<PAGE>
<PAGE>
================================================================
NOTE: THIS SPECIAL FINANCIAL REPORT IS BEING FILED PURSUANT TO
RULE 15d-2 AND CONTAINS ONLY THE REGISTRANT'S FINANCIAL
STATEMENTS FOR THE FISCAL YEAR ENDING DECEMBER 31, 1998 WHICH
CONSIST OF THE FINANCIAL STATEMENTS OF THE REGISTRANT'S
SUBSIDIARY, KENTUCKY NATIONAL BANK.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(MARK ONE)
[ ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period __________ to __________
Commission File No. 333-72371
KENTUCKY NATIONAL BANCORP, INC.
-------------------------------
(Name of Small Business Issuer in Its Charter)
INDIANA 61-1345603
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1000 NORTH DIXIE AVENUE, ELIZABETHTOWN, KENTUCKY 42701
- ------------------------------------------------ ----------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (502) 737-6000
Securities registered pursuant to Section 12(b) of the Act:
NONE
----
Securities registered pursuant to Section 12(g) of the Act:
NONE
----
Check whether the issuer (l) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act
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 NO X
--- ---
Check if there is no disclosure of delinquent filers in
response to Item 405 of Regulation S-B in this form, and no
disclosure will be contained to the best of registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year:
$2,450,457
The aggregate market value of the voting stock held by
nonaffiliates of the registrant based on the last sale of which
the registrant was aware ($25 per share), was approximately $3.9
million as of May 19, 1999. Solely for purposes of this
calculation, the term "affiliate" refers to all directors and
executive officers of the registrant and all stockholders
beneficially owning more than 5% of the registrant's common
stock.
As of May 19, 1999, there were issued and outstanding
240,000 shares of the registrant's common stock.
Transitional Small Business Disclosure Format: YES NO X
-- --
================================================================
<PAGE>
<PAGE>
KENTUCKY NATIONAL BANK
_________________
REPORT ON AUDITS
OF FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1998
AND FOR THE PERIOD FROM OCTOBER 15, 1997 (INCEPTION)
TO DECEMBER 31, 1997
<PAGE>
<PAGE>
KENTUCKY NATIONAL BANK
-----------------------
TABLE OF CONTENTS
-----------------
Pages
-----
FINANCIAL STATEMENTS:
Independent Auditors' Report 1
Statements of Condition 2
Statements of Operations 3
Statements of Stockholders' Equity 4
Statements of Cash Flows 5
Notes to Financial Statements 6 - 16
<PAGE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
Board of Directors
Kentucky National Bank
Elizabethtown, Kentucky
We have audited the accompanying statements of condition of
Kentucky National Bank as of December 31, 1998 and 1997, and the
related statements of operations, stockholders' equity, and
cash flows for the year ended December 31, 1998 and the period
from October 15, 1997 (inception) to December 31, 1997. These
financial statements are the responsibility of the Bank's
management. Our responsibility is to express an opinion on
these 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 audit 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 consolidated 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 financial statements referred to above
present fairly, in all material respects, the financial position
of Kentucky National Bank as of December 31, 1998 and 1997, and
the results of it's operations and cash flows for the year ended
December 31, 1998 and the period from October 15, 1997
(inception) to December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ Whelan, Doerr & Company, PSC
Certified Public Accountants
Elizabethtown, Kentucky
February 5, 1999
-1-
<PAGE>
<PAGE>
KENTUCKY NATIONAL BANK
----------------------
STATEMENTS OF CONDITION
-----------------------
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1997
--------- ----------
ASSETS
------
<S> <C> <C>
Cash and due from banks $ 924,798 $ 110,888
Federal funds sold -- 4,243,000
Investment in Federal Home Loan Bank 96,900 --
Investment in Federal Reserve Stock 180,000 180,000
Loans, net 34,200,584 8,255,212
Premises and equipment 1,933,623 33,532
Accrued interest receivable and other assets 492,711 257,415
------------ -----------
TOTAL ASSETS $ 37,828,616 $ 13,080,047
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES:
- -----------
Deposits $ 30,512,242 $ 6,783,685
Due to banks -- 631,250
Federal funds purchased 447,000 --
Obligations under capital leases 1,349,196 --
Accrued interest payable and other liabilities 324,491 123,690
------------ ------------
TOTAL LIABILITIES $32,632,929 $ 7,538,625
============ ============
STOCKHOLDERS' EQUITY:
- --------------------
Common stock, $1 par value; authorized,
1,000,000 shares; issued and outstanding,
240,000 shares 240,000 240,000
Surplus 5,762,966 5,735,870
Retained deficit (807,279) (434,448)
------------ -----------
TOTAL STOCKHOLDERS' EQUITY 5,195,687 5,541,422
------------ ------------
Commitments and contingent liabilities -- --
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 37,828,616 $ 13,080,047
============ ============
</TABLE>
See notes to financial statements.
-2-
<PAGE>
KENTUCKY NATIONAL BANK
----------------------
STATEMENTS OF OPERATIONS
------------------------
<TABLE>
<CAPTION>
December 31,
--------------------------------
1998 1997
--------- -----------
<S> <C> <C>
INTEREST INCOME:
- ---------------
Loans, including fees $ 2,119,140 $ 90,083
Securities 13,064 --
Federal funds sold 120,656 61,027
---------- ---------
TOTAL INTEREST INCOME 2,252,860 151,110
---------- ---------
INTEREST EXPENSE:
- ----------------
Deposit accounts 655,983 17,706
Certificates of deposit over $100,000 352,718 18,967
Interest expense - capital lease 100,475 --
---------- ---------
TOTAL INTEREST EXPENSE 1,109,176 36,673
---------- ---------
NET INTEREST INCOME 1,143,684 114,437
Provision for loan losses 287,941 75,000
---------- ---------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 855,743 39,437
---------- ---------
OTHER INCOME:
- ------------
Service charges and fees 160,267 10,337
Credit life and accident insurance 37,330 24,665
Other -- 14,279
---------- ---------
197,597 49,281
---------- ---------
OTHER EXPENSES:
- --------------
Salaries and employee benefits 629,229 122,410
Net occupancy expense 70,447 3,704
Advertising 117,924 20,549
Data processing 17,403 6,733
Postage, telephone and supplies 86,011 11,868
Directors fees 76,330 19,000
Insurance expense 5,139 5,373
Professional services 247,384 4,124
Amortization of intangibles 41,518 8,465
Other operating expenses 134,786 77,835
---------- ---------
1,426,171 280,061
---------- ---------
Loss before income taxes (372,831) (191,343)
Income taxes -- --
---------- ---------
NET LOSS $ (372,831) $(191,343)
========== =========
Earnings (loss) per share $ (1.55) $ (.80)
========== =========
</TABLE>
See notes to financial statements.
-3-
<PAGE>
<PAGE>
KENTUCKY NATIONAL BANK
----------------------
STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------
<TABLE>
<CAPTION>
Common Stock
--------------------- Retained
Shares Amount Surplus Deficit Total
------ ------ ----------- --------- --------
<S> <C> <C> <C> <C> <C>
Issuance of common stock 240,000 $240,000 $ 5,735,870 $ -- $5,975,870
Organizer's expense -- -- -- (243,105) (243,105)
Net loss -- -- -- (191,343) (191,343)
-------- -------- ----------- --------- ----------
BALANCE, December 31, 1997 240,000 240,000 5,735,870 (434,448) 5,541,422
Incentive stock option plan -- -- 27,096 -- 27,096
Net loss -- -- -- (372,831) (372,831)
-------- -------- ----------- --------- ----------
BALANCE, December 31, 1998 240,000 $240,000 $ 5,762,966 $(807,279) $5,195,687
======== ======== =========== ========= ==========
</TABLE>
See notes to financial statements.
-4-
<PAGE>
<PAGE>
KENTUCKY NATIONAL BANK
----------------------
STATEMENTS OF CASH FLOWS
------------------------
<TABLE>
<CAPTION>
December 31,
--------------------------------
1998 1997
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
- --------------------
Net loss $ (372,831) $ (191,343)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Provision for loan losses 287,941 75,000
Provision for depreciation 55,222 1,569
Provision for amortization 41,518 8,465
Incentive stock option plan 27,096 --
Changes in assets and liabilities:
Increase in accrued interest receivable
and other assets (276,814) (59,625)
Increase in accrued interest payable 200,801 123,690
Increase (decrease) in due to banks (631,250) 631,250
------------ -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (668,317) 589,006
------------ -----------
INVESTING ACTIVITIES:
- --------------------
Purchase of Federal Home Loan Bank Stock (96,900) --
Purchase of Federal Reserve Stock -- (180,000)
Net increase in loans (26,233,313) (7,790,075)
Purchased loans -- (540,137)
Purchases of premises and equipment (565,411) (35,101)
Capitalized organizational expense -- (206,255)
------------ ----------
NET CASH USED IN INVESTING ACTIVITIES (26,895,624) (8,751,568)
----------- ----------
FINANCING ACTIVITIES:
- --------------------
Net increase in deposits 23,728,557 6,783,685
Payments on capital lease obligations (40,706) --
Net increase in federal funds purchased 447,000 --
Proceeds from issuance of stock -- 5,975,870
Organizer's cost -- (243,105)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 24,134,851 12,516,450
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS (3,429,090) 4,353,888
CASH AND CASH EQUIVALENTS, beginning of period 4,353,888 --
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 924,798 $ 4,353,888
=========== ===========
SUPPLEMENTAL DISCLOSURES
Cash paid for interest $ 962,363 $ 30,408
=========== ===========
</TABLE>
Noncash Transactions
- --------------------
The Bank recorded assets and obligations for bank equipment and
buildings under capital leases in the aggregate amount of
$1,389,902.
See notes to financial statements.
-5-
<PAGE>
<PAGE>
KENTUCKY NATIONAL BANK
----------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
A. SIGNIFICANT ACCOUNTING POLICIES
-------------------------------
The following is a description of the more significant
accounting policies which Kentucky National Bank follows in
preparing and presenting its financial statements.
(1) BUSINESS - Kentucky National Bank (the Bank) provides
a full range of banking services to individual and
corporate customers primarily in the Hardin County,
Kentucky and surrounding area. The Bank is subject to
competition from other financial institutions. The
Bank is also subject to bank regulations and undergoes
periodic examination by bank regulators.
(2) USE OF ESTIMATES - The preparation of financial
statements in conformity with generally accepted
accounting principles requires management to make
estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of
the financial statements and the reported amounts of
revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Material estimates that are particularly susceptible
to significant change relate to the determination of
the allowance for losses on loans and the valuation of
real estate acquired in connection with foreclosures
or in satisfaction of loans. In connection with the
determination of the allowances for losses on loans
and foreclosed real estate, management obtains
independent appraisals for significant properties.
(3) SECURITIES:
FEDERAL RESERVE STOCK - Investment in stock of Federal
Reserve is required by law of every national bank.
The investment is carried at cost.
FEDERAL HOME LOAN BANK - Investment in stock of
Federal Home Loan Bank is carried at market.
(4) LOANS - Loans are stated at the unpaid principal
balance, less the allowance for loan losses and
unearned income. Interest income on loans is recorded
on the accrual basis except for those loans in a
nonaccrual income status. Loans are placed in a
nonaccrual income status when, in the opinion of
management, the prospects for recovering both
principal and accrued interest are considered
doubtful. Unearned income, arising principally from
consumer installment loans, is reflected as a
reduction of loans and is recognized as income by a
method that approximates the interest method. The
accrual of interest on impaired loans is discontinued
when, in managements opinion, the borrower may be
unable to meet payments as they come due. Interest
income is subsequently recognized only to the extent
cash payments are received.
-6-
<PAGE>
<PAGE>
KENTUCKY NATIONAL BANK
----------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
A. SIGNIFICANT ACCOUNTING POLICIES - (Continued)
---------------------------------------------
(5) ALLOWANCE FOR CREDIT LOSSES - The allowance is
maintained at a level adequate to absorb probable
losses. Management determines the adequacy of the
allowance based upon reviews of the portfolio, recent
loss experience, current economic conditions, the risk
characteristics of the various categories of loans and
other pertinent factors. Allowances for impaired
loans are generally determined based on collateral
values or the present values of estimated cash flows.
The allowance for loan losses is increased by the
provision for loan losses and reduced by chargeoffs,
net of recoveries.
(6) PREMISES AND EQUIPMENT - Premises and equipment are
stated at cost, net of accumulated depreciation.
Depreciation expense is computed using the
straight-line method over the estimated useful lives
of the assets.
(7) ORGANIZATION COSTS - The cost of organizing the
Company, included in other assets, is being amortized
over 60 months using the straight-line method. At
December 31, 1998 and 1997, respectively, organization
costs net of accumulated amortization were $156,272
and $197,790.
(8) INCOME TAXES - Income taxes are provided for the tax
effects of the transactions reported in the financial
statements and consist of taxes currently due plus
deferred taxes related primarily to differences
between allowance for loan losses, accumulated
depreciation and startup cost for financial and income
tax reporting. The deferred tax assets and
liabilities represent the future tax return
consequences of those differences, which will either
be taxable or deductible when the assets and
liabilities are recovered or settled.
(9) FAIR VALUES OF FINANCIAL INSTRUMENTS - The following
methods and assumptions were used by the Bank in
estimating its fair value disclosures for financial
instruments:
CASH AND CASH EQUIVALENTS: The carrying amounts
reported in the statement of financial condition
for cash and cash equivalents approximate those
assets' fair values.
INVESTMENT SECURITIES: Fair values for
investment securities are based on quoted market
prices, where available. If quoted market
prices are not available, fair values are based
on quoted market prices of comparable
instruments.
-7-
<PAGE>
<PAGE>
KENTUCKY NATIONAL BANK
----------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
A. SIGNIFICANT ACCOUNTING POLICIES - (Continued)
---------------------------------------------
LOANS: For variable-rate loans that reprice
frequently and with no significant change in
credit risk, fair values are based on carrying
amounts. The fair values for other loans (for
example, fixed rate commercial real estate and
rental property mortgage loans and commercial
and industrial loans) are estimated using
discounted cash flow analysis, based on interest
rates currently being offered for loans with
similar terms to borrowers of similar credit
quality. Loan fair value estimates include
judgments regarding future expected loss
experience and risk characteristics.
DEPOSITS: The fair values disclosed for demand
deposits (for example, interest-bearing checking
accounts and passbook accounts) are, by
definition, equal to the amount payable on demand
at the reporting date (that is, their carrying
amounts). The fair values for certificates of
deposit are estimated using a discounted cash
flow calculation that applies interest rates
currently being offered on certificates to a
schedule of aggregated contractual maturities on
such time deposits.
SHORT-TERM BORROWINGS: The carrying amounts of
federal funds purchased approximate their fair
values.
OBLIGATIONS UNDER CAPITAL LEASES: The fair
values of the Bank's capital lease obligations
are estimated using discounted cash flows
analyses based on the Bank's current incremental
borrowing rates for similar types of borrowing
arrangements.
OTHER LIABILITIES: Commitments to extend credit
were evaluated and fair value was estimated using
the fees currently charged to enter into similar
agreements, taking into account the remaining
terms of the agreements and the present
creditworthiness of the counterparties. For
fixed-rate loan commitments, fair value also
considers the difference between current levels
of interest rates and the committed rates.
ACCRUED INTEREST: The carrying amounts of
accrued interest approximate their fair values.
OFF-BALANCE-SHEET INSTRUMENTS: Fair values for
off-balance-sheet lending commitments are based
on fees currently charged to enter into similar
agreements, taking into account the remaining
terms of the agreements and the counterparties'
credit standings.
(10) EARNINGS PER SHARE - Earnings per share has been
determined in accordance with Statements of Financial
Accounting Standards No. 128 "Earnings Per Share".
Earnings per share has been computed based on the
weighted average number of shares outstanding since
inception of 240,000. Diluted earnings per share has
not been presented as the effect of options granted at
inception to purchase 16,000 shares of common stock is
antidilutive.
-8-
<PAGE>
<PAGE>
KENTUCKY NATIONAL BANK
----------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
A. SIGNIFICANT ACCOUNTING POLICIES - (Continued)
---------------------------------------------
(11) OFF BALANCE SHEET FINANCIAL INSTRUMENTS - In the
ordinary course of business the Bank has entered into
off balance sheet financial instruments consisting of
commitments to extend credit, commercial letters of
credit and standby letters of credit. Such financial
instruments are recorded in the financial statements
when they become payable.
(12) STATEMENT OF CASH FLOWS - For purposes of the
statement of cash flows, cash and cash equivalents
include cash on hand, demand balances due from banks,
and federal funds sold.
(13) ADVERTISING - The Bank expenses the cost of
advertising as incurred.
(14) RECLASSIFICATIONS - Certain amounts in 1997 have been
reclassified to conform with the 1998 presentation.
B. LOANS
-----
The composition of loans at December 31, 1998 and 1997 are
as follows:
<TABLE>
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C>
Commercial and industrial $ 3,634,251 $ 1,836,302
Real Estate - Mortgage 20,343,920 4,179,030
Real Estate - Construction 3,623,849 929,782
Agriculture 1,592,058 155,834
Consumer 5,533,394 1,328,378
Other 18,500 239
------------- -----------
34,745,972 8,429,565
Less:
Allowance for loan losses 347,000 75,000
Unearned income 198,388 99,353
------------- -----------
$ 34,200,584 $ 8,255,212
============= ===========
</TABLE>
Impairment of loans having recorded investments of approximately
$120,000 at December 31, 1998 has been recognized in conformity
with FASB Statement No. 114, as amended by FASB Statement No.
118. The average recorded investment in impaired loans during
1998 was $10,000. The total allowance for loan losses related
to these loans was $0. There was no interest income on impaired
loans recognized for cash payments received in 1998.
At December 31, 1997, the Bank had no loans that were
specifically classified as impaired.
An analysis of the changes in the allowance for loan losses is
as follows:
<TABLE>
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C>
Balance, beginning of period $ 75,000 $ --
Loans charged off (17,286) --
Loan recoveries 1,345 --
Provision of loan losses 287,941 75,000
---------- --------
Balance, end of period $ 347,000 $ 75,000
========== ========
</TABLE>
-9-
<PAGE>
<PAGE>
KENTUCKY NATIONAL BANK
----------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
B. LOANS - (Continued)
-------------------
Loans to executive officers and directors amounted to
approximately $204,400 at December 31, 1998. There were no
loans to executive officers and directors during the period
from inception to December 31, 1997.
C. PREMISES AND EQUIPMENT
----------------------
A summary of premises and equipment at December 31, 1998
and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C>
Bank premises $ 309,981 $ --
Furniture and equipment 290,531 35,101
Leaseholds 1,389,902 --
------------ -----------
1,990,414 35,101
Less accumulated depreciation 56,791 1,569
------------ -----------
$ 1,933,623 $ 33,532
============ ===========
</TABLE>
D. DEPOSITS
--------
The composition of deposits at December 31, 1998 and 1997
is summarized as follows:
<TABLE>
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C>
Non-interest bearing demand $ 3,737,818 $ 1,032,022
Interest bearing demand 2,845,617 1,142,577
Savings 567,889 130,318
Certificates of Deposit over $100,000 8,000,026 2,696,305
Other interest-bearing deposits 15,360,892 1,782,463
------------ -----------
$ 30,512,242 $ 6,783,685
============ ===========
</TABLE>
At December 31, 1998, scheduled maturities of certificates
of deposit including IRA's are as follows:
1999 $ 22,061,746
2000 1,197,404
2001 100,668
2002 1,100
------------
$ 23,360,918
============
The Bank held deposits of approximately $2,656,000 and
$1,259,700 for related parties at December 31, 1998 and
1997, respectively.
-10-
<PAGE>
<PAGE>
KENTUCKY NATIONAL BANK
----------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
E. CAPITAL LEASES
--------------
The Bank has entered into a long-term capital lease
agreement for substantially all bank equipment and
furniture. The lease, which commenced on February 1, 1998,
extends for a five year period expiring 2003. The Bank has
also entered into an agreement to lease a branch building
and land commencing on May 11, 1998 and extending for an
initial five year period with five successive five year
renewal terms expiring in 2028. In addition, the Bank
has entered into an agreement with a related party for
lease of the bank building and land. This lease commenced
on March 1, 1998 and extends for an initial period of ten
years with four successive ten year renewal terms expiring
in 2048. The building components of these leases are
classified as capital leases. The land components are
classified as operating leases. At December 31, 1998 the
future minimum lease payments under the capital leases were
as follows:
For the year ending:
1999 $ 178,396
2000 178,396
2001 178,395
2002 178,395
2003 132,361
Thereafter 5,260,090
------------
Total minimum lease payments 6,106,033
Less amounts representing interest 4,756,837
------------
Present value of net minimum lease
payment $ 1,349,196
============
Future minimum annual rental commitments under the
noncancelable operating lease for land is as follows:
For the year ending:
1999 $ 56,519
2000 56,519
2001 56,519
2002 56,519
2003 56,519
Thereafter 2,220,168
------------
Total minimum annual rental
commitments $ 2,502,763
============
Rental expense under operating leases was approximately
$40,000 for the year ended December 31, 1998.
F. FEDERAL HOME LOAN BANK ADVANCES
-------------------------------
During 1998, the Bank entered into a blanket agreement for
advances from the Federal Home Loan Bank (FHLB). The Bank
had no outstanding advances from FHLB at December 31,
1998. Mortgage loans with a balance of approximately
$15,240,000 at December 31, 1998 and all FHLB stock were
pledged to the FHLB as collateral in the event that the
Bank requires future advances.
-11-
<PAGE>
<PAGE>
KENTUCKY NATIONAL BANK
----------------------
NOTES TO FINANCIAL STATEMENTS
------------------------------
G. INCOME TAXES
------------
At December 31, 1998 and 1997 deferred tax assets and
liabilities are composed of the following:
<TABLE>
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 83,300 $ 13,000
Net operating losses 136,200 60,500
Startup costs 65,200 82,400
Stock options 9,200 --
---------- ---------
293,900 155,900
Deferred tax liabilities:
Accumulated depreciation (11,800) --
---------- ---------
282,100 155,900
Less valuation allowance (282,100) (155,900)
---------- ---------
Net deferred tax asset $ -- $ --
========== =========
</TABLE>
The Bank has tax loss carryforwards of approximately
$395,100 that may be offset against future taxable income.
The carryforwards expire in 2012 and 2013.
H. REGULATORY MATTERS
Under applicable banking laws, bank regulatory authorities
must approve the declaration of dividends in any year, in
an amount in excess of the sum of net income of that year
and retained earnings net of dividends and required
transfers of the preceding two years. At December 31,
1998, there were no retained earnings available for the
payment of dividends without approval by bank regulatory
authorities.
The Bank is subject to various regulatory capital
requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate
certain mandatory and possibly additional discretionary
actions by regulators that, if undertaken, could have a
direct material effect on the Bank's financial statements.
Under capital adequacy guidelines and the regulatory
framework for prompt corrective actions, the Bank must meet
specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities, and certain
off-balance sheet items as calculated under regulatory
accounting practices. The Bank's 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 Bank to maintain minimum
amounts and ratios (set forth in the table below) of total
and Tier I capital (as defined by regulations) to
risk-weighted assets (as defined), and of Tier I capital
(as defined) to average assets (as defined). Management
believes, as of December 31, 1998 and 1997, that the Bank
meets all capital adequacy requirements to which it is
subject.
-12-
<PAGE>
<PAGE>
KENTUCKY NATIONAL BANK
----------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
H. REGULATORY MATTERS - (Continued)
--------------------------------
As of December 31, 1998, the most recent notification from
the Office of the Comptroller of Currency (OCC) categorized
the Bank as well capitalized under the regulatory framework
for prompt corrective action.
To be categorized as adequately capitalized, the Bank must
maintain minimum total risk-based, Tier I risk-based, Tier
I leverage ratios as set forth in the table. There are no
conditions or events since this notification that
Management believes have changed the institution's
category.
The Bank's actual capital amounts and ratios are also
presented in the table as of December 31, 1998 and 1997.
<TABLE>
<CAPTION>
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provision
--------------------- ------------------ -----------------
Amount % Amount % Amount %
DECEMBER 31, 1998: ------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Total capital to risk
weighted assets $ 5,387 17.88% $ 2,410 8.00% $ 3,012 10.00%
Tier I capital to risk
weighted assets 5,040 16.73% $ 1,205 4.00% $ 1,807 6.00%
Tier I capital to average
assets 5,040 14.16% $ 1,068 3.00% $ 1,780 5.00%
DECEMBER 31, 1997:
Total capital to risk
weighted assets 5,420 66.54% $ 651 8.00% $ 815 10.00%
Tier I capital to risk
weighted assets 5,345 66.62% $ 326 4.00% $ 489 6.00%
Tier I capital to average
assets 5,345 68.03% $ 236 3.00% $ 393 5.00%
</TABLE>
I. STOCK OPTION PLAN
-----------------
Under a plan effective at inception, the bank granted
performance based options to purchase 16,000 shares of stock
to key employees. The option to purchase shares expires 10
years from the date of the grant. Options vest over three
years upon achievement of performance or production
incentives. There are no additional options available to be
granted to employees under the plan. Compensation accrued
under the plan at December 31, 1998 was approximately
$27,100.
-13-
<PAGE>
<PAGE>
KENTUCKY NATIONAL BANK
----------------------
NOTES TO FINANCIAL STATEMENTS
------------------------------
I. STOCK OPTION PLAN - (Continued)
-------------------------------
A summary of the options outstanding during 1998 and during
the period from inception to December 31, 1997 is as
follows:
<TABLE>
<CAPTION>
1998 1997
------------------------------ ---------------------------
Weighted Weighted
Average Average
Number of Exercise Number of Exercise
Options Price Options Price
--------- -------- -------- ----------
<S> <C> <C> <C> <C>
Issued at inception 16,000 $ 25.00 16,000 $ 25.00
Granted during period -- -- -- --
Exercised during period -- -- -- --
------- ------
Outstanding at year end 16,000 $ 25.00 16,000 $ 25.00
======= ======
Eligible for exercise at year end 6,000 -
------- ------
Weighted average fair value of
options granted during period $ -- $ 3.90
======= =======
</TABLE>
J. FAIR VALUES OF FINANCIAL INSTRUMENTS
------------------------------------
The estimated fair values of the Company's financial
instruments are as follows:
<TABLE>
<CAPTION>
Carrying Fair
Amount Value
-------- -----
(in thousands)
<S> <C> <C>
FINANCIAL ASSETS:
Cash and cash equivalents $ 925 $ 925
Investment in Federal Home Loan Bank Stock 97 97
Investment in Federal Reserve Stock 180 180
Loans, net of allowance 34,201 34,201
Accrued interest receivable 336 336
FINANCIAL LIABILITIES:
Deposits 30,512 30,101
Federal Funds purchased 447 447
Obligations under capital leases 1,349 1,349
Accrued interest payable 177 177
OFF-BALANCE-SHEET LIABILITIES:
Commitments to extend credit 2,963 2,963
Standby letters of credit 316 316
</TABLE>
The carrying amounts in the preceding table are included in
the statement of financial condition under the applicable
captions.
-14-
<PAGE>
<PAGE>
KENTUCKY NATIONAL BANK
----------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
K. RELATED PARTY TRANSACTIONS
--------------------------
The Bank, in the normal course of business, leases its main
office from a related party. Payments made under both
capital and operating leases for the year ended December
31, 1998 amounted to approximately $120,000. In addition,
during 1998, the Bank made payments of approximately
$310,000 to a related party for construction of improvement
to a new branch location.
L. YEAR 2000
---------
As the Bank is newly opened with newly purchased
millennium-compliant hardware and software, the Bank's
systems will require few modifications or related costs
relative to Year 2000 compliance. Kentucky National Bank
has developed a proactive plan for minimizing its risk and
ensuring its computer hardware, software, vendors and
business partners are Year 2000 compliant. Although the
Bank has received assurances that its data processor will
be Year 2000 compliant, the Bank has provided for a back-up
plan in the event its data processor does not become Year
2000 compliant in a timely manner. The Bank believes that
remaining compliance issues will be resolved in the near
term and that any related costs will not have a material
impact on the operations, cash flows or financial condition
of future periods.
M. COMMITMENTS AND CONTINGENT LIABILITIES
--------------------------------------
In the normal course of business, the Bank has outstanding
commitments and contingent liabilities. At December 31,
1998, the Bank had commitments to extend credit which are
not reflected in the financial statements of approximately
$3,279,000, including stand-by letters of $316,000 and
commitments to related parties of $75,000. The Bank's
exposure to credit loss in the event of nonperformance by
the other party to these commitments is represented by the
contractual amount of those instruments.
Commitments to extend credit are agreements to lend 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 and may
require payment of a fee. Since many of the commitments
are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements and do not generally present any significant
liquidity risk to the Bank. The Bank evaluates each
customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the
Bank upon extension of credit, is based on management's
credit evaluation of the customer. Collateral held varies
but may include accounts receivable, inventory, property,
plant and equipment, and income-producing commercial
properties.
-15-
<PAGE>
<PAGE>
KENTUCKY NATIONAL BANK
----------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
M. COMMITMENTS AND CONTINGENT LIABILITIES - (Continued)
----------------------------------------------------
Standby letters of credit are conditional commitments
issued by the Bank to guarantee the performance of a
customer to a third party. Standby letters of credit
generally have fixed expiration dates or other termination
clauses and may require payment of a fee. The credit risk
involved in issuing letters of credit is essentially the
same as that involved in extending loan facilities to
customers. The Bank's policy for obtaining collateral, and
the nature of such collateral, is essentially the same as
that involved in making commitments to extend credit.
N. CONCENTRATIONS OF CREDIT
------------------------
Most of the Bank's loans, commitments and standby letters
of credit have been granted to customers in the Bank's
market area. Most credit customers are depositors of the
Bank. The concentrations of credit by type of loan are set
forth in Note B. The distribution of commitments to extend
credit approximates the distribution of loans outstanding.
-16-
<PAGE>
<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.
KENTUCKY NATIONAL BANCORP, INC.
Date: June 15, 1999 By: /s/ Lawrence P. Calvert
----------------------------
Lawrence P. Calvert
Chief Executive Officer
(Duly Authorized Officer)
Pursuant to the requirements of 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.
By: /s/ Lawrence P. Calvert Date: June 15, 1999
------------------------------------
Lawrence P. Calvert
Chief Executive Officer and Director
(Principal Executive Officer)
By: /s/ Ronald J. Pence Date: June 15, 1999
------------------------------------
Ronald J. Pence
President and Director
(Principal Financial and Accounting
Officer)
By: /s/ Robert E. Robbins, MD Date: June 15, 1999
------------------------------------
Robert E. Robbins
Chairman of the Board and Director
By: /s/ Kevin D. Addington Date: June 15, 1999
-------------------------------------
Kevin D. Addington
Director
By: /s/Henry Lee Chitwood Date: June 15, 1999
-------------------------------------
Henry Lee Chitwood
Director
By: /s/ Lois W. Gray Date: June 15, 1999
-------------------------------------
Lois Watkins Gray
Director
By: /s/ William R. Hawkins Date: June 15, 1999
-------------------------------------
William R. Hawkins
Director
By: /s/ Christopher G. Knight Date: June 15, 1999
-------------------------------------
Christopher G. Knight
Director
By: /s/ Leonard Allen McNutt Date: June 15, 1999
-------------------------------------
Leonard Allen McNutt
Director
