partly contributed to the temporary investment of new FHLB advances into short-
term interest bearing deposits, which have a lower yield then the corporation's
other earning assets. The increase in the cost of funds of 12 basis points also
contributed to the narrower net interest spread. The increase in the cost of
funds is the result of a shift in the mix of deposits to a large volume of
certificates of deposits as customers seek ways to increase their return.
Risk Elements of Loan Portfolio
Non-performing assets include non-accrual loans, loans 90 days or more
delinquent and still accruing interest, foreclosed real estate and other
repossessed assets. The following table presents non-performing assets for the
periods indicated, (in thousands):
December 31, September 30,
1998 1998
---- ----
Non-accrual loans............................................. $ 736 $ 524
Loans past due 90 days or more and still accruing interest.... 67 57
Foreclosed real estate and other repossessed assets........... 0 9
----- -----
Total non-performing assets........................... $ 803 $ 590
===== =====
Non performing assets at December 31, 1998 were .79% of total assets,
compared to .63% of total assets at September 30, 1998. Non-accrual loans at
December 31, 1998 consisted primarily of residence real estate loans, commercial
and commercial real estate loans.
Provision for Loan Losses/Allowance for Loan Losses
The provision for loan losses increased $8,000 for the three months ended
December 31, 1998 compared to the same period a year ago. Loan charge offs
totaled $13,000 for three month period ended December 31, 1998 compared to
$29,000 during the three month period ended December 31, 1997. Loan recoveries
were $2,000 during the quarter ended December 31, 1998 and $3,000 for the
comparable period last year. The allowance for loan losses at December 31,
1998 was $601,000 or .98% of outstanding loans compared to $599,000 or .95% at
September 30, 1998.
Non-Interest Income
Non-interest income for the three month period ended December 31, 1998 of
$83,000 decreased $14,000 from the three month period ended December 31, 1997.
The decrease in non-interest income resulted from a decrease in deposit service
charges and insurance commissions.
Non-Interest Expense
Non-interest expense of $595,000 decreased $31,000 or 5.0% from the same
period last year. Salaries and benefit cost decreased $44,000 during the
quarter ended December 31, 1998 from the same period last year primarily from a
reduction in the cost of Management Recognition and Development Plan and the
ESOP Plan. The Management Recognition Development Plan expense of $50,000 for
the quarter ended December 31, 1998, decreased $38,000 compared to the same
period last year. ESOP expense of $30,000 decreased $13,000 from amount
expensed in the three month period ended December 31, 1997.
-12-
LEXINGTON B & L FINANCIAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
Liquidity and Capital Resources
- -------------------------------
The Company's subsidiaries, B & L Bank and Lafayette County Bank, 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 deposits and
advances from Federal Home Loan Bank, of which both bank subsidiaries are
members. Asset liquidity is typically provided through proceeds from principal
and interest payments on loans, mortgage-backed securities, investment
securities and net operating income. While scheduled maturities and
amortization of loans, investment securities and mortgage-backed 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
Federal Home Loan Bank of Des Moines ("FLHB") 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 December 31, 1998, total stockholders' equity of $15,654,000 represented
15.3% of total assets compared to $15,593,000 or 16.6% of total assets at
September 30, 1998 and exceed regulatory requirements and the Company's peer
group average.
Liquidity and Capital Resources-continued
B & L Bank
The Office of Thrift Supervision currently requires a thrift institution to
maintain an average daily balance of liquid assets (cash and eligible
investments) equal to at least 4% of the average daily balance of its net
withdrawable deposits and short-term borrowing. B & L Bank's liquidity ratio
was 32.3% at December 31, 1998. B & L Bank consistently maintains liquidity
levels in excess of regulatory requirements, and believes this is an appropriate
strategy for proper asset and liability management.
The Office of Thrift Supervision requires institutions such as B & L Bank to
meet certain tangible, core, and risk-based capital requirements. Tangible
capital generally consists of stockholders' equity minus certain intangible
assets. Core capital general consists of stockholders' equity. The risk-based
capital requirements presently address risk related to both recorded assets and
off-balance sheet commitments and obligations. The following table summarizes
B & L Bank's capital ratios and the ratios required by regulation at
December 31, 1998.
Minimum
B & L Bank Required
Ratios at Capital
December 31, 1998 Ratios
------------------ ---------
Risk-based capital........... 30.3% 8.0%
Core capital................. 15.5% 3.0%
Tangible capital............. 15.5% 1.5%
-13-
LEXINGTON B & L FINANCIAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
Lafayette County Bank
The Federal Deposit Insurance Corporation adopted capital-related regulations
under FDICA. Under those regulations, a bank will be adequately capitalized if
it: (I) had a risk-based capital ratio of 8% or greater; (ii) had a ratio of
Tier I capital to risk-adjusted assets of 4% or greater, (iii) had a ratio of
Tier I capital to adjusted total assets of 4% or greater, (iv) was not subject
to an order, written agreement, capital directive, or prompt corrective action
directive to meet and maintain a specific capital level for any capital measure.
The following table summarizes Lafayette County Bank's capital ratios and ratios
required by regulation at December 31, 1998.
Lafayette Minimum
County Bank Required
Ratios at Capital
December 31, 1998 Ratios
------------------ --------
Risk-based capital.......................... 15.1% 8.0%
Tier 1 capital to net risk-weighted assets.. 13.9% 4.0%
Tangible equity ratio....................... 7.6% 4.0%
-14-
LEXINGTON B & L FINANCIAL CORP.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Neither the Registrant nor its banking subsidiaries, B & L Bank or Lafayette
County Bank, are a party to any material legal proceedings at this time. From
time to time the Company's banking subsidiaries are involved in various claims
and legal actions arising in the ordinary course of business.
ITEM 2. CHANGES IN SECURITIES
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBIT 27 FINANCIAL DATA SCHEDULE
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Lexington B & L Financial Corp.
Date 2/12/99 By: /s/ William J. Huhmann
------------------- ---------------------------
Date 2/12/99 By: /s/ E. Steva Vialle
------------------- ---------------------------