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 June 30, 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.)
P.O. Box 190, Lexington, MO 64067
- ---------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
660-259-2247
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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 August 5, 1998, there were 1,008,685 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
JUNE 30, 1998
INDEX PAGE
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PART I - FINANCIAL INFORMATION
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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 5-8
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 9-13
PART II - OTHER INFORMATION
- ---------------------------
ITEM 1 - LEGAL PROCEEDINGS 14
ITEM 2 - CHANGES IN SECURITIES 14
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES 14
ITEM 4 - SUBMISSION OF MATTERS TO VOTE OF SECURITY-HOLDERS 14
ITEM 5 - OTHER INFORMATION 14
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 14
SIGNATURES
LEXINGTON B & L FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)
June 30, September 30,
1998 1997
---------------------------
(Unaudited)
ASSETS
Cash $ 2,418 $ 635
Interest-bearing deposits 7,165 6,183
Certificates of deposit 25 25
Investment securities available-for-sale, at
fair value 1,544 1,709
Investment securities held-to-maturity
(estimated market value of $15,784 at
June 30, 1998 and $1,048 at September 30, 1997) 15,633 878
Mortgage-backed securities available-for-sale,
at fair value 946 1,669
Federal Funds sold 1,175 ---
Stock in Federal Home Loan Bank of Des Moines 520 464
Loans receivable (allowance for loan losses of
$599 at June 30, 1998 and $221 at September 30,
1997) 62,455 45,873
Accrued interest receivable 756 282
Premises and equipment 967 360
Cost in excess of net assets acquired 1,030 ---
Other assets 667 705
--------- ---------
TOTAL ASSETS $ 95,301 $ 58,783
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $ 76,756 $ 42,694
Advances from borrowers for taxes and insurance 122 169
Advances from Federal Home Loan Bank of Des Moines 240 ---
Notes payable 463 ---
Amount due on Treasury Stock Purchase 1,835 ---
Dividend payable 168 ---
Other liabilities 413 268
--------- ---------
TOTAL LIABILITIES 79,997 43,131
Commitments and contingencies
Stockholders' Equity
Preferred stock, $.01 par value per share;
500,000 shares authorized, none issued --- ---
Common stock, $.01 par value per share;
8,000,000 shares authorized,
1,265,000 issued at June 30, 1998 and
September 30, 1997 13 13
Paid-in capital 12,248 12,115
Retained earnings-substantially restricted 8,353 8,225
Unrealized gain on securities available-for-sale,
net of taxes 16 29
Treasury stock, 256,315 shares at June 30, 1998
and 206,500 at September 30, 1997, at cost (4,130) (3,205)
Unearned ESOP shares (792) (869)
Unearned MRP shares (404) (656)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 15,304 15,652
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 95,301 $ 58,783
========= =========
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 Nine Months Ended
June 30, June 30,
1998 1997 1998 1997
---------------------------------------
(Unaudited)
Interest Income
Mortgage loans $ 1,078 $ 872 $ 3,138 $ 2,626
Other loans 280 69 972 203
Investment securities and
interest-bearing deposits 339 185 975 536
Federal funds sold 30 --- 85 ---
Mortgage-backed securities 23 29 78 93
------- ------ ------- -------
TOTAL INTEREST INCOME 1,750 1,155 5,248 3,458
Interest Expense
Deposits 935 573 2,759 1,721
FHLB advances 5 --- 16 ---
Notes payable 12 --- 35 ---
------- ------ ------- -------
TOTAL INTEREST EXPENSE 952 573 2,810 1,721
------- ------ ------- -------
NET INTEREST INCOME 798 582 2,438 1,737
Provision for Loan Losses 11 --- 20 21
------- ------ ------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 787 582 2,418 1,716
Non-interest Income
Service charges and other fees 80 8 201 21
Commissions, net 15 6 37 16
Income (loss) from foreclosed assets ( 5) --- ( 5) ---
Gain (loss) on sale of investments --- --- 1 ---
Other 9 6 48 25
------- ------ ------- -------
TOTAL NON-INTEREST INCOME 99 20 282 62
Non-interest Expense
Employee salaries and benefits 397 157 1,228 470
Occupancy costs 45 12 136 45
Advertising 8 3 28 10
Data processing 25 8 81 42
Federal insurance premiums 10 7 32 35
Other 171 65 476 269
------- ------ ------- -------
TOTAL NON-INTEREST EXPENSE 656 252 1,981 871
------- ------ ------- -------
INCOME BEFORE INCOME TAXES 230 350 719 907
Income Taxes 73 124 255 325
------- ------ ------- -------
NET INCOME $ 157 $ 226 $ 464 $ 582
======= ====== ======= =======
Basic Earnings Per Share $ 0.16 $ 0.22 $ 0.47 $ 0.53
======= ====== ======= =======
Diluted Earnings Per Share $ 0.15 $ 0.22 $ 0.45 $ 0.53
======= ====== ======= =======
See accompanying notes to Consolidated Financial Statements
-2-
LEXINGTON B & L FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Nine Months Ended
June 30,
1998 1997
-----------------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 464 $ 582
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 73 20
Amortization of premiums and discounts (7) (20)
Loss on sale of foreclosed real estate 6 ---
Provisions for loan losses 20 21
Amortization of acquisition premium 56 ---
ESOP shares released128 105
Amortization of deferred recognition and retention
plan 252 ---
Amortization of salary continuation plan costs 56 ---
Changes to assets and liabilities increasing (decreasing)
cash flows
Accrued interest receivable (88) 31
Other assets 13 (137)
Other liabilities (119) (222)
------- -------
NET CASH PROVIDED BY (USED
IN) OPERATING ACTIVITIES 854 380
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from principal payments of mortgage-backed
securities available-for-sale 811 332
Purchase of mortgage-backed securities available-
for-sale (93) ---
Proceeds from maturities of certificates of deposit --- 2,500
Proceeds from maturities of investment securities
available-for-sale 500 400
Proceeds from maturities of investment securities
held-to-maturity 8,704 ---
Purchase of securities held-to-maturity (8,953) ---
Purchase of investment securities available-
for-sale (1,300) (999)
Loans originated, net of repayments (503) 111
Purchase of premises and equipment (279) (6)
Redemption of FHLB stock 58 ---
Cash paid in the acquisition of Lafayette
Bancshares, Inc. (1,245) ---
Cash acquired in acquisition of Lafayette
Bancshares, Inc 1,551 ---
Proceeds from sales of foreclosed real estate 48 11
------- -------
NET CASH PROVIDED BY (USED
IN) INVESTING ACTIVITIES (701) 2,349
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits 2,707 (152)
Net increase in Federal funds sold 900 ---
Net decrease in advances from borrowers for property
taxes and insurance (47) (32)
Repayment of notes payable and advances from FHLB (225) ---
Funds provided to MRP Trust for purchase of common
stock --- (774)
Dividends (168) ---
Purchase of treasury stock (555) (1,925)
------- -------
NET CASH PROVIDED BY (USED
IN) FINANCING ACTIVITIES 2,612 (2,883)
------- -------
NET INCREASE (DECREASE) IN CASH 2,765 (154)
Cash and cash equivalents, beginning of period 6,818 6,268
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 9,583 $ 6,114
======= =======
See accompanying notes to Consolidated Financial Statements
-3-
LEXINGTON B & L FINANCIAL CORP
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(Dollars in thousands)
Gain
Addi- (loss)
tional Unearned on Unearned Stock-
Common Paid-In Retained ESOP Securi- MRDP Treasury holders'
Stock Capital Earnings Shares ties Shares Stock Equity
----- ------- -------- ------ ---- ------ ----- ------
Balance at September 30, 1996 $ 13 $ 12,070 $ 7,650 $ (971) $--- $ --- $ --- $ 18,762
Net income................... --- --- 746 --- --- --- --- 746
Release of ESOP shares....... --- 45 --- 102 --- --- --- 147
Change in unrealized gain
(loss) on securities........ --- --- --- --- 29 --- --- 29
Repurchase of common stock... --- --- --- --- --- --- (3,979) (3,979)
Adoption of MRDP-Note ....... --- --- --- --- --- (774) 774 ---
Amortization of MRDP......... --- --- --- --- --- 118 --- 118
Dividend declared ($.15 per
share....................... --- --- (171) --- --- --- --- (171)
---- -------- ------- ------ ---- ------ ------- --------
Balance at September 30, 1997 13 12,115 8,225 (869) 29 (656) (3,205) 15,652
Net income................... --- --- 464 --- --- --- --- 464
Release of ESOP shares....... --- 51 --- 77 --- --- --- 128
Change in unrealized gain
(loss) on securities........ --- --- --- --- (13) --- --- (13)
Repurchase of common stock... --- --- --- --- --- --- (2,390) (2,390)
Amortization of MRDP......... --- --- --- --- --- 252 --- 252
Dividend declared ($.30
per share).................. --- --- (336) --- --- --- --- (336)
Record acquisition of
Lafayette County Bank....... --- 82 --- --- --- --- 1,465 1,547
---- -------- ------- ------ ---- ------ ------- --------
Balance at June 30, 1998..... $ 13 $ 12,248 $ 8,353 $ (792) $ 16 $ (404) $(4,130) $ 15,304
==== ======== ======= ====== ==== ====== ======= ========
See accompanying notes to Consolidated Financial Statements.
-4-
LEXINGTON B&L FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--Basis of Presentation
- -----------------------------
The accompanying consolidated interim financial statements as of June 30, 1998
and for the nine and three month periods then ended include the accounts of
Lexington B & L Financial Corp. and it majority-owned subsidiaries, B & L
Bank, Lafayette County Bank and B & L Financial Services Corp. 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 June 30, 1998, interim financial
statements. The results of operations for the period ended June 30, 1998, are
not necessarily indicative of the operating results for the full year. The
consolidated interim financial statements as of June 30, 1998, should be read
in conjunction with the Registrant's audited consolidated financial statements
as of September 30, 1997 and for the year then ended included in the
Registrant's 1997 Annual Report to Shareholders. The significant accounting
policies followed in the preparation of the quarterly financial statements are
the same as disclosed in the 1997 Annual Report to Shareholders to which
reference is made.
NOTE B--Allowance for Loan Losses
- ---------------------------------
The following is a summary of the allowance for loan losses (in thousands):
Three Months Ended Nine Months Ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
Balance, beginning of period..... $598 $221 $221 $200
Allowance for loan losses of
acquired bank................... --- --- 391 ---
Provision for loan losses ....... 11 --- 20 21
Recoveries on loans.............. 1 --- 14 ---
Charge-offs....................... (11) --- (47) ---
---- ---- ---- ----
Balance, end of period........... $599 $221 $599 $221
==== ==== ==== ====
At June 30, 1998, non-performing assets were $459,000, which was .73% of total
loans and .48% of total assets. This balance consisted of $448,000 in loans
not accruing interest, $7,000 in loans past due 90 days and still accruing
interest, and $4,000 in foreclosed real estate and other repossessed assets.
NOTE C--Investment Securities
- -----------------------------
Investment securities, consist of the following at June 30, 1998 and September
30, 1997 (in thousands)
June 30, September 30,
1998 1997
Available for Sale, at fair value: ---- ----
U.S. government and federal agency
obligations.............................. $ 1,544 $ 1,709
Held to Maturity, at amortized cost:
U.S. government and federal agency
obligations.............................. 13,691 ---
State and municipal obligations........... 1,942 878
------- -------
Total held to maturity.............. $15,633 $ 878
======= =======
-5-
LEXINGTON B & L FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE D--Earnings Per Share
- --------------------------
During the quarter ended December 31, 1997, the Company adopted Statement of
Financial Accounting Standard No. 128, "Earnings Per Share" ("SFAS No. 128).
The Statement requires restatement of all prior-period earnings per share
("EPS") data presented. It replaces the presentation of primary EPS with
basic EPS and requires dual presentation of basic and diluted EPS on the face
of the statement of income. Basic EPS is computed by dividing income
available to common stockholders by the weighted average number of common
shares outstanding for the period(s). Diluted EPS reflects the potential
dilution that would occur if securities or other contracts to issue common
stock were excise red or converted into common stock.
On October 1, 1997, 96,111 treasury shares were issued in connection with the
acquisition of Lafayette Bancshares, Inc. During October 1997, the Company
repurchased 33,850 shares of stock (3% of outstanding shares) for $555,000.
During the quarter ended June 30, 1998, the Company repurchased 112,076
shares of stock (10% of outstanding shares) for $1,835,000. The total number
of shares outstanding at June 30, 1998 and 1997, was 1,008,685 and 1,058,500,
respectively. The following presents the computation of EPS (in thousands,
except per share data):
Three Months Ended Nine Months Ended
June 30, June 30,
1998 1997 1998 1997
------------------ -----------------
Basic Earnings Per Share:
Income available to common
stockholders $ 157 $ 226 $ 464 $ 582
===== ===== ======= =======
Average common shares outstanding 989 997 983 1,100
===== ===== ======= =======
Basic earnings per share $0.16 $0.22 $ 0.47 $ 0.53
===== ===== ======= =======
Diluted Earnings Per Share:
Income available to common
stockholders $ 157 $ 226 $ 464 $ 582
===== ===== ======= =======
Average common shares outstanding 989 997 983 1,100
Dilutive potential common shares
outstanding due to common stock
options and awards 37 --- 37 ---
Average number of common shares and ----- ----- ------- -------
dilutive potential shares
outstanding 1,026 997 1,021 1.100
===== ===== ======= =======
Diluted earnings per share $0.15 $0.22 $ 0.45 $ 0.53
===== ===== ======= =======
-6-
LEXINGTON B & L FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE E--Employee Stock Ownership Plan
- -------------------------------------
In connection with the conversion to stock, 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 $41,693 and $127,884 for the three and nine months
ended June 30, 1998, respectively, compared to $37,460 and $105,148 for the
three months and nine months ended June 30, 1997, respectively.
A summary of ESOP shares at June 30, 1998 is as follows:
Shares Allocated........................................... 14,300
Shares released for allocation............................. 7,668
Unreleased shares.......................................... 79,232
----------
TOTAL 101,200
==========
Fair value of unreleased shares............................$1,263,196
==========
-7-
LEXINGTON B & L FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE F--Management Recognition Plan
- -----------------------------------
The Board of Directors adopted (November 27, 1996) and shareholders
subsequently approved (January 27, 1997) a management recognition and
development plan ("MRDP"). Under the MRDP, common stock of 50,600 shares was
awarded to certain directors, officers and employees of the Company and 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).
On June 11, 1998 10,120 shares were vested. The Company recognized $75,444
and $252,126 for the three and nine months ended June 30, 1998, respectively,
and no expense for the same periods ended June 30, 1997.
NOTE G -- Stock Options
- -----------------------
Under the Company's 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 and subsidiaries. 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 H--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 $195,000 of
expenses were incurred in connection with the acquisition. The transaction
was accounted for under the purchase method of accounting, with $1,073,000
recorded as cost in excess of net assets acquired.
NOTE I--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 Year 2000 conversion goals. As of June 30, 1998,
hardware and software application have been assessed and all mission critical
application have been identified and Year 2000 Testing Strategies and Plans
have been prepared. All Year 2000 non compliant hardware is under contract
for replacement by October 1998. Also, the Company has been informed by
software vendors that all mission critical applications are, or will be,
fully tested and Year 2000 compliant by December 31, 1998. Other non-critical
hardware and software applications are currently being tested for Year 2000
compliance and if not compliant will be upgraded or replaced by March 31,
1999. The Company will perform independent testing on all mission critical
application on or before March 31, 1999. Estimated cost to the Company is not
expected to be material. A budget of $50,000 has been set up for new
hardware, software and testing.
-8-
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 and nine month periods ended June 30,
1998 and 1997 as well as those material changes in liquidity and capital
resources that have occurred since September 30, 1997.
On October 1, 1997, the Company completed its acquisition of Lafayette
Bancshares, Inc., the holding company of Lafayette County Bank ("Lafayette").
See Note H--Acquisition in Notes to Consolidated Financial Statements included
in this report.
The following should be read in conjunction with the Company's 1997
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 Nine Months Ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
Per Share Data
Basic earnings per share..... $ .16 $ .22 $ .47 $ .53
Diluted earnings per share... .15 .22 .45 .53
Cash dividends............... .15 --- .30 ---
Book value................... 15.17 14.79
Market price (closing price at
end of period).............. 15.94 14.94
Selected Ratios
Loans to deposits............. 81.37% 107.45%
Allowance for loan losses to
loans........................ .95% .48%
Equity to total assets........ 16.06% 26.63%
Return on equity.............. 3.75% 5.45% 3.69% 4.32%
Return on assets.............. .66% 1.53% .66% 1.28%
Efficiency ratio.............. 71.13% 41.86% 70.77% 48.42%
Summary
Consolidated net income for the nine month period ended June 30, 1998 was
$464,000; a $118,000 or 20.3% decline from the same period last year. Basic
earnings per share of 47 cents declined 6 cents or 11.3% compared to the same
period ended June 30, 1997. Diluted earnings per share decreased 8 cents from
the 53 cents per share earned for the nine month period ended June 30, 1997.
During the nine month period increases in net interest income of $701,000 and
in non-interest income of $220,000, was offset by a $1,110,000 increase in
non-interest expense. The provision for loan losses decreased $1,000 from
the amount provided last year.
Third quarter net income was $157,000, a decrease of $69,000 or 30.5%
from the third quarter of 1997. Basic earnings per share of 16 cents
decreased 6 cents from the 22 cents reported for the quarter ended March 31,
1997. Diluted earnings per share decreased 7 cents from the 22 cents reported
in the three month period ending June 30, 1997. In the third quarter, an
increase in net interest income of $216,000 and non-interest income of
$79,000, was offset by an increase in non-interest expenses of $404,000.
The provision for loan losses was $11,000 in the third quarter of 1998
compared to no provision recorded in the same quarter of 1997.
The increases recorded for the three and nine months ended June 30, 1998
can be attributed primarily to the inclusion of the operating results of
Lafayette County Bank acquired on October 1, 1998, and accounted for by the
purchase method of accounting.
-9-
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
(tax equivalent basis)
Three Months Ended Nine Months Ended
June 30, 1998 vs 1997 June 30, 1998 vs 1997
--------------------- ---------------------
Change Due To Change Due To
------------- -------------
Average Average Average Average
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
Interest income:
Loans.................... $ 369 $ 48 $ 417 $ 883 $ 398 $1,281
Investment securities.... 221 (100) 121 879 (442) 437
Federal funds sold....... 15 15 30 42 43 85
Time deposits............ 4 32 36 (58) 79 21
----- ------ ----- ------ ----- ------
Total interest income... 609 (5) 604 1,746 78 1,824
Interest expense
Deposits................. 410 (48) 362 1,179 (141) 1,038
Advances from Federal
Home Loan Bank of Des
Moines.................. 3 2 5 8 8 16
Notes payable............ 6 6 12 25 10 35
----- ------ ----- ------ ----- ------
Total interest expense.. 419 (40) 379 1,212 (123) 1,089
----- ------ ----- ------ ----- ------
Net interest income....... $ 190 $ 35 $ 225 $ 534 $ 201 $ 735
===== ====== ===== ====== ===== ======
Total interest income, on a fully tax equivalent basis, for the nine
month period ended June 30, 1998 increased $1,824,000 or 52.4%, over the
comparable period a year ago, and increased $604,000 or 51.8% for the latest
three month period over the same period last year. Interest expense for the
nine and three month periods ended June 30, 1998, increased $1,089,000 or
63.3% and $384,000 or 66.1%, respectively, over the same periods a year ago.
The following table provides summaries of average assets and liabilities and
the corresponding average rates earned/paid on a fully tax equivalent basis
(in thousands).
---- Nine Months Ended ---- ---- Nine Months Ended -----
----- June 30, 1998 ------ ----- June 30, 1997 -------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ----
Interest Earning
Assets
Loans........... $ 62,706 $ 4,110 8.76% $ 44,967 $ 2,829 8.41%
Investment
securities..... 18,470 851 6.16% 6,435 470 9.77%
Interest-bearing
deposits....... 5,024 258 6.87% 7,376 181 3.28%
Federal funds
sold........... 2,081 85 5.46% ---- --- ---
Total Earning -------- ------- ---- -------- ------- ----
Assets/Average
Yield......... 88,281 5,304 8.03% 58,778 3,480 7.92%
Interest Bearing
Liabilities
Deposits........ 70,690 2,759 5.22% 41,947 1,721 5.49%
Advances from
FHLB........... 332 16 6.44% --- --- ---
Notes payable... 470 35 9.96% --- --- ---
Total Interest -------- ------- ---- -------- ------- ----
Bearing
Liabilities/
Average Rate.. $ 71,492 $ 2,810 5.26% $ 41,947 $ 1,721 5.49%
Net Interest ------- -------
Income......... $ 2,494 $ 1,759
Net Interest ======= -------
Spread......... 2.77% 2.43%
Net Interest
Margin......... 3.78% 4.00%
-10-
LEXINGTON B & L FINANCIAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
Net Interest Income - continued
---- Three Months Ended ---- ---- Three Months Ended ----
----- June 30, 1998 ------ ----- June 30, 1997 ------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ----
Interest Earning
Assets
Loans........... $ 62,164 $ 1,358 8.76% $ 44,668 $ 941 8.45%
Investment
securities..... 18,723 284 6.08% 6,714 163 9.74%
Interest-bearing
deposits....... 6,281 97 6.19% 5,902 61 4.15%
Federal funds
sold........... 2,227 30 5.40% --- ---- ---
Total Earning -------- ------- ----- -------- ------- ----
Assets/Average
Yield......... 89,395 1,769 7.94% 57,284 1,165 8.16%
Interest Bearing
Liabilities
Deposits........ 71,597 935 5.24% 41,827 573 5.50%
Advances from
FHLB........... 315 5 6.37% ---- --- ---
Notes payable... 463 12 10.00% ---- --- ---
Total Interest -------- ------- ----- -------- ------- ----
Bearing
Liabilities/
Average Rate.. $ 72,375 $ 952 5.28% $ 41,827 $ 573 5.50%
Net Interest ------- -------
Income......... 817 592
Net Interest ======= -------
Spread......... 2.66% 2.66%
Net Interest
Margin......... 3.67% 4.15%
Net interest income for the nine month period ended June 30, 1998 was
$2,494,000, a 41.8% increase over the same period last year, and for the
quarter was $817, 000, a 38.0% increase over the same quarter a year ago. As
indicated in the above schedule higher volumes of earning assets accounted
for the majority of the increase in net interest income. A majority of the
increased volume can be attributed to the inclusion of the operations of
Lafayette in the amounts reported for the nine and three month periods ended
June 30, 1998. Also, contributing to the increase in net interest earnings
was an improvement in the net interest spread. For the nine months period
ended June 30, 1998, the net interest spread increased to 2.78% or 35 basis
points over the same period a year ago.
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):
June 30, September 30,
1998 1997
---- ----
Non-accrual loans.............................. $ 448 $ 394
Loans past due 90 days or more and still
accruing interest............................. 7 ---
Foreclosed real estate and other repossessed
assets........................................ 4 ---
----- -----
Total non-performing assets.................. $ 459 $ 394
===== =====
Non performing assets at June 30, 1998 were .48% of total assets,
compared to .67% of total assets at September 30, 1997. Non-accrual loans at
June 30, 1998 consisted primarily of residence real estate loans, commercial
and commercial real estate loans.
-11-
LEXINGTON B & L FINANCIAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
Provision for Loan Losses/Allowance for Loan Losses
The provision for loan losses declined $1,000 or 4.8% for the nine months
ended June 30, 1998 and increased $11,000 during the current three month
period compared to the same period a year ago. Loan charge offs totaled
$47,000 and $11,000 for the nine and three month period ended June 30, 1998.
There were no loans charged off during the same periods last year. Loan
recoveries were $14,000 and $1,000, respectively, for the nine and three month
periods ended June 30, 1998. No loan recoveries were received last year.
The allowance for loan losses at June 30, 1998 was $599,000 or .95% of
outstanding loans compared to $221,000 or .48% at September 30, 1997. The
increase in the allowance for loan losses at June 30, 1998 is the result of
loan reserves acquired in the acquisition of Lafayette.
Non-Interest Income
Non-interest income for the nine month period ended June 30, 1998 of
$282,000 increased $220,000 over the nine month period ended June 30, 1997.
During the quarter ended June 30, 1998, non-interest income totaled $99,000 an
increase of $79,000 over the same period a year ago. The increase can be
attributed to service charge income and insurance commissions earned during
the quarter and nine month periods ended June 30, 1998 from the operations of
Lafayette.
Non-Interest Expense
Non-interest expense of $1,981,000 and $656,000, respectively, for the
nine and three months ended June 30, 1998, increased $1,110,000 and $404,000
over the comparable periods a year ago. Salaries and benefit cost increased
$758,000 during the nine month period ended June 30, 1998 and $240,000 in the
latest three month period over the same periods last year. This increase was
primarily due to salary and benefit cost of Lafayette of $442,000 and
$147,000, respectively, for the nine and three month periods ended June 30,
1998 which have been included since the beginning of the Company's fiscal
year on October 1, 1997. Also, contributing to the increase in salary and
benefits expense was cost associated with the Management Recognition
Development Plan awards totaling $252,000 and $75,000, respectively, for the
nine and three months ended June 30, 1998. Other expense increased $207,000
and $106,000, respectively, for the nine and three month periods ended June
30, 1998 over the same periods last year. Included in the increase in other
expenses is the amortization of goodwill on acquisition of Lafayette amounting
to $53,000 and $18,000, respectively, for the nine and three month periods
ended June 30, 1998. Also, contributing to the increase in other expenses and
all other categories non-interest expenses in fiscal year 1998 over 1997, were
the expenses incurred by Lafayette since the date of acquisition.
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 maturities
and 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 June 30, 1998, total stockholders' equity of $15,304,000 represented
16.1% of total assets compared to $15,652,000 or 26.6% of total assets at
September 30, 1997. These levels of primary equity exceed regulatory
requirements and the Company's peer group average.
-12-
LEXINGTON B & L FINANCIAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
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 17.5% at June 30, 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 June 30, 1998.
Minimum
B & L Bank Required
Ratios at Capital
June 30, 1998 Ratios
------------- ------
Risk-based capital................. 42.3% 8.0%
Core capital....................... 21.9% 3.0%
Tangible capital................... 21.9% 1.5%
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 summaries Lafayette County Bank's
capital ratios and ratios required by regulation at June 30, 1998.
Lafayette Minimum
County Bank Required
Ratios at Capital
June 30, 1998 Ratios
------------- ------
Risk-based capital.................. 14.2% 8.0%
Tier 1 capital to net risk-weighted
assets............................. 12.9% 4.0%
Tangible equity ratio............... 7.4% 4.0%
-13-
LEXINGTON B & L FINANCIAL CORP.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Neither the Registrant nor its subsidiaries, B & L Bank and Lafayette County
Bank, are parties to any material legal proceedings at this time. From time
to time B & L Bank and Lafayette County Bank 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
-14-
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 August 5, 1998 By: s/ E. Steva Vialle
-------------------------------------
Date August 5, 1998 By: s/ William J. Huhmann
-------------------------------------
-15-