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 SEPTEMBER 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 September 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.
-------
FINANCIAL INFORMATION
Item 1.
Consolidated Statement of Condition as of September 30, 2000
and December 31, 1999 (Unaudited) 3
Consolidated Statement of Income - (Unaudited) for the three months
and nine months ended September 30, 2000 and 1999 4
Consolidated Statement of Cash Flows - (Unaudited)
for the nine months ended September 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 9
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>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- -----------
<S> <C> <C>
ASSETS
Cash and due from banks $ 1,358,625 $ 1,594,188
Federal funds sold 1,631,000 1,331,000
Investment securities:
Securities available-for-sale 3,260,620 2,152,985
Securities held-to-maturity, at fair value 152,300 180,000
Loans, net 55,977,588 48,330,667
Premises and equipment 1,938,781 1,980,301
Accrued interest receivable and other assets 933,487 501,106
----------- -----------
Total assets $65,252,401 $56,070,247
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $57,615,415 $49,206,413
Obligations under capital leases 1,271,576 1,305,929
Accrued interest payable and other
liabilities 562,445 477,767
----------- -----------
Total liabilities 59,449,436 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 September 30, 2000 and December 31,
1999, respectively 2,464 2,400
Surplus 5,432,861 5,212,125
Retained earnings (deficit) 380,540 (125,467)
Accumulated other comprehensive income (12,900) (8,920)
----------- -----------
Total stockholders' equity 5,802,965 5,080,138
----------- -----------
Commitments and contingent liabilities -- --
----------- ------------
Total liabilities and stockholders'
equity $65,252,401 $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 NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- ---------------------------
2000 1999 2000 1999
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees $ 1,320,736 $ 1,033,647 $3,731,264 $2,813,823
Securities 57,065 2,615 166,379 11,067
Federal funds sold 26,729 6,125 63,057 12,203
----------- ----------- ---------- ----------
Total interest income 1,404,530 1,042,387 3,960,700 2,837,093
----------- ----------- ---------- ----------
Interest expense:
Deposit accounts 525,589 316,408 1,416,985 881,125
Certificates of deposit over $100,000 232,102 133,751 641,006 385,895
Interest expense - federal funds -- 18,127 1,187 33,965
Interest expense - capital lease 33,251 33,630 100,134 101,500
----------- ----------- ---------- ----------
Total interest expense 790,942 501,916 2,159,312 1,402,485
----------- ----------- ---------- ----------
Net interest income 613,588 540,471 1,801,388 1,434,608
Provision for loan losses 55,200 67,638 162,372 326,442
----------- ----------- ---------- ----------
Net interest income after provision
for loan losses 558,388 472,833 1,639,016 1,108,166
----------- ----------- ---------- ----------
Other income:
Service charges and fees 100,737 71,390 266,003 194,081
Credit life and accident insurance 7,647 5,085 42,894 22,430
----------- ----------- ---------- ----------
108,384 76,475 308,897 216,511
----------- ----------- ---------- ----------
Other expenses:
Salaries and employee benefits 272,167 192,849 763,897 593,298
Net occupancy expense 33,271 28,370 103,442 88,972
Advertising 28,454 29,339 88,612 91,155
Data processing 67,910 49,517 158,566 123,274
Postage, telephone and supplies 26,517 27,587 84,162 76,364
Bank franchise tax 17,664 9,292 50,812 37,828
Directors fees 15,088 19,320 36,108 57,330
Professional services 49,124 47,499 170,799 144,012
Other operating expenses 87,073 68,540 209,308 160,639
----------- ----------- ---------- ----------
597,268 472,313 1,665,706 1,372,872
----------- ----------- ---------- ----------
Income (loss) before income taxes and
cumulative effect of accounting change 69,504 76,995 282,207 (48,195)
Income tax expense (benefit) 20,561 -- (223,800) --
----------- ----------- ---------- ----------
Net income (loss) before cumulative effect
of accounting change 48,943 76,995 506,007 (48,195)
Cumulative effect of accounting change -- -- -- (156,769)
----------- ----------- ---------- ----------
Net income (loss) $ 48,943 $ 76,995 $ 506,007 $ (204,964)
=========== =========== ========== ==========
Earnings (loss) per share $ .20 $ .32 $ 2.08 $ (.85)
=========== =========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
KENTUCKY NATIONAL BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
2000 1999
----------- -----------
<S> <C> <C>
Operating activities:
Net income (loss) $ 506,007 $ (204,964)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
FHLB stock dividend (12,400) --
Provision for loan losses 162,372 326,442
Provision for depreciation, amortization
and accretion, net 78,782 67,131
Incentive stock option plans 59,800 13,637
Deferred tax (223,800) --
Cumulative effect of accounting change -- 156,769
Changes in assets and liabilities:
Increase in accrued interest receivable
and other assets (206,532) (156,718)
Increase in accrued interest payable
and other liabilities 245,678 64,519
------------ ------------
Net cash provided by
operating activities 609,907 266,816
------------ ------------
Investing activities:
Purchases of available-for-sale securities (1,101,019) (65,500)
Proceeds from maturity of held-to-maturity
securities 27,700 --
Net increase in loans (7,809,293) (10,894,647)
Purchases of premises and equipment (37,507) (137,458)
------------ ------------
Net cash used in investing
activities (8,920,119) (11,097,605)
------------ ------------
Financing activities:
Net increase in deposits 8,409,002 11,702,916
Payments on capital lease obligations (34,353) (32,297)
Net decrease in federal funds purchased -- (447,000)
Federal Home Loan Bank advances -- 1,000,000
------------ ------------
Net cash provided by financing
activities 8,374,649 12,223,619
------------ ------------
Net increase in cash and cash equivalents 64,437 1,392,830
Cash and cash equivalents, beginning of period 2,925,188 924,798
------------ ------------
Cash and cash equivalents, end of period $ 2,989,625 $ 2,317,628
============ ============
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest $ 2,040,589 $ 1,368,867
============ ============
</TABLE>
NONCASH TRANSACTIONS:
During the nine month period ended September 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 income 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 income
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 September 30, 2000 and December 31, 1999, the Bank held securities
classified as available-for-sale, which have net unrealized losses of
approximately $19,500 and $13,500, respectively. The before and after tax
amount and tax expense (benefit) of this component of comprehensive income
at September 30, 2000 and December 31, 1999 is summarized below:
<TABLE>
<CAPTION>
TAX
BEFORE (BENEFIT) AFTER
TAX EXPENSE TAX
------- --------- ------
<S> <C> <C> <C>
SEPTEMBER 30, 2000
Unrealized holding losses $ (19,545) $ (6,645) $ (12,900)
Reclassification adjustment
for gains included in net
income -- -- --
--------- ---------- ----------
$ (19,545) $ (6,645) $ (12,900)
========= ========= =========
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 nine month periods ended September 30,
2000 and 1999 have been computed based on the weighted average number of
shares outstanding throughout the periods of 243,578 and 240,000,
respectively. Earnings (loss) per share for the three month periods ended
September 30, 2000 and 1999 have been computed based on the weighted
average number of shares outstanding throughout the periods of 246,440 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 nine months ended September 30, 2000 and 1999
were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
------------- -------------
<S> <C> <C>
Current $ -- $ --
Deferred (223,800) --
----------- --------
$ (223,800) $ --
=========== ========
</TABLE>
7
<PAGE>
KENTUCKY NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
6. INCOME TAXES, CONTINUED
At September 30, 2000 and December 31, 1999 deferred tax assets and
liabilities are composed of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 136,100 $ 143,200
Net operating losses 36,100 109,000
Startup costs 40,200 54,100
Organization costs 28,600 39,200
Stock options 35,900 15,600
Available-for-sale securities 6,600 4,600
----------- -----------
283,500 365,700
----------- -----------
Deferred tax liabilities:
Federal Home Loan Bank stock (8,000) (3,800)
Depreciation (45,100) (34,100)
----------- -----------
(53,100) (37,900)
----------- -----------
230,400 327,800
Less valuation allowance -- (323,200)
----------- -----------
Net deferred tax asset $ 230,400 $ 4,600
=========== ===========
</TABLE>
At September 30, 2000, the Company has tax loss carryforwards of
approximately $106,200 that may be offset against future taxable income.
The carryforwards expire from 2012 to 2015.
7. LEASE COMMITMENT
A related party is currently constructing a building addition onto the main
branch which the Bank will lease under a capital lease arrangement upon its
completion which is expected to be August 2001. As a result of the addition
of building and equipment under capital leases in the aggregate amount of
approximately $900,000, the Bank will incur monthly amortization expense of
approximately $1,900, and monthly operating lease expense for land rental
of approximately $700. The monthly cash flow requirement under the lease
obligations, including interest expense, will be approximately $10,500 per
month.
8
<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 regulatory 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 NINE MONTH PERIODS
ENDED SEPTEMBER 30, 2000 AND 1999
NET INCOME (LOSS). Net income for the quarter ended September 30, 2000 was
$48,900 or $.20 per share compared to net income of $77,000 or $.32 per share
for the same period last year, a decrease of $28,100 or $.12 per share. The year
to date net income at September 30, 2000 was $506,000 or $2.08 per share
compared to a net loss of $(205,000) or $(.85) per share for the same period in
1999. The decrease in net income for the three months ended September 30, 2000
over the same period last year was due primarily to increases in deferred income
tax expense, salaries expense, and other operating expenses related to the
Bank's continued growth. The increase in the year to date income at September
30, 2000 of $711,000 or $2.93 per share is due largely to 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 $223,800. The
increase is also due to the increase in net interest income of $366,800,
increase in other income of $92,400, reduced provision for loan losses of
$164,000, relative to an increase in expense of $292,800. In addition, the nine
months ended September 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.
9
<PAGE>
NET INTEREST INCOME. Net interest income increased $73,100 or 13.5% to $613,600
for the three months ended September 30, 2000 compared to $540,500 for the three
months ended September 30, 1999. Year to date net interest income was $1.8
million and $1.4 million for the nine months ended September 30, 2000 and 1999,
respectively, an increase of $400,000 or 28.6%. Total average interest-earning
assets increased by approximately $15.6 million with an increase in average
yield of 12 basis points while average interest bearing liabilities increased by
approximately $14.3 million with an increase in average costs of approximately
49 basis points. The increase in the average cost of funds is due primarily to
higher yields paid on interest bearing deposits driven by market rates. As a
result, the Bank's interest rate spread decreased to 3.42% for the nine months
ended September 30, 2000 compared to 3.79% for the nine months ended September
30, 1999. Net interest margin was to 4.21% for the nine months ended September
30, 2000 compared to 4.62% for the nine months ended September 30, 1999.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $55,200 and $67,600
for the quarters ended September 30, 2000 and 1999, respectively. The year to
date provision for loan losses was $162,400 and $326,400 for the nine months
ended September 30, 2000 and 1999, respectively. The year to date decrease of
$164,000 was primarily due to a specific charge off in the amount of $120,000
during the first quarter of 1999. At September 30, 2000, the Bank's allowance
for loan losses was $562,400 or 1.0% of the gross loan portfolio.
OTHER INCOME. Other income was $108,400 and $76,500 for the quarters ended
September 30, 2000 and 1999, respectively. Year to date other income was
$308,900 and $216,500 for the nine months ended September 30, 2000 and 1999,
respectively. The increase for the quarter of $31,900 or 41.7%, and the year to
date increase of $92,400 or 42.7%, 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 $597,300 and $472,300 for the quarters ended
September 30, 2000 and 1999, respectively. Year to date other expense was $1.7
million and $1.4 million for the nine months ended September 30, 2000 and 1999,
respectively. The increase for the quarter of $125,000 or 26.5% and the year to
date increase of $300,000 or 21.4% was due primarily to the increases in
salaries and employee benefits of $79,300 or 41.1% for the quarter and $170,600
or 28.8% 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, the accrual of compensation
under a stock option plan effective April 25, 2000, and the addition of a
mortgage banking division during this quarter.
INCOME TAX BENEFIT (EXPENSE). Income tax expense (benefit) was $20,600 and
$(223,800) for the three and nine months ended September 30, 2000, compared to
no tax expense (benefit) during 1999. The tax expense (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.
10
<PAGE>
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
The Bank continued to experience asset growth during the third quarter of 2000.
Total assets increased $9.2 million, or 16.4% to $65.3 million at September 30,
2000 compared to $56.1 million at December 31, 1999. The increase in total
assets was primarily attributable to a $7.6 million or 15.7% increase in the
loan portfolio. Also contributing to the increase in assets was a $1.1 million
increase in investment securities, $300,000 increase in federal funds sold, and
a $432,400 increase in other assets due primarily to the recordation of the
deferred tax asset of $223,800. Funding for the Bank's asset growth came
primarily from increased deposits. At September 30, 2000, deposits totaled $57.6
million, an $8.4 million, or 17.1%, increase over deposits at December 31, 1999.
Stockholders' equity increased by $722,800 to $5.8 million at September 30, 2000
from $5.1 million at December 31, 1999. Net income for the year of $506,000, 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 of $59,800, less a $4,000 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 of 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 September 30, 2000, with a Tier 1 capital ratio of
9.01%. 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.
As a result of the addition of building and equipment under capital leases in
the aggregate amount of approximately $900,000, the Company will incur monthly
amortization expense of approximately $1,900, and monthly operating lease
expense for land rental of approximately $700 upon completion of construction
which is currently expected to be August 2001. The monthly cash flow requirement
under the lease obligations, including interest expense, will be approximately
$10,500 per month. Management projects that future cash flow from operations
will be sufficient to meet the cash flow requirement of the leases.
ASSET QUALITY
The following table sets forth information regarding the Bank's non-performing
assets at the dates indicated.
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------ ------------
<S> <C> <C>
Restructured loans $ -- $ --
Non-accrual loans 305,200 155,000
Accruing loans past due 90 days or more -- --
----------- ----------
Total $ 305,200 $ 155,000
=========== ==========
</TABLE>
At September 30, 2000, there were $1,069,000 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. The growth in
non-performing and potentially problematic loans is due to the maturation of the
loan portfolio and is contained in relatively few borrowers.
11
<PAGE>
An analysis of the changes in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
Nine Months ended September 30,
--------------------------------------
2000 1999
----------- ----------
<S> <C> <C>
Balance, beginning of period $ 561,944 $ 347,000
Loans charged off (169,308) (167,185)
Loan recoveries 7,369 1,061
---------- -----------
Net charge-offs (161,939) (166,124)
Provision for loan losses 162,372 326,442
---------- -----------
Balance, end of period $ 562,377 $ 507,318
========== ===========
</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.
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 September 30, 2000, the Bank's ratio of loans to deposits was 97.2% 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. A related party has
begun an expansion of bank premises which the Bank will lease under a capital
lease arrangement upon its completion which is expected to be August 2001.
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 September 30, 2000,
totaled $3.0 million compared to $2.3 million at September 30, 1999. The Bank's
cash flows were provided mainly by financing activities, including $8.4 million
from net deposit increases. Operating activities provided $609,900 in cash for
the nine months ended September 30, 2000 compared to $266,800 in cash for the
first nine months of 1999. The Bank used cash flows for its investing activities
primarily to fund an increase in gross loans of $7.8 million and purchase of
securities of $1.1 million.
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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 least 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 September 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.
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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 September 30, 2000, the Company did not file
any current reports on Form 8-K.
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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: November 14, 2000 By: /s/ Ronald J. Pence
----------------------- --------------------------------
Ronald J. Pence, President
(Duly Authorized Represen-
tative and Principal
Financial Officer)
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