SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
------------------------------
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
COMMISSION FILE NUMBER 333-72371
KENTUCKY NATIONAL BANCORP, INC.
------------------------------------------------------------------------------
(Exact name of Small Business Issuer as specified in its Charter)
Indiana 61-1345603
--------------------------------------------- -------------------
(State or other jurisdiction of organization) (IRS Employer
Identification No.)
1000 North Dixie Avenue, Elizabethtown, Kentucky 42701
------------------------------------------------ ---------
(Address of principal executive offices) (Zip code)
Issuer's telephone number, including area code: (270) 737-6000
--------------
Check whether the issuer (1) 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.
X Yes No
----- -----
As of June 30, 2000, there were 246,440 shares of the Registrant's
common stock, par value $.01 per share, outstanding.
Transitional Small Business Issuer Disclosure Format (check one):
Yes X No
----- ------
<PAGE>
KENTUCKY NATIONAL BANCORP, INC.
ELIZABETHTOWN, KENTUCKY
INDEX
PAGE
----
PART I.
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FINANCIAL INFORMATION
Item 1.
Consolidated Statement of Condition as of June 30, 2000
and December 31, 1999 (Unaudited) 3
Consolidated Statement of Income - (Unaudited) for the
three months and six months ended June 30, 2000 and 1999 4
Consolidated Statement of Cash Flows - (Unaudited)
for the six months ended June 30, 2000 and 1999 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2.
Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II.
-------
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
2
<PAGE>
KENTUCKY NATIONAL BANCORP, INC.
CONSOLIDATED STATEMENT OF CONDITION
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
------------ ------------
ASSETS
<S> <C> <C>
Cash and due from banks $ 1,513,103 $ 1,594,188
Federal funds sold 1,856,000 1,331,000
Investment securities:
Securities available-for-sale 3,224,980 2,152,985
Securities held-to-maturity, at fair value 152,300 180,000
Loans, net 53,914,049 48,330,667
Premises and equipment 1,937,305 1,980,301
Accrued interest receivable and other assets 884,506 501,106
----------- -----------
Total assets $63,482,243 $56,070,247
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $56,058,912 $49,206,413
Obligations under capital leases 1,283,614 1,305,929
Accrued interest payable and other
liabilities 418,793 477,767
----------- -----------
Total liabilities 57,761,319 50,990,109
----------- -----------
Stockholders' equity:
Preferred stock, $.01 par value;
authorized 1,000,000 shares - -
Common stock, $.01 par value;
authorized 5,000,000 shares; issued and outstanding,
246,440 and 240,000 shares at June 30, 2000 and
December 31, 1999, respectively 2,464 2,400
Surplus 5,419,861 5,212,125
Retained earnings (deficit) 331,597 (125,467)
Accumulated other comprehensive income (32,998) (8,920)
----------- -----------
Total stockholders' equity 5,720,924 5,080,138
----------- -----------
Commitments and contingent liabilities - -
----------- -----------
Total liabilities and stockholders'
equity $63,482,243 $56,070,247
=========== ===========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
KENTUCKY NATIONAL BANCORP, INC.
CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- --------------------------
2000 1999 2000 1999
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees $ 1,253,286 $ 947,674 $2,410,528 $1,780,176
Securities 61,558 5,400 109,314 8,452
Federal funds sold 28,771 1,272 36,328 6,078
----------- ----------- ---------- ----------
Total interest income 1,343,615 954,346 2,556,170 1,794,706
----------- ----------- ---------- ----------
Interest expense:
Deposit accounts 487,505 291,248 891,396 564,717
Certificates of deposit over $100,000 207,291 130,935 408,904 252,144
Interest expense - federal funds - 11,442 1,187 15,838
Interest expense - capital lease 33,379 33,866 66,883 67,870
----------- ----------- ---------- ----------
Total interest expense 728,175 467,491 1,368,370 900,569
----------- ----------- ---------- ----------
Net interest income 615,440 486,855 1,187,800 894,137
Provision for loan losses 54,600 83,234 107,172 258,804
----------- ----------- ---------- ----------
Net interest income after provision
for loan losses 560,840 403,621 1,080,628 635,333
----------- ----------- ---------- ----------
Other income:
Service charges and fees 87,491 66,369 165,266 122,691
Credit life and accident insurance 23,703 12,222 35,247 17,345
----------- ----------- ---------- ----------
111,194 78,591 200,513 140,036
----------- ----------- ---------- ----------
Other expenses:
Salaries and employee benefits 247,544 201,839 491,730 400,449
Net occupancy expense 35,950 31,822 70,171 60,602
Advertising 24,757 27,884 60,158 61,816
Data processing 47,309 25,168 90,656 73,757
Postage, telephone and supplies 30,024 21,436 57,645 48,777
Bank franchise tax 16,418 22,975 33,148 28,536
Directors fees 15,000 19,110 21,020 38,010
Professional services 60,436 40,459 121,675 96,513
Other operating expenses 58,001 37,790 122,235 92,099
----------- ----------- ---------- ----------
535,439 428,483 1,068,438 900,559
----------- ----------- ---------- ----------
Income (loss) before income taxes and
cumulative effect of accounting change 136,595 53,729 212,703 (125,190)
Income tax benefit 244,361 - 244,361 -
----------- ----------- ---------- -----------
Net income (loss) before cumulative effect
of accounting change 380,956 53,729 457,064 (125,190)
Cumulative effect of accounting change - - - (156,769)
----------- ----------- ---------- ----------
Net income (loss) $ 380,956 $ 53,729 $ 457,064 $ (281,959)
=========== =========== ========== ==========
Earnings (loss) per share $ 1.56 $ .22 $ 1.89 $ (1.17)
=========== =========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
KENTUCKY NATIONAL BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------------------
2000 1999
----------- -----------
<S> <C> <C>
Operating activities:
Net income (loss) $ 457,064 $ (281,959)
Adjustments to reconcile net loss to net
cash provided by operating activities:
FHLB stock dividend (7,300) -
Provision for loan losses 107,172 258,804
Provision for depreciation, amortization
and accretion, net 52,291 44,420
Incentive stock option plans 46,800 9,303
Deferred tax (244,361) -
Cumulative effect of accounting change - 156,769
Changes in assets and liabilities:
Increase in accrued interest receivable
and other assets (126,635) (66,713)
Increase in accrued interest payable
and other liabilities 102,026 34,224
----------- -----------
Net cash provided by
operating activities 387,057 154,848
----------- -----------
Investing activities:
Purchases of available-for-sale securities (1,101,019) (62,900)
Proceeds from maturity of held-to-maturity
securities 27,700 -
Net increase in loans (6,041,916) (9,405,927)
Purchases of premises and equipment (9,453) (114,980)
----------- -----------
Net cash used in investing
activities (7,124,688) (9,583,807)
----------- -----------
Financing activities:
Net increase in deposits 7,203,861 9,318,009
Payments on capital lease obligations (22,315) (21,328)
Net decrease in federal funds purchased - (447,000)
Federal Home Loan Bank advances - 1,000,000
----------- -----------
Net cash provided by financing
activities 7,181,546 9,849,681
----------- -----------
Net increase in cash and cash equivalents 443,915 420,722
Cash and cash equivalents, beginning of period 2,925,188 924,798
----------- -----------
Cash and cash equivalents, end of period $ 3,369,103 $ 1,345,520
=========== ===========
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest $ 1,305,981 $ 892,073
=========== ===========
</TABLE>
NONCASH TRANSACTIONS:
During the six month period ended June 30, 2000, the Company issued 6,440 shares
of common stock in lieu of cash payment for accrued directors' fees from
inception through December 31, 1999 in the amount of $161,000 in accordance with
a deferred compensation plan approved by the stockholders on April 25, 2000.
See notes to consolidated financial statements.
5
<PAGE>
KENTUCKY NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
Kentucky National Bancorp, Inc., (the Company) became the holding company
for Kentucky National Bank (the Bank) on May 18, 1999, by issuing and
exchanging its stock on a share for share basis for the outstanding stock
of the Bank. The transfer of stock between the entities under common
control was accounted for at historical cost in a manner similar to a
pooling of interests. Accordingly, the 1999 financial statements are
presented as if the holding company formation occurred on January 1, 1999.
The unaudited consolidated financial statements include the accounts of
Kentucky National Bancorp, Inc., and its subsidiary Kentucky National Bank.
All material intercompany balances and transactions have been eliminated in
consolidation.
The accompanying unaudited consolidated financial statements were prepared
in accordance with instructions for Form 10-QSB and therefore, do not
include all disclosures necessary for a complete presentation of the
statement of financial condition, statement of operations and statement of
cash flows in conformity with generally accepted accounting principles.
However, all adjustments (all of which are of a normal recurring nature)
which are, in the opinion of management, necessary for the fair
presentation of the interim financial statements have been included. The
statement of operations for periods presented is not necessarily indicative
of the results which may be expected for the entire year.
2. COMPREHENSIVE INCOME
During the year ended December 31, 1999, Kentucky National Bancorp, Inc.
adopted FASB Statement No. 130, "Reporting Comprehensive Income." The
statement requires the reporting of comprehensive income in addition to net
income from operations. Comprehensive income is a more inclusive financial
reporting methodology that includes disclosures of certain financial
information that historically has not been recognized in the calculation of
net income.
At June 30, 2000 and December 31, 1999, the Bank held securities classified
as available-for-sale, which have net unrealized losses of approximately
$50,000 and $13,500, respectively. The before and after tax amount and tax
expense (benefit) of this component of comprehensive income at June 30,
2000 and December 31, 1999 is summarized below:
<TABLE>
<CAPTION>
TAX
BEFORE (BENEFIT) AFTER
TAX EXPENSE TAX
------ --------- -----
<S> <C> <C> <C>
JUNE 30, 2000
Unrealized holding losses $ (49,997) $ (16,999) $ (32,998)
Reclassification adjustment
for gains included in net
income - - -
--------- --------- ---------
$ (49,997) $ (16,999) $ (32,998)
========= ========= =========
DECEMBER 31, 1999
Unrealized holding losses $ (13,515) $ (4,595) $ (8,920)
Reclassification adjustment
for gains included in net
income - - -
--------- --------- ---------
$ (13,515) $ (4,595) $ (8,920)
========= ========= =========
</TABLE>
6
<PAGE>
KENTUCKY NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
3. EARNINGS (LOSS) PER SHARE
Earnings (loss) per share has been determined in accordance with Statements
of Financial Accounting Standards No. 128, "Earnings per Share."
Earnings (loss) per share for the six month periods ended June 30, 2000 and
1999 have been computed based on the weighted average number of shares
outstanding throughout the periods of 242,147 and 240,000, respectively.
Earnings (loss) per share for the three month periods ended June 30, 2000
and 1999 have been computed based on the weighted average number of shares
outstanding throughout the periods of 244,293 and 240,000, respectively.
Diluted earnings (loss) per share has not been presented as the effect of
options granted under stock option plans are antidilutive.
4. ORGANIZATION COSTS
In April 1998, Accounting Standards Executive Committee issued Statement of
Position 98-5, "Reporting on the Costs of Start-up Activities," effective
for financial statements for fiscal years beginning after December 15,
1998. In accordance with this standard, the Bank expensed on January 1,
1999, unamortized start-up costs in the amount of $156,769 as a cumulative
effect of a change in accounting principle.
5. RECLASSIFICATIONS
Certain 1999 amounts have been reclassified to conform with the 2000
presentation.
6. INCOME TAXES
The Company and the Bank file a consolidated income tax return. The Bank is
charged or credited the amount equal to the income tax that would have been
applicable on a separate return basis.
The components of consolidated income tax expense (benefit) applicable to
continuing operations for the six months ended June 30, 2000 and 1999 were
as follows:
<TABLE>
<CAPTION>
June 30, June 30,
2000 1999
---------- --------
<S> <C> <C>
Current $ -- $ --
Deferred (244,361) --
--------- ------
$(244,361) $ --
========= ======
</TABLE>
7
<PAGE>
KENTUCKY NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
6. INCOME TAXES, CONTINUED
At June 30, 2000 and December 31, 1999 deferred tax assets and liabilities
are composed of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
----------- -------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 151,200 $ 143,200
Net operating losses 31,700 109,000
Startup costs 44,700 54,100
Organization costs 32,100 39,200
Stock options 31,500 15,600
Available-for-sale securities 17,000 4,600
----------- -----------
308,200 365,700
----------- -----------
Deferred tax liabilities:
Federal Home Loan Bank stock (6,500) (3,800)
Depreciation (40,400) (34,100)
----------- -----------
(46,900) (37,900)
----------- -----------
261,300 327,800
Less valuation allowance - (323,200)
----------- -----------
Net deferred tax asset $ 261,300 $ 4,600
=========== ===========
</TABLE>
At June 30, 2000, the Company has tax loss carryforwards of approximately
$93,300 that may be offset against future taxable income. The carryforwards
expire from 2012 to 2015.
7. STOCK OPTION PLAN
Under a new plan approved by stockholders on April 25, 2000, the Company
granted performance based options to purchase 24,000 shares of stock to key
employees, service providers and consultants. The options to purchase
shares expire 10 years from the date of the grant. One third of the options
vested immediately. The remaining options vest over two years upon
achievement of corporate performance goals. There are 6,000 additional
options available to be granted under the plan. Compensation accrued under
this plan at June 30, 2000 was $36,400.
A summary of the options outstanding during 2000 for the year 2000 stock
option plan is as follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE
OF EXERCISE
OPTIONS PRICE
--------- --------
<S> <C> <C>
Issued at inception 24,000 $25.00
Granted during period -- --
Exercised during period -- --
------ ------
24,000 $25.00
======
Eligible for exercise at end of period 9,333
------
Weighted average fair value of options
granted during period --
======
</TABLE>
8
<PAGE>
KENTUCKY NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
8. DEFERRED COMPENSATION PLAN
On April 25, 2000, the stockholders approved a plan for the payment of
deferred directors' fees whereby 18,000 shares of common stock were issued
for the settlement of directors' fees in lieu of cash payment. Under the
plan, 6,440 shares were immediately distributed for payment of fees accrued
from inception through December 31, 1999 in the amount of $161,000. Shares
are to be distributed annually as soon as practical after the calendar year
for which the shares have been earned. The plan is effective until its
termination by the Board of Directors.
9
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following discussion and analysis is intended to assist in understanding the
consolidated financial condition and results of operations of the Company.
FORWARD-LOOKING STATEMENTS
When used in this discussion and elsewhere in this Quarterly Report on Form
10-QSB, the words or phrases "will likely result," "are expected to," will
continue," "is anticipated," "estimate," "project," or similar expressions are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. The Company cautions readers
not to place undue reliance on any such forward-looking statements, which speak
only as of the date made, and advises readers that various factors, including
regional and national economic conditions, substantial changes in level of
market interest rates, credit and other risks of lending and investment
activities and competitive and regulator factors could affect the Company's
financial performance and could cause the Company's actual results for future
periods to differ materially from those anticipated or projected.
The Company does not undertake and specifically disclaims any obligation to
update any forward-looking statements to reflect occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTH PERIODS
ENDED JUNE 30, 2000 AND 1999
NET INCOME (LOSS). Net income for the quarter ended June 30, 2000 was $381,000
or $1.56 per share compared to net income of $53,700 or $.22 per share for the
same period last year, an increase of $327,300 or $1.34 per share. The year to
date net income at June 30, 2000 was $457,100 or $1.89 per share compared to a
net loss $282,000 or $1.17 per share for the same period in 1999. The
improvement of net income for the three months ended June 30, 2000 over the same
period last year was due primarily to increased profitability of the Bank and
the lifting of the valuation allowance relating to net deferred tax assets. In
accordance with Statement of Financial Accounting Standards No. 109, the Company
has determined that it is more likely than not that net deferred tax assets will
be realized, and thus concluded that no valuation allowance is needed for
deductible temporary differences. The lifting of the valuation allowance
relating to net deferred tax assets resulted in a current income tax benefit of
$244,400. The increase in the year to date income at June 30, 2000 of $739,100
or $3.06 per share is due largely to the increase in net interest income of
$293,700, increase in other income of $60,500, reduced provision for loan losses
of $31,600, and the recognition of the income tax benefit of $244,400 as
described above, relative to an increase in expense of $167,900. In addition,
the six months ended June 30, 1999 included a nonrecurring accounting change
implementation which required the Bank to expense previously capitalized
start-up costs of $156,800 and also included a specific charge off of $120,000
which increased the provision for loan losses for that period.
NET INTEREST INCOME. Net interest income increased $128,600 or 26.4% to $615,400
for the three months ended June 30, 2000 compared to $486,800 for the three
months ended June 30, 1999. Year to date net interest income was $1.2 million
and $894,100 for the six months ended June 30, 2000 and 1999, respectively, an
increase of $305,900 or 34.2%. Total average interest-earning assets increased
by approximately $16.2 million with an increase in average yield of 9 basis
points while average interest bearing liabilities increased by approximately
$14.7 million with an increase in average costs of approximately 28 basis
points.
10
<PAGE>
As a result, the Bank's interest rate spread decreased to 3.49% for the six
months ended June 30, 2000 compared to 3.68% for the six months ended June 30,
1999. Net interest margin was to 4.28% for the six months ended June 30, 2000
compared to 4.54% for the six months ended June 30, 1999.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $54,600 and $83,200
for the quarters ended June 30, 2000 and 1999, respectively. The year to date
provision for loan losses was $107,200 and $258,800 for the six months ended
June 30, 2000 and 1999, respectively. The year to date decrease of $151,600 was
primarily due to a specific charge off in the amount of $120,000 during the
first quarter of 1999. At June 30, 2000, the Bank's allowance for loan losses
was $585,300 or 1.1% of the gross loan portfolio.
OTHER INCOME. Other income was $111,200 and $78,600 for the quarters ended June
30, 2000 and 1999, respectively. Year to date other income was $200,500 and
$140,000 for the six months ended June 30, 2000 and 1999, respectively. The
increase for the quarter of $32,600 or 41.5%, and the year to date increase of
$60,500 or 43.2%, is reflective of loan and deposit growth from which other
income of service charges, fees, and credit life and accident insurance
commissions are generated.
OTHER EXPENSE. Other expense was $535,400 and $428,500 for the quarters ended
June 30, 2000 and 1999, respectively. Year to date other expense was $1,068,400
and $900,600 for the six months ended June 30, 2000 and 1999, respectively. The
increase for the quarter of $106,900 or 24.9% and the year to date increase of
$167,800 or 18.6% was due primarily to the increases in salaries and employee
benefits of $45,700 or 22.6% for the quarter and 91,300 or 22.8% year to date.
The growth in salaries and employee benefits are the results of bank growth, the
addition of the branch location in December 1998, the addition of internet
banking personnel in 1999 and the accrual of $36,400 compensation under a stock
option plan effected April 25, 2000.
INCOME TAX BENEFIT (EXPENSE). For the three and six months ended June 30, 2000,
the Company recorded a tax benefit of $244,400 compared to no tax benefit or
expense during the three and six months ended June 30, 1999. The tax benefit
during the 2000 periods related to the reversal of valuation allowances related
to its net deferred tax assets. The Company provides for both the current and
deferred tax effects of the transactions reported in its financial statements
and established deferred tax assets and liabilities for the temporary
differences between the financial reporting and tax bases of its assets and
liabilities. The Company, however, establishes valuation allowances for its net
deferred tax assets unless it is more likely than not that these net deferred
tax assets will be realized. Based on its current earnings and other factors,
the Company determined that it is more likely than not that it will realize
certain of its net deferred tax assets and reversed the corresponding valuation
allowance.
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2000 AND DECEMBER 31, 1999
The Bank continued to experience strong asset growth during the second quarter
of 2000. Total assets increased $7.4 million, or 13.2% to $63.5 million at June
30, 2000 compared to $56.1 million at December 31, 1999. The increase in total
assets was primarily attributable to a $5.6 million or 11.6% increase in the
loan portfolio. Also contributing to the increase in assets was a $1 million
increase in investment securities, $525,000 increase in federal funds sold, and
a $383,400 increase in other assets due primarily to the recordation of the
deferred tax asset of $244,300. Funding for the Bank's asset growth came
primarily from increased deposits. At June 30, 2000, deposits totaled $56.1
million, a $6.9 million, or 13.9%, increase over deposits at December 31, 1999.
Stockholders' equity increased by $640,800 to $5,720,924 at June 30, 2000 from
$5,080,100 at December 31, 1999. Net income for the year of $457,100 the
recordation of stock and contributed capital for payment of deferred directors'
fees through December 31, 1999 of $161,000 and surplus from stock options
accrued
11
<PAGE>
of $46,800, less $24,100 change in unrealized gain or loss on available-for-sale
securities is the source of the increase. Management believes that a strong
capital position is vital to future profitability and to promote depositor and
investor confidence. The Bank continues to be in compliance with all applicable
regulatory capital requirements.
As a condition to its approval of the Bank's deposit insurance, the FDIC
required the Bank to maintain a ratio of Tier I capital to assets of no less
than 8% during its first three years of operations. The Bank was in compliance
with this requirement as of June 30, 2000, with a Tier 1 capital ratio of 9.22%,
an increase of .16% over the March 31, 2000 Tier I capital ratio of 9.06%. Based
on its level of Tier I capital at June 30, 2000, the Bank will only be permitted
to grow its assets to approximately $72 million prior to October 15, 2000 and
still be in compliance with the FDIC requirement. The Company has made
arrangements to borrow funds from a third party lender for capital infusion to
enhance continued growth. Although the Bank believes that it will be permitted
to maintain Tier 1 capital at a lower percentage of assets after October 15,
2000, there can be no assurance that the Bank will be permitted to resume its
historic rate of growth without an increase in capital.
ASSET QUALITY
The following table sets forth information regarding the Bank's non-performing
assets at the dates indicated.
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
----------- ------------
<S> <C> <C>
Restructured loans $ - $ -
Non-accrual loans 124,900 155,000
Accruing loans past due 90 days or more - -
----------- ------------
Total $ 124,900 $ 155,000
=========== ===========
</TABLE>
At June 30, 2000, there were $676,700 in loans outstanding not reflected in the
above table as to which known information about possible credit problems of
borrowers caused management to have serious doubts as to the ability of such
borrowers to comply with present loan repayment terms.
An analysis of the changes in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------------
2000 1999
----------- ----------
<S> <C> <C>
Balance, beginning of period $ 561,944 $ 347,000
Loans charged off (89,123) (159,110)
Loan recoveries 5,345 20
---------- ----------
Net charge-offs (83,778) (159,090)
Provision for loan losses 107,172 258,804
---------- ----------
Balance, end of period $ 585,338 $ 446,714
========== ==========
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES.
The Company currently has no operating business other than the Bank and does not
have material funding needs. In the future, the Company may require funds for
dividends and tax payments for which it will rely on dividends and other
distributions from the Bank. The Bank is subject to various regulatory
restrictions on the payment of dividends.
12
<PAGE>
The Bank's sources of funds for lending activities and operations are deposits
from its primary market area, funds raised in its initial public offering,
principal and interest payments on loans, interest received on other investments
and federal funds purchased. The Bank is also eligible to borrow from the FHLB
of Cincinnati. Its principal funding commitments are for the origination of
loans, the payment of maturing deposits and obligations under capital leases for
buildings and equipment. Deposits are considered a primary source of funds
supporting the Bank's lending and investment activities.
At June 30, 2000, the Bank's ratio of loans to deposits was 96.2% compared to
98.2% at December 31, 1999. The loan-to-deposit ratio is used as an indicator of
a bank's ability to originate additional loans and general liquidity. The Bank's
comparatively high loan-to-deposit ratio reflects management's emphasis on
building the loan portfolio and has been possible because the Bank has funded a
significant portion of its loan growth with capital raised in its initial public
offering. Because the Bank's continued loan growth will depend on deposit
growth, management expects to place more emphasis on building liquidity on the
balance sheet and that the loan-to-deposit ratio will decline. The Bank's
strategies in this regard include the sale of participations in loans and the
creation of an investment securities portfolio that can be used as a source of
liquidity and earnings.
Due to the growth of the Bank and increase in personnel, the Bank is currently
reaching full premises capacity at the main branch location. Management has
begun the preliminary planning stage for future expansion of bank premises to
enable continued growth.
The Bank's most liquid assets are cash and cash equivalents, which are cash on
hand, amounts due from financial institutions, federal funds sold and money
market mutual funds. The levels of such assets are dependent on the Bank's
operating financing and investment activities at any given time. The variations
in levels of cash and cash equivalents are influenced by deposit flows and
anticipated future deposit flows.
Cash and cash equivalents (cash due from banks, interest-bearing deposits in
other financial institutions, and federal funds sold), as of June 30, 2000,
totaled $3.4 million compared to $1.3 million at June 30, 1999. The Bank's cash
flows were provided mainly by financing activities, including $7.2 million from
net deposit increases. Operating activities provided $387,100 in cash for the
six months ended June 30, 2000 compared to $154,800 in cash for the first six
months of 1999. The Bank used cash flows for its investing activities primarily
to fund an increase in gross loans of $6 million and purchase of securities of
$1.1 million.
As a national bank, the Bank is subject to regulatory capital requirements of
the Office of the Comptroller of the Currency ("OCC"). In order to be well
capitalized under OCC regulations, the Bank must maintain a leverage ratio of
Tier I Capital to average assets of at lease 5% and ratios of Tier I and total
capital to risk-weighted assets of at least 6% and 10% respectively. In
addition, as a condition to the approval of the insurance of its deposits, the
FDIC required the Bank to maintain a ratio of Tier I capital to assets of at
least 8% for the first three years of operations. At June 30, 2000, the Bank
satisfied the capital requirements for classification as well as capitalized
under OCC regulations and was in compliance with the condition imposed by the
FDIC in connection with the insurance of its deposits.
13
<PAGE>
PART II
OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) The following exhibits are being filed with this quarterly report on
Form 10-QSB:
Number Description
------ -----------
27 Financial Data Schedule (EDGAR only)
(b) During the quarter ended June 30, 2000, the Company did not file any
current reports on Form 8-K.
14
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
KENTUCKY NATIONAL BANCORP, INC.
Date: August 10, 2000 By: /s/ Ronald J. Pence
-----------------------------
Ronald J. Pence, President
(Duly Authorized Represen-
tative and Principal
Financial Officer)
15
