<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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Commission File No. 0-25180
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CKF BANCORP, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 61-1267810
- -------------------------------- --------------------------
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
340 WEST MAIN STREET, DANVILLE, KENTUCKY 40422
- --------------------------------------------- ---------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (606) 236-4181
--------------
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or such shorter period that the registrant was required to
file such reports) and (2) has been subject to such filing requirements for the
past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K. [X]
As of March 13, 1997, the aggregate market value of the 629,405 shares of Common
Stock of the registrant issued and outstanding held by non-affiliates on such
date was approximately $11.9 million based on the closing sales price of $18.87
per share of the registrant's Common Stock on March 13, 1997, as quoted on the
Nasdaq SmallCap Market. For purposes of this calculation, it is assumed that
directors, officers and beneficial owners of more than 5% of the registrant's
outstanding voting stock are affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
The following lists the documents incorporated by reference and the Part of
the Form 10-K into which the document is incorporated:
1. Portions of the Annual Report to Stockholders for the fiscal year
ended December 31, 1996. (Parts I and II)
2. Portions of Proxy Statement for the 1997 Annual Meeting of
Stockholders. (Part III)
<PAGE>
PART I
ITEM 1. BUSINESS
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GENERAL
THE COMPANY. CKF Bancorp, Inc., a Delaware corporation (the
"Company"), was organized by Central Kentucky Federal Savings Bank, formerly
Central Kentucky Federal Savings and Loan Association ("Central Kentucky
Federal" or the "Bank") to be a savings institution holding company whose only
subsidiaries are the Bank and its subsidiary. The Company was incorporated at
the direction of the Board of Directors of the Bank in August 1994. On December
29, 1994, the Bank converted from mutual to stock form as a wholly owned
subsidiary of the Company (the "Conversion"). In conjunction with the
Conversion, the Company issued 1,000,000 shares of its common stock (the "Common
Stock") to the public.
The Company is classified as a unitary savings and loan holding
company subject to regulation by the Office of Thrift Supervision ("OTS") of the
Department of the Treasury. Prior to its acquisition of the Bank, the Company
had no assets and no liabilities and engaged in no business activities. The
Company purchased all the capital stock of the Bank issued in the conversion in
exchange for 50% of the net conversion proceeds. Since the acquisition, the
Company has not engaged in any significant activity other than holding the stock
of the Bank and operating the Bank. The Company has no significant assets other
than the outstanding capital of the Bank and $1.9 million in bank deposits held
by the Bank, which are invested with the Federal Home Loan Bank ("FHLB") of
Cincinnati. Accordingly, the information set forth in this report, including
financial statements and related data, relates primarily to the Bank and its
subsidiary. On a consolidated basis at December 31, 1996, the Company had total
assets of $60.0 million, deposits of $42.8 million, net loans receivable of
$53.1 million and stockholders' equity of $15.1 million.
The executive offices of the Company and the Bank are located at 340
West Main Street, Danville, Kentucky 40422, and its telephone number is (606)
236-4181.
THE BANK. Central Kentucky Federal was formed in 1886 as a Kentucky-
chartered mutual building and loan association. In December 1960, the Bank
obtained federal insurance of accounts and became a member of the FHLB of
Cincinnati. The Bank converted to a federal mutual savings and loan association
in 1969 and changed its name to Central Kentucky Federal Savings and Loan
Association. Upon its conversion to stock form in December 1994, the Bank
adopted its present name. The Bank operates through one full service office in
Danville, Kentucky.
The Bank is principally engaged in the business of accepting deposits
from the general public through a variety of deposit programs and investing
these funds by originating loans in its market area, which include loans secured
by one- to four-family residential properties, loans secured by multi-family
residential and commercial properties, construction loans, second mortgage loans
on single-family residences, home equity lines of credit and consumer loans,
both secured and unsecured, including loans secured by savings accounts.
Deposits of the Bank are insured by the Federal Deposit Insurance
Corporation ("FDIC") up to applicable limits for each depositor, and the Bank is
a member of the FHLB of Cincinnati, which is one of the 12 district banks
comprising the FHLB System. The Bank is subject to comprehensive examination,
supervision and regulation by the OTS and the FDIC. Such regulation is intended
primarily for the protection of depositors.
LENDING ACTIVITIES
General. Central Kentucky Federal's primary lending activity is the
origination of conventional mortgage loans for the purpose of constructing,
purchasing or refinancing owner-occupied one- to four-family residential
properties in its primary market area. To a lesser extent, Central Kentucky
Federal originates multi-family residential, commercial real estate and church
loans. Central Kentucky Federal also originates consumer loans.
2
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Central Kentucky Federal has sought to build an interest rate-
sensitive loan portfolio by originating adjustable rate mortgage loans ("ARMs").
As of December 31, 1996, 90.5% of the mortgage loan portfolio was comprised of
ARMs. Central Kentucky Federal's ARMs have an interest rate that adjusts
periodically to the index value of the National Average Contract Mortgage rate
for the Purchase of Previously Occupied Homes by Combined Lenders. The interest
rates on these loans have an initial adjustment period of between one and seven
years, and generally adjust annually thereafter, with a maximum adjustment of 2%
per year and 6% over the life of the loan. All mortgage loans originated by
Central Kentucky Federal are retained in Central Kentucky Federal's loan
portfolio.
The retention of ARMs in the portfolio helps reduce Central Kentucky
Federal's exposure to increase in interest rates. However, there are
unquantifiable credit risks resulting from potential increased costs to the
borrower as a result of repricing of ARMs. It is possible that during periods
of rising interest rates, the risk of default on ARMs may increase due to the
upward adjustment of interest costs to the borrower. Although ARMs allow
Central Kentucky Federal to increase the sensitivity of its asset base to
changes in interest rates, the extent of this interest sensitivity is limited by
the periodic and lifetime interest rate ceiling contained in ARM contracts.
Accordingly, there can be no assurance that yields on Central Kentucky Federal's
ARMs will adjust sufficiently to compensate for increase in its cost of funds.
The Bank intends to continue actively monitoring the interest rate environment,
prepayment activity, interest rate risk and other factors in developing its
strategy with respect to the volume and pricing of its fixed rate loans and in
its lending activities generally.
The Bank is also involved to a limited extent in the origination of
fixed-rate mortgage loans on owner-occupied, single-family residential
properties. The Board of Directors initially authorized the origination of up
to $1.0 million of such loans in 1992 to meet consumer demand in a declining
interest rate environment. All such loans were originated in 1992 and 1993, and
the Board of Directors in 1994 authorized the origination of an additional $1.0
million in fixed rate residential loans. Because of the subsequent increase in
interest rates in 1994, only approximately $418,000 in fixed rate loans have
since been originated by the Bank from this second authorized amount as of
December 31, 1996. See "-- One- to Four-Family Real Estate Lending."
Savings institutions generally are subject to the loan-to-one-borrower
lending limits applicable to national banks. With certain limited exceptions,
the maximum amount that a savings institution or a national bank may lend to any
borrower (including certain related entities of the borrower) at one time may
not exceed 15% of the unimpaired capital and surplus of the institution, plus an
additional 10% of unimpaired capital and surplus for loans fully secured by
readily marketable collateral. Savings institutions are additionally authorized
to make loans to one borrower, for any purpose, in an amount not to exceed
$500,000 or, by order of the Director of OTS, in an amount not to exceed the
lesser of $30,000,000 or 30% of unimpaired capital and surplus to develop
residential housing, provided: (i) the purchase price of each single-family
dwelling in the development does not exceed $500,000; (ii) the savings
institution is in compliance with its fully phased-in capital requirements;
(iii) the loans comply with applicable loan-to-value requirements; and (iv) the
aggregate amount of loans made under this authority does not exceed 150% of
unimpaired capital and surplus. At December 31, 1996, the maximum amount that
the Bank could have loaned to any one borrower without prior OTS approval was
$2.3 million. At such date, the largest aggregate amount of loans that the Bank
had outstanding to any one borrower was $852,000.
3
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Loan Portfolio Composition. The following table sets forth selected
data relating to the composition of the Bank's loan portfolio by type of loan at
the dates indicated. At December 31, 1996, the Bank had no concentrations of
loans exceeding 10% of total loans that are not otherwise disclosed below.
<TABLE>
<CAPTION>
At December 31,
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1996 1995 1994
---------------- ----------------- ----------------
Amount % Amount % Amount %
------- ------- -------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family residential (1).. $44,042 81.35% $40,649 80.52 $38,446 84.09%
Multi-family residential (2)......... 1,255 2.32 1,323 2.62 1,159 2.54
Non-residential...................... 6,510 12.03 6,270 12.42 4,942 10.81
Consumer loans:
Savings account...................... 416 .77 424 .84 243 .53
Other (3)............................ 1,913 3.53 1,815 3.60 931 2.03
------- ------ ------- ------ ------- ------
54,136 100.00% 50,481 100.00% 45,721 100.00%
======= ====== ====== ======
Less:
Loans in process..................... 784 690 460
Deferred loan fees................... 64 53 42
Allowance for loan losses............ 107 100 76
------- ------- -------
Total............................. $53,181 $49,638 $45,143
======= ======= =======
</TABLE>
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(1) Includes home equity loans. Also includes construction loans that will be
converted to permanent loans and which comprised $1,367,500, $692,500 and
$821,400 at December 31, 1996, 1995 and 1994, respectively.
(2) Also includes a construction loan that will be converted to a permanent
loan and which amounted to $306,000 at December 31, 1996.
(3) Consists primarily of unsecured loans made to qualified existing depositors
of the Bank.
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Loan Maturity Schedule. The following table sets forth certain information
at December 31, 1996 regarding the dollar amount of loans maturing in the Bank's
portfolio based on their contractual terms to maturity, including scheduled
repayments of principal. Demand loans, loans having no stated schedule of
repayments and no stated maturity, and overdrafts are reported as due in one
year or less. The table below does not include any estimate of prepayments,
which significantly shorten the average life of all mortgage loans and may cause
the Bank's actual repayment experience to differ from that shown below.
<TABLE>
<CAPTION>
Due during the year ending Due after Due after Due after
December 31, 3 through 5 through 10 through Due after 15
--------------------------- 5 years after 10 years after 15 years after years after
1997 1998 1999 12/31/96 12/31/96 12/31/96 12/31/96 Total
---- ---- ---- ------------- -------------- -------------- ------------ -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate mortgage (1).. $ 20 $ 123 $ 101 $ 924 $ 5,416 $ 9,531 $ 33,331 $49,446
Real estate construction.. 870 -- -- -- -- -- -- 870
Consumer.................. 1,124 99 155 607 -- -- -- 1,985
Commercial................ 518 30 -- 163 7 333 -- 1,051
------ ----- ----- ------ -------- -------- -------- -------
Total................. $2,532 $ 252 $ 256 $1,694 $ 5,423 $ 9,864 $ 33,331 $53,352
====== ===== ===== ====== ======== ======== ======== =======
</TABLE>
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(1) Includes home equity loans.
The following table sets forth at December 31, 1996, the dollar amount
of all loans due one year or more after December 31, 1996 which have
predetermined interest rates or have floating or adjustable interest rates.
<TABLE>
<CAPTION>
Predetermined Floating or
Rate Adjustable Rates Total
------------- ---------------- -------
(In thousands)
<S> <C> <C> <C>
Real estate mortgage.. $3,677 $45,749 $49,426
Consumer.............. -- 861 861
Commercial............ 7 526 533
------ ------- -------
Total................ $3,684 $47,136 $50,820
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</TABLE>
5
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Scheduled contractual principal repayments of loans do not necessarily
reflect the actual life of such assets. The average life of long-term loans is
substantially less than their contractual terms, due to prepayments. In
addition, "due-on-sale" clauses in mortgage loans generally give Central
Kentucky Federal the right to declare a loan due and payable in the event, among
other things, that a borrower sells the real property subject to the mortgage
and the loan is not repaid. Due-on-sale clauses are a means of increasing the
rate on existing mortgage loans during periods of rising interest rates and
increasing the turnover of mortgage loans in the Bank's portfolio. The average
life of mortgage loans tends to increase when current mortgage loan market rates
are substantially higher than rates on existing mortgage loans and tends to
decrease when current mortgage loan market rates are substantially lower than
rates on existing mortgage loans.
One- to Four-Family Real Estate Lending. The primary emphasis of the
Bank's lending activity is the origination of loans secured by first mortgages
on owner-occupied, one- to four-family residential properties. At December 31,
1996, $44.0 million, or 81.35%, of the Bank's gross loan portfolio consisted of
loans secured by one- to four-family residential real properties which were
owner-occupied, single-family residences primarily located in the Bank's market
area and construction loans that are originated for subsequent conversion into
permanent financing secured by the underlying residential property.
Central Kentucky Federal offers 15 year term, fixed rate mortgage
loans and ARMs. At December 31, 1996, $1.0 million, or 1.88%, of Central
Kentucky Federal's loan portfolio consisted of 15 year or less term, fixed rate
loans. Fixed rate loans are made only on single family, owner occupied homes.
Central Kentucky Federal also originates loans on condominiums, duplex dwellings
and townhomes in its market area.
Central Kentucky Federal offers four types of residential ARMs, all of
which are tied to the National Average Contract Mortgage Rate for the Purchase
of Previously Occupied Homes by Combined Lenders index. The ARMs' adjustment
periods range from one to seven years, with interest rate adjustments of not
more than 2% per year and a limit on adjustments over the life of the loan of
not more than 6%.
The Bank's adjustable rate residential mortgage loans are for terms of
up to 30 years, amortized on a monthly basis, with principal and interest due
each month. Residential real estate loans often remain outstanding for
significantly shorter periods than their contractual terms. Borrowers may
refinance or prepay loans at their option without penalty.
The Bank's lending policies generally limit the maximum loan-to-value
ratio on mortgage loans secured by owner-occupied properties to 80% of the
lesser of the appraised value or purchase price. The maximum loan-to-value
ratio on mortgage loans secured by non-owner-occupied properties and/or used for
refinancing purposes is 80%. The Bank does originate some loans on owner-
occupied single-family residences with loan-to-value ratios as high as 89.9%.
In each case, for those loans with a loan-to-value ratio in excess of 80%, the
Bank also charges an additional .5% over the otherwise available interest rate,
plus a loan fee of .5% rather than $250.
Central Kentucky Federal also originates, to a limited extent, fixed-
rate mortgage loans on owner-occupied, single-family residential properties with
terms to maturity of up to 15 years. Central Kentucky Federal originated
$93,000 in fixed rate single-family mortgage loans with a maximum term of 15
years during 1996 and such loans amounted to $1.0 million, or 1.88%, of the
Bank's loan portfolio at December 31, 1996. All such loans were held as long-
term investments, and none were held for sale.
Construction Lending. Central Kentucky Federal engages in
construction lending involving loans to qualified borrowers for construction of
one- to four-family residential and commercial properties, with the intent of
such loans converting to permanent financing upon completion of construction.
These properties are primarily located in the Bank's market area. At December
31, 1996, the Bank's loan portfolio included $870,000 of net loans secured by
properties under construction, all of which were construction/permanent loans
structured to become permanent loans upon the completion of construction. All
construction loans are secured by a first lien on the
6
<PAGE>
property under construction. Loan proceeds are disbursed in increments as
construction progresses and as inspections warrant. Construction/permanent loans
generally have adjustable or fixed interest rates and are underwritten in
accordance with the same terms and requirements as the Bank's permanent
mortgages, except the loans generally provide for disbursement in stages during
a construction period of up to six months, during which period the borrower is
not required to make monthly payments. Accrued interest must be paid at
completion of construction and monthly payments start being paid one month from
the date the loan is converted to permanent financing. Borrowers must satisfy
all credit requirements which would apply to the Bank's permanent mortgage loan
financing for the subject property and must execute a Construction Loan
Agreement with the Bank.
Construction financing generally is considered to involve a higher
degree of risk of loss than long-term financing on improved, occupied real
estate. Risk of loss on a construction loan is dependent largely upon the
accuracy of the initial estimate of the property's value at completion of
construction or development and the estimated cost (including interest) of
construction. During the construction phase, a number of factors could result
in delays and cost overruns. If the estimate of construction costs proves to be
inaccurate, the Bank may be required to advance funds beyond the amount
originally committed to permit completion of the development. If the estimate
of value proves to be inaccurate, the Bank may be confronted, at or prior to the
maturity of the loan, with a project having a value which is insufficient to
assure full repayment. The ability of a developer to sell developed lots or
completed dwelling units will depend on, among other things, demand, pricing,
availability of comparable properties and economic conditions. The Bank has
sought to minimize this risk by limiting construction lending to qualified
borrowers in the Bank's market area and by limiting the aggregate amount of
outstanding construction loans.
Multi-Family and Commercial Real Estate Lending. The multi-family and
commercial real estate loans originated by the Bank have generally been made to
individuals, small businesses and partnerships and have primarily been secured
by first mortgages on apartment buildings, office buildings, churches and other
properties. The Bank benefits from originating such loans due to the higher
origination fees and interest rates, as well as shorter terms to maturity, than
can be obtained from one- to four-family residential mortgage loans. Central
Kentucky Federal's multi-family residential and commercial real estate loans
generally have terms of 20 years and have adjustable rates and loan-to-value
ratios not exceeding 80%. At December 31, 1996, loans on commercial real estate
properties constituted approximately $6.5 million, or 12.03%, respectively, of
the Bank's gross loan portfolio.
Multi-family and commercial real estate lending entails significant
additional risks as compared to one- to four-family residential lending. For
example, such loans typically involve large loans to single borrowers or related
borrowers, the payment experience on such loans is typically dependent on the
successful operation of the project, and these risks can be significantly
affected by the supply and demand conditions in the market for commercial
property and multi-family residential units. To minimize these risks, Central
Kentucky Federal generally limits itself to its market area and to borrowers
with which it has substantial experience or who are otherwise well known to the
Bank. It is the Bank's current practice to obtain personal guarantees and
current financial statements from all principals obtaining commercial real
estate loans. Substantially all of the properties securing the Bank's
commercial real estate loans are inspected by the Bank's lending personnel
before the loan is made. The Bank also obtains appraisals on each property in
accordance with applicable regulations. If such loans later become delinquent,
the Bank contacts and works with the borrower to resolve the delinquency before
initiating foreclosure proceedings.
Consumer Lending. Central Kentucky Federal does not emphasize
consumer lending although it does originate such loans on a regular basis. The
Bank originates consumer loans on a secured and unsecured basis and generally
requires a pre-existing relationship with the Bank. The Bank generally makes
certificate of deposit loans for terms of up to six months for up to 90% of the
face amount of the certificate. The interest rate charged on these loans is the
prevailing market rate but not less than one percent above the rate paid on the
certificate, and interest is billed on a quarterly basis. These loans are
payable on demand and the account must be assigned to the Bank as collateral for
the loan. At December 31, 1996, consumer loans amounted to $2.3 million, or
4.30%, of the Bank's gross loan portfolio.
7
<PAGE>
Consumer loans generally involve more risk than first mortgage one- to
four-family residential real estate loans. Repossessed collateral for a
defaulted loan may not provide an adequate source of repayment of the
outstanding loan balance as a result of damage, loss or depreciation, and the
remaining deficiency often does not warrant further substantial collection
efforts against the borrower. In addition, loan collections are dependent on
the borrower's continuing financial stability, and thus are more likely to be
adversely affected by job loss, divorce, illness or personal bankruptcy.
Further, the application of various federal and state laws, including federal
and state bankruptcy and insolvency laws, may limit the amount which can be
recovered. These loans may also give rise to claims and defenses by a borrower
against the Bank, and a borrower may be able to assert against the Bank claims
and defenses which it has against the seller of the underlying collateral. In
underwriting consumer loans, the Bank considers the borrower's credit history,
an analysis of the borrower's income, expenses and ability to repay the loan and
the value of the collateral. The Bank's risks associated with consumer loans
are further minimized by the modest amount of consumer loans made by the Bank.
Loan Solicitation and Processing. Loan originations are derived from
a number of sources. Residential mortgage, consumer and other loan originations
primarily come from walk-in customers and referrals by realtors, depositors and
borrowers. Loan applications may be taken by the President or Vice President of
Lending of the Bank, and are then submitted to the Bank's Loan Committee
consisting of the President, Vice President of Lending and two members of the
Board of Directors. Upon receipt of a loan application from a prospective
borrower, a credit report and verifications are ordered to verify specific
information relating to the loan applicant's employment, income and credit
standing. An appraisal of the real estate intended to secure the proposed loan
is undertaken by an independent appraiser approved by the Bank. All mortgage
loans are required to be presented to the Loan Committee for final approval.
All unsecured consumer loans over $50,000 must be approved by the Board of
Directors. Consumer loans less than $50,000 may be approved by the President or
Vice President of Lending and are presented at the next meeting of the Board of
Directors for ratification.
Loan applicants are promptly notified of the decision of the Bank.
Interest rates on approved loans are subject to change if the loan is not funded
within 30 days after approval for residential mortgage loans and for consumer
loans. If an approved loan is not funded within 30 days, the applicant must re-
apply. It has been management's experience that substantially all approved
loans are funded. Fire and casualty insurance, as well as flood insurance, are
required for all loans as appropriate, and a title opinion is required for loans
secured by real estate. The requirement of a title opinion rather than title
insurance is a standard practice in the Bank's market area because of the desire
by financial institutions to use attorneys familiar with the land recordation
process and also because such opinions are generally less costly than insurance.
To minimize its exposure from a faulty opinion, the Bank requires that
attorneys providing opinions maintain a minimum amount of malpractice insurance
against deficiencies in such opinions. The Bank has never experienced a loss
arising from a deficient title opinion.
8
<PAGE>
Originations, Purchases and Sales of Loans. The following table sets
forth certain information with respect to originations of loans during the
periods indicated. During such periods, no loans were sold.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1996 1995 1994
------- ------- --------
(In thousands)
<S> <C> <C> <C>
Loans originated:
Real estate loans:
Construction (1)........... $ 2,156 $ 1,965 $ 1,447
One- to four-family........ 9,528 7,528 7,703
Multi-family (1)........... 757 -- --
Non-residential and other.. 626 1,371 1,348
Consumer loans............... 2,664 3,358 1,518
------- ------- -------
Total loans originated... $15,731 $14,222 $12,016
======= ======= =======
Loans purchased:
Real estate loans:
Conventional loans......... $ -- $ -- $ --
Other loans.................. 305 37 185
------- ------- -------
Total loans purchased.... $ 305 $ 37 $ 185
======= ======= =======
</TABLE>
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(1) Construction loans include one loan at December 31, 1996 that will be
converted to permanent loans in the multi-family and non-residential
category upon completion of construction. See " -- Loan Portfolio
Composition."
Central Kentucky Federal has never sold any of its loans. The Bank also
does not service any loans for other lenders.
Interest Rates and Loan Fees. Interest rates charged by the Bank on
mortgage loans are primarily determined by competitive loan rates offered in its
market area. Mortgage loan rates reflect factors such as general interest rate
levels, the supply of money available to the savings industry and the demand for
such loans. These factors are in turn affected by general economic conditions,
the monetary policies of the Federal government, including the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board"), the
general supply of money in the economy, tax policies and governmental budget
matters.
In addition to the interest earned on loans, the Bank receives fees in
connection with loan commitments and originations, loan modifications, late
payments and fees for miscellaneous services related to its loans. The Bank
charges a processing fee for its adjustable rate mortgage loans and fixed rate
mortgage loans. All fee income is recognized by the Bank in accordance with
guidelines established by Statement of Financial Accounting Standards ("SFAS")
No. 91.
To the extent that loans are originated or acquired for the portfolio, SFAS
No. 91 limits immediate recognition of loan origination or acquisition fees as
revenues and requires that such income (net of certain loan origination or
acquisition costs) be recognized over the estimated life of such loans and
thereby reduces the amount of revenue recognized by Central Kentucky Federal at
the time such loans are originated or acquired. At December 31, 1996, the Bank
had received $64,000 of loan fees, net of loan origination costs, that had been
deferred and were being recognized as income over the estimated lives of the
related loans.
Asset Classification and Allowance for Loan Losses. Federal regulations
require savings associations to review their assets on a regular basis and to
classify them as "substandard," "doubtful" or "loss," if warranted. Assets
classified as substandard or doubtful require the institution to establish
general allowances for loan losses. If an asset or portion thereof is
classified loss, the insured institution must either establish specified
allowances for loan losses in the amount of 100% of the portion of the asset
classified loss, or charge off such amount. An asset which does not currently
warrant classification but which possesses weaknesses or deficiencies deserving
close attention is
9
<PAGE>
required to be designated as "special mention." Currently, general loss
allowances established to cover possible losses related to assets classified
substandard or doubtful may be included in determining an institution's
regulatory capital, while specific valuation allowances for loan losses do not
qualify as regulatory capital. See "Regulation of the Bank --Regulatory Capital
Requirements." OTS examiners may disagree with the insured institution's
classifications and amounts reserved. If an institution does not agree with an
examiner's classification of an asset, it may appeal this determination to the
OTS. Management of the Bank reviews assets on a monthly basis, and at the end of
each quarter prepares an asset classification listing in conformity with the OTS
regulations, which is reviewed by the Board of Directors. At December 31, 1996,
management had no assets classified as special mention, $450,000 of assets
classified as substandard, no assets classified as doubtful and no assets
classified as loss. For additional information, see " -- Non-Performing Loans
and Other Problem Assets." See also " -- Multi-Family and Commercial Real Estate
Lending."
In originating loans, the Bank recognizes that credit losses will be
experienced and that the risk of loss will vary with, among other things, the
type of loan being made, the creditworthiness of the borrower over the term of
the loan, general economic conditions and, in the case of a secured loan, the
quality of the security for the loan. It is management's policy to maintain an
adequate allowance for loan losses based on, among other things, the Bank's and
the industry's historical loan loss experience, evaluation of economic
conditions and regular reviews of delinquencies and loan portfolio quality. The
Bank increases its allowance for loan losses by charging provisions for loan
losses against the Bank's income.
In June 1993, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 114, "Accounting by
Creditors for Impairment of a Loan." This promulgation, which was amended by
SFAS No. 118 as to certain income recognition and disclosure provisions, became
effective as to the Company in fiscal 1995. The new accounting standards
require that impaired loans be measured based upon the present value of expected
future cash flows discounted at the loan's effective interest rate, or as an
alternative, at the loan's observable market price or fair value of the
collateral. The Bank's current procedures for evaluating impaired loans result
in carrying such loans at the lower of cost or fair value. See Note 1 of Notes
to Consolidated Financial Statements. At December 31, 1996, the Bank had
identified impaired loans, as defined by SFAS No. 114, totaling $270,465 for
which no allowance for loss has been provided.
General allowances are made pursuant to management's assessment of risk in
the Bank's loan portfolio as a whole. Specific allowances are provided for
individual loans when ultimate collection is considered questionable by
management after reviewing the current status of loans which are contractually
past due and considering the net realizable value of the security for the loan.
Management also reviews individual loans for which full collectibility may not
be reasonably assured and evaluates among other things the net realizable value
of the underlying collateral. General allowances are included in calculating
the Bank's risk-based capital, while specific allowances are not so included.
Management continues to actively monitor the Bank's asset quality and to charge
off loans against the allowance for loan losses when appropriate or to provide
specific loss reserves when necessary. Although management believes it uses the
best information available to make determinations with respect to the allowance
for loan losses, future adjustments may be necessary if economic conditions
differ substantially from the economic conditions in the assumptions used in
making the initial determinations.
The Bank was last examined by the OTS in November 1996 and its loan loss
allowance was considered by the OTS to be adequate as of that time. While the
Bank believes it has established its existing allowances for loan losses in
accordance with generally accepted accounting principles, there can be no
assurance that regulators, in reviewing the Bank's loan portfolio during future
examinations, will not request the Bank to significantly increase its allowance
for loan losses, thereby negatively effecting the Bank's financial condition and
earnings.
10
<PAGE>
The following table sets forth an analysis of the Bank's allowance for loan
losses for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1996 1995
------------ -----------
(Dollars in thousands)
<S> <C> <C>
Balance at beginning of period........ $ 100 $ 76
------ ----------
Loans charged-off..................... -- --
Recoveries............................ -- --
------ ----------
Net loans charged-off................. -- --
------ ----------
Provision for loan losses............. 7 24
------ ----------
Balance at end of period.............. $ 107 $ 100
====== ==========
Ratio of net charge-offs to average
loans outstanding during the period.. --% --%
====== ==========
Ratio of allowance for loan losses
to non-performing loans.............. 24.00% 18.28%
====== ==========
</TABLE>
The following table sets forth the breakdown of the allowance for loan
losses by loan category at the dates indicated. Management believes that the
allowance can be allocated by category only on an approximate basis. The
allocation of the allowance to each category is not necessarily indicative of
future losses and does not restrict the use of the allowance to absorb losses in
any category.
<TABLE>
<CAPTION>
At December 31,
------------------------------------------
1996 1995
------------------- --------------------
Percent of Percent of
Loans in Loans in
Category to Category to
Amount Total Loans Amount Total Loans
------ ------------ ------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real estate - mortgage:
Residential (2)..................... $107 78.80% $100 82.16%
Commercial.......................... -- 13.16 -- 11.06
Real estate - construction............ -- 3.10 -- 2.34
Commercial business................... -- .64 -- 0.18
Consumer (3).......................... -- 4.30 -- 4.26
------ ------ ------ ------
Total allowance for loan losses.. $107 100.00% $100 100.00%
====== ====== ====== ======
</TABLE>
- --------------------
(1) Before deduction for loans in process, deferred loan fees and allowance for
loan losses.
(2) Includes home equity loans.
(3) Includes loans on deposits.
Non-Performing Loans and Other Problem Assets. Management reviews the
Bank's loans on a regular basis. The policy of the Bank is to classify in a
nonaccrual status any mortgage loan which is past due 90 days or more, and whose
loan balance plus accrued interest exceeds 90% of the estimated loan collateral
value. Consumer and
11
<PAGE>
commercial loans not secured by real estate are charged-off, or any expected
loss is reserved after they become more than 90 days past due.
The Bank's collection procedures provide that late payment notices are
mailed on the 10th, 20th and last day of the month. After a loan becomes 60
days delinquent, the customer will be contacted by the lending officer with an
attempt to collect the delinquent payments or establish a work out plan to
remove the loan from the delinquent status. After a loan becomes 90 days or
more past due, management will generally initiate legal proceedings, unless a
work out plan has been developed with the borrower.
Real estate acquired by the Bank as a result of foreclosure is classified
as real estate owned until such time as it is sold. When such property is
acquired, it is recorded at the lower of the unpaid principal balance or its
fair market value. Any required write-down of the loan to its appraised fair
market value upon foreclosure is charged against the allowance for loan losses.
Subsequent to foreclosure, in accordance with generally accepted accounting
principles, a valuation allowance is established if the carrying value of the
property exceeds its fair value net of related selling expenses.
The following table sets forth information with respect to the Bank's
nonperforming assets at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
------------------------
1996 1995
------------ ----------
(Dollars in thousands)
<S> <C> <C>
Loans accounted for on a non-accrual basis: (1)
Real Estate:
Residential........................................ $ 87 $ 49
Consumer........................................... -- 9
----- -----
Total............................................ $ 87 $ 58
===== =====
Accruing loans which are contractually past due
90 days or more:
Real Estate:
Residential....................................... $ 359 $ 482
Commercial........................................ -- --
Consumer.......................................... -- 7
----- -----
Total........................................... $ 359 $ 489
===== =====
Total of non-accrual and 90 days past due loans.. $ 446 $ 547
===== =====
Percentage of total loans.............................. .82% 1.10%
===== =====
Other non-performing assets (2)........................ $ 227 $ --
===== =====
Restructured loans..................................... $ 271 $ --
===== =====
</TABLE>
- --------------------
(1) Non-accrual status denotes any mortgage loan past due 90 days or more and
whose loan balance, plus accrued interest exceeds 90% of the estimated loan
collateral value, and any consumer or commercial loan more than 90 days
past due, whose principal and accrued interest exceeds 90% of the fair
value of the collateral. Payments received on a non-accrual loan are
either applied to the outstanding principal balance or recorded as interest
income, or both, depending on assessment of the collectibility of the loan.
(2) Other non-performing assets represents property acquired by the Bank
through foreclosure or repossession. This property is carried at the fair
market value, net of any selling expenses.
12
<PAGE>
During the year ended December 31, 1996, additional interest income of
$5,600 would have been recorded on loans accounted for on a non-accrual basis if
the loans had been current throughout the year. Interest on such loans actually
included in income during the year ended December 31, 1996 was $4,000. During
the year ended December 31, 1996, additional interest of $568 would have been
recorded on the Bank's restructured loan had such loan performed in accordance
with its original terms throughout the year. Interest on such loan actually
included in income during the year ended December 31, 1996 was $21,929.
The Bank has a participation loan, which at December 31, 1996 had a
recorded investment of $270,465. The original loan and participation agreement
was dated October 7, 1991 and totaled $1,250,000, in which the Bank purchased a
25% interest. The loan is to a not-for-profit agency in the community of
Danville, Kentucky, which provides child care services. The loan is secured by
a first mortgage on the land and building acquired by the agency. The original
term of the loan was for 20 years with interest adjusted annually at .5% over
the prime rate as determined by the New York banks. During 1996 the
participating banks restructured this loan by extending the repayment by 5 years
to the original 20 year period, and lowering the interest rate to 7.5% for the
initial year after the restructuring. Based on management's evaluation at
December 31, 1996, no allowance for loss has been provided on this loan.
At December 31, 1996, there were no loans identified by management, which
were not reflected in the preceding table but as to which known information
about possible credit problems of borrowers caused management to have serious
doubts as to the ability of the borrowers to comply with present loan repayment
terms.
INVESTMENT SECURITIES
Central Kentucky Federal is permitted under federal law to make certain
investments, including investments in securities issued by various federal
agencies and state and municipal governments, deposits at the FHLB of
Cincinnati, certificates of deposits in federally insured institutions, certain
bankers' acceptances and federal funds. The Bank may also invest, subject to
certain limitations, in commercial paper having one of the two highest
investment ratings of a nationally recognized credit rating agency, and certain
other types of corporate debt securities and mutual funds. Federal regulations
require the Bank to maintain an investment in FHLB of Cincinnati stock and a
minimum amount of liquid assets which may be invested in cash and specified
securities. From time to time, the OTS adjusts the percentage of liquid assets
which savings institutions are required to maintain. For additional
information, see "Regulation of the Bank -- Liquidity Requirements."
The Bank invests in investment securities in order to diversify its assets,
manage cash flow, obtain yield and maintain the minimum levels of liquid assets
required by regulatory authorities. Such investments generally include
purchases of federal funds, federal government and agency securities and
qualified deposits in other financial institutions. Investment decisions
generally are made by the Investment Committee comprised of Directors Stigall,
Hudson and Bosley.
It is management's intention, and Central Kentucky Federal has the ability,
to hold the majority of its investment security portfolio to maturity. In
accordance with SFAS No. 115, effective January 1, 1994, the Bank began
classifying marketable equity securities as investment securities held for sale.
Investment securities in this classification are recorded at market value. At
December 31, 1996, the unrealized holding gains of $703,000, less the applicable
deferred tax of $239,000, is included as a separate component of retained
earnings pursuant to SFAS No. 115. The balance of investment securities being
held to maturity are recorded at cost, adjusted for amortization of premiums and
accretion of discounts on a method which approximates the interest method over
the term of the related security. For further information, see Note 2 of Notes
to Consolidated Financial Statements.
13
<PAGE>
The following table sets forth the carrying value of the Bank's investment
securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
----------------------
1996 1995
---------- ----------
(Dollars in thousands)
<S> <C> <C>
Investment securities available for sale:
FHLMC capital stock................................. $ 728 $ 819
------ ------
Total investment securities available for sale.. $ 728 $ 819
====== ======
Investment securities held to maturity:
U.S. government and agency securities............... $1,753 $1,512
Mortgage-backed securities.......................... 465 --
FHLB stock.......................................... 481 449
Common stock of subsidiary.......................... 15 15
------ ------
Total investment securities held to maturity.... $2,714 $1,976
====== ======
</TABLE>
14
<PAGE>
The following table sets forth the scheduled maturities, carrying
values, market values and average yields for the Bank's investment portfolio at
December 31, 1996.
<TABLE>
<CAPTION>
More than Ten
One Year or Less One to Five Years Five to Ten Years Years Total Investment Portfolio
------------------ ------------------ ----------------- ----------------- --------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Market Average
Value Yield Value Yield Value Yield Value Yield Value Value Yield
-------- -------- -------- -------- -------- ------- -------- -------- -------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities
available for sale:
FHLMC securities....... $ 728 1.52% $ -- --% $ -- --% $ -- --% $ 728 $ 728 1.52%
Investment securities
held-to-maturity:
U.S. Government and
agency securities.... 500 6.52 1,253 6.04 -- -- -- -- 1,753 1,756 6.18
Mortgage-backed
securities........... -- -- 465 5.90 -- -- -- -- 465 459 5.90
FHLB stock............. -- -- -- -- -- -- 481 6.88 481 481 6.88
Common stock of
subsidiary........... -- -- -- -- -- -- 15 -- 15 15 --
-------- ------- -------- ------- -------- ------- -------- ------- -------- ------ -------
Total.............. 500 6.52 1,718 6.00 -- -- 496 6.67 2,714 2,711 6.22
-------- ------- -------- ------- -------- ------- -------- ------- -------- ------ -------
Total Investment
securities..... $1,228 3.56% 1,718 6.00% $ -- --% $496 6.67% $3,442 $3,439 5.23%
======== ======= ======== ======= ======== ======= ======== ======= ====== ====== =======
</TABLE>
15
<PAGE>
DEPOSIT ACTIVITY AND OTHER SOURCES OF FUNDS
General. Deposits are the primary source of the Bank's funds for
lending and other investment purposes. In addition to deposits, Central
Kentucky Federal derives funds from loan principal repayments, maturing
investment securities, and interest payments. Loan repayments and interest
payments are a relatively stable source of funds, while deposit inflows and
outflows are significantly influenced by general interest rates and money market
conditions.
Deposits. Deposits are attracted principally from within the Bank's
primary market area through the offering of a variety of deposit instruments,
including passbook and statement accounts and certificates of deposit ranging in
term from three months to five years. Deposit account terms vary, principally
on the basis of the minimum balance required, the time periods the funds must
remain on deposit and the interest rate. The Bank also offers individual
retirement accounts ("IRAs").
The Bank's policies are designed primarily to attract deposits from
local residents rather than to solicit deposits from areas outside its primary
market. The Bank does not accept deposits from brokers due to the volatility
and rate sensitivity of such deposits. Interest rates paid, maturity terms,
service fees and withdrawal penalties are established by the Bank on a periodic
basis. Determination of rates and terms are predicated upon funds acquisition
and liquidity requirements, rates paid by competitors, growth goals and federal
regulations.
Savings deposits in the Bank as of December 31, 1996 were represented
by the various types of savings programs described below.
<TABLE>
<CAPTION>
Interest Minimum Minimum Percentage of
Rate Term Category Amount Balances Total Savings
- -------- ----------- ------------------------------- ------- -------- --------------
(In thousands)
<S> <C> <C> <C> <C> <C>
2.72% None NOW Accounts $ 50 $ 2,125 4.96%
3.00 None Passbook Statement Accounts 1 3,539 8.26
4.10 None Money Market Deposits Accounts 2,500 3,170 7.40
2.72 None Super NOW Accounts 2,500 101 .24
Certificates of Deposit
-------------------------------
4.95 91 days 3-month Money Market 500 825 1.93
5.18 182 days 6-month Money Market 500 5,188 12.10
5.32 12-month Fixed-Term, Fixed-Rate 500 8,209 19.17
5.44 18 month Fixed-Term, Fixed-Rate 500 589 1.38
5.87 18 month 18 month IRA Accounts 500 4,702 10.98
5.86 24 month Fixed-Term, Fixed-Rate 500 2,758 6.44
5.87 30 month Fixed-Term, Fixed-Rate 500 1,775 4.14
5.73 36 month Fixed-Term, Fixed-Rate 500 2,712 6.33
5.64 42 month Fixed-Term, Fixed-Rate 500 430 1.00
5.73 48 month Fixed-Term, Fixed-Rate 500 856 2.00
5.95 60 month Fixed-Term, Fixed-Rate 500 5,853 13.67
------- ------
$42,832 100.00%
======= ======
</TABLE>
- -------------------------
* Represents weighted average interest rate.
The following tables set forth, for the periods indicated, the average
balances and interest rates based on month-end balances for interest-bearing
demand deposits and time deposits.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------
1996 1995 1994
--------------------- --------------------- ---------------------
Interest- Interest- Interest-
Bearing Bearing Bearing
Demand Time Demand Time Demand Time
Deposits Deposits Deposits Deposits Deposits Deposits
---------- --------- ---------- --------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Average balance.. $9,341 $32,772 $8,268 $30,612 $9,961 $33,703
Average rate..... 3.31% 5.60% 3.18% 5.49% 3.00% 4.44%
</TABLE>
16
<PAGE>
The following table sets forth the change in dollar amount of deposits
in the various types of accounts offered by the Bank between the dates
indicated.
<TABLE>
<CAPTION>
Balance at Balance at Balance at
December 31, % Increase December 31, % Increase December 31, %
1996 Deposit (Decrease) 1995 Deposits (Decrease) 1994 Deposits
------------ -------- -------------- ------------ --------- ---------- ------------ ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NOW accounts................. $ 2,125 4.96% $ (82) $ 2,207 5.61% $ 732 $ 1,475 3.66%
Passbook and regular savings. 3,539 8.26 (161) 3,700 9.40 (806) 4,506 11.99
Money market deposit accounts 3,170 7.40 523 2,647 6.73 (141) 2,788 6.92
Super NOW accounts........... 101 .24 86 15 0.04 (137) 152 .38
6-month Money Market......... 5,188 12.10 (64) 5,252 13.34 (345) 5,597 13.09
1 year certificates.......... 8,209 19.17 1,857 6,352 16.14 (551) 6,903 17.14
18 month IRA accounts........ 4,702 10.98 180 4,522 11.49 191 4,331 10.75
2 year certificate........... 2,758 6.44 201 2,557 6.49 202 2,355 5.85
30 month certificates........ 1,775 4.14 (298) 2,073 5.27 (561) 2,634 6.54
3 year certificates.......... 2,712 6.33 444 2,268 5.76 236 2,032 5.04
5 year certificates.......... 5,853 13.67 486 5,367 13.64 516 4,851 12.04
Other........................ 2,700 6.31 304 2,396 6.09 (267) 2,663 6.60
------- ------ ------ ------- ------ ----- ------- ------
Total....................... $42,832 100.00% $3,476 $39,356 100.00% $(931) $40,287 100.00%
======= ====== ====== ======= ====== ===== ======= ======
</TABLE>
17
<PAGE>
The following table sets forth the time deposits in the Bank
classified by nominal rates at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
-------------
1996 1995
----------- -----------
(In thousands)
<S> <C> <C>
2.01 - 4.00%............... $ -- $ 199
4.01 - 6.00%............... 28,669 22,678
6.01 - 8.00%............... 5,228 7,910
8.01 - 10.00%.............. -- --
------- -------
$33,897 $30,787
======= =======
</TABLE>
The following table sets forth the amount and maturities of time
deposits at December 31, 1996.
<TABLE>
<CAPTION>
Amount Due
-------------------------------------------------
Less Than After
Rate One Year 1-2 Years 2-3 Years 3 Years Total
- --------------- --------- --------- --------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C>
4.01 - 6.00%... $19,143 $5,393 $2,530 $1,603 $28,669
6.01 - 8.00%... 1,914 1,318 848 1,148 5,228
------- ------ ------ ------ -------
$21,057 $6,711 $3,378 $2,751 $33,897
======= ====== ====== ====== =======
</TABLE>
The following table indicates the amount of the Bank's certificates of
deposit of $100,000 or more by time remaining until maturity as of December 31,
1996.
<TABLE>
<CAPTION>
Certificates
Maturity Period of Deposits
- --------------- --------------
(In thousands)
<S> <C>
Three months or less............ $4,982
Over three through six months... 1,687
Over six through twelve months.. 1,154
Over twelve months.............. 1,042
------
Total......................... $8,865
======
</TABLE>
The following table sets forth the savings deposit activities of
the Bank for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1996 1995
----------- -----------
(In thousands)
<S> <C> <C>
Deposits.............................................. $39,435 $35,844
Withdrawals........................................... 37,427 38,128
------- -------
Net increase (decrease) before interest credited.. 2,008 (2,284)
Interest credited..................................... 1,469 1,353
------- -------
Net increase (decrease) in savings deposits....... $ 3,477 $ (931)
======= =======
</TABLE>
18
<PAGE>
The Bank does not offer premiums for deposits, does not generally
offer interest rates on deposits which exceed the average rates offered by other
financial institutions in its market area, and usually does not institute
promotional programs which result in increased rates being paid on deposits.
The Bank does, however, offer above-average rates on certificates of deposit if
management believes that the deposit will entail administrative savings by the
Bank as well as contribute to the stability of the Bank's core deposit base.
These strategies are consistent with management's goals of keeping the Bank's
cost of funds at reduced levels and maintaining slow and measurable growth for
the Bank.
BORROWINGS
Savings deposits historically have been the primary source of funds
for the Bank's lending and investment activities and for its general business
activities. The Bank is authorized, however, to use advances from the FHLB of
Cincinnati to supplement its supply of lendable funds and to meet deposit
withdrawal requirements. Advances from the FHLB are secured by the Bank's stock
in the FHLB and a portion of the Bank's mortgage loans.
The FHLB of Cincinnati functions as a central reserve bank providing
credit for savings institutions and certain other member financial institutions.
As a member, Central Kentucky Federal is required to own capital stock in the
FHLB and is authorized to apply for advances on the security of such stock and
certain of its home mortgages and other assets (principally, securities which
are obligations of, or guaranteed by, the United States) provided certain
standards related to creditworthiness have been met. See "Regulation of the
Bank -- Federal Home Loan Bank System."
The following table sets forth certain information regarding
borrowings by the Bank at the dates and for the periods indicated.
<TABLE>
<CAPTION>
At or For the
Year Ended December 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C>
Amounts outstanding at end of period:
FHLB advances (1).......................... $1,252 $ 288 $ 323
====== ===== =====
Weighted average rate paid................. 5.77% 6.85% 6.85%
At or For the
Year Ended December 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
(In thousands)
<S> <C> <C> <C>
Maximum amount of borrowings outstanding
at any month end:
FHLB advances.............................. $1,252 $ 319 $ 487
====== ===== =====
At or For the
Year Ended December 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C>
Approximate average borrowings outstanding
with respect to:
FHLB advances.............................. $ 352 $ 304 $ 457
====== ===== =====
Approximate weighted average rate paid..... 5.11% 6.85% 6.91%
- --------------------
</TABLE>
(1) The Bank makes monthly principal and interest payments of $4,540 with the
principal being amortized through the year 2002, on one note which had a
balance of $252,000 at December 31, 1996. The other note had a balance of
$1,000,000 at December 31, 1996 and matures on March 28, 1996.
19
<PAGE>
SUBSIDIARY ACTIVITIES
As a federally chartered savings bank, Central Kentucky Federal is
permitted to invest an amount equal to 2% of its assets in subsidiaries with an
additional investment of 1% of assets where such investment serves primarily
community, inner-city, and community development purposes. Under such
limitations, as of December 31, 1996 Central Kentucky Federal was authorized to
invest up to approximately $1.8 million in the stock of or loans to subsidiaries
including the additional 1% investment for community inner-city and community
development purposes. Institutions meeting regulatory capital requirements,
such as the Bank; may invest up to 50% of their regulatory capital in conforming
first mortgage loans to subsidiaries in which they own 10% or more of the
capital stock.
The Bank's only service corporation is Central Kentucky Savings and Loan
Service Corporation in which its investment was $15,000 at December 31, 1996.
The sole purpose of the service corporation is to purchase and hold the required
amount of stock of Intrieve, Incorporated ("Intrieve"), pursuant to the Bank's
agreement with Savings and Loan Data Corporation, Inc. ("SLDC"), predecessor to
Intrieve, for data processing services. Central Kentucky Savings and Loan
Service Corporation is otherwise currently inactive.
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") requires Savings Association Insurance Fund ("SAIF") insured savings
institutions to give the FDIC and the Director of the OTS 30 days' prior notice
before establishing or acquiring a new subsidiary, or commencing any new
activity through an existing subsidiary. Both the FDIC and the Director of the
OTS have authority to order termination of subsidiary activities determined to
pose a risk to the safety or soundness of the institution. In addition, capital
requirements require savings institutions to deduct the amount of their
investments in and extensions of credit to subsidiaries engaged in activities
not permissible to national banks from capital in determining regulatory capital
compliance. The activities of Central Kentucky Savings and Loan Service
Corporation are not impermissible for national banks. See "Regulation of the
Bank -- Regulatory Capital Requirements."
EMPLOYEES
As of December 31, 1996, Central Kentucky Federal had 8 full-time
employees, none of whom was represented by a collective bargaining agreement.
Central Kentucky Federal believes that it enjoys good relations with its
personnel.
COMPETITION
The Bank experiences competition both in attracting and retaining savings
deposits and in the making of mortgage and other loans. Direct competition for
savings deposits in Boyle County comes from one other savings institution, a
credit union, and three commercial banks. Significant competition for the
Bank's other deposit products and services comes from money market mutual funds,
brokerage firms and insurance companies. The primary factors in competing for
loans are interest rates and loan origination fees and the range of services
offered by various financial institutions. Competition for origination of real
estate loans normally comes from savings banks and commercial banks.
REGULATION OF THE BANK
GENERAL. As a savings association, Central Kentucky Federal is subject to
extensive regulation by the OTS. The lending activities and other investments
of the Bank must comply with various federal regulatory requirements. The OTS
will periodically examine the Bank for compliance with various regulatory
requirements. The FDIC also has the authority to conduct examinations of SAIF
members. The Bank must file reports with OTS describing its activities and
financial condition. The Bank is also subject to certain reserve requirements
promulgated by the Federal Reserve Board. This supervision and regulation is
intended primarily for the protection of depositors. Certain of these
regulatory requirements are referred to below or appear elsewhere herein.
20
<PAGE>
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLB System,
which consists of twelve district Federal Home Loan Banks subject to supervision
and regulation by the Federal Housing Finance Board ("FHFB"). The Federal Home
Loan Banks provide a central credit facility primarily for member institutions.
As a member of the FHLB of Cincinnati, the Bank is required to acquire and hold
shares of capital stock in the FHLB of Cincinnati in an amount at least equal to
1% of the aggregate unpaid principal of its home mortgage loans, home purchase
contracts, and similar obligations at the beginning of each year, or 1/20 of its
advances (borrowings) from the FHLB of Cincinnati, whichever is greater. The
FHLB of Cincinnati serves as a reserve or central bank for its member
institutions within its assigned district. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It makes
advances to members in accordance with policies and procedures established by
the FHFB and the Board of Directors of the FHLB of Cincinnati. Long-term
advances may only be made for the purpose of providing funds for residential
housing finance. See " -- Borrowings."
LIQUIDITY REQUIREMENTS. The Bank is required to maintain average daily
balances of liquid assets (cash, certain time deposits, bankers' acceptances,
highly rated corporate debt and commercial paper, securities of certain mutual
funds, and specified United States government, state or federal agency
obligations) equal to the monthly average of not less than a specified
percentage (currently 5%) of its net withdrawable savings deposits plus short-
term borrowings. The Bank is also required to maintain average daily balances
of short-term liquid assets at a specified percentage (currently 1%) of the
total of its net withdrawable savings accounts and borrowings payable in one
year or less. Monetary penalties may be imposed for failure to meet liquidity
requirements. The average daily liquidity and short-term ratios of the Bank for
the month ended December 31, 1996 were 8.72% and 3.88%, respectively.
QUALIFIED THRIFT LENDER TEST. A savings association that does not meet the
Qualified Thrift Lender test ("QTL Test") must either convert to a bank charter
or comply with the following restrictions on its operations: (i) the institution
may not engage in any new activity or make any new investment, directly or
indirectly, unless such activity or investment is permissible for a national
bank; (ii) the branching powers of the institution shall be restricted to those
of a national bank; (iii) the institution shall not be eligible to obtain any
advances from its FHLB; and (iv) payment of dividends by the institution shall
be subject to the rules regarding payment of dividends by a national bank. Upon
the expiration of three years from the date the institution ceases to be a
Qualified Thrift Lender, it must cease any activity, and not retain any
investment not permissible for a national bank and immediately repay any
outstanding FHLB advances (subject to safety and soundness considerations).
In order to satisfy the QTL Test, a savings institution must either
satisfy the definition of domestic building and loan institution under the
Internal Revenue Code or its Qualified Thrift Investments must represent at
least 65% of portfolio assets. Qualified Thrift Investments include investments
in residential mortgages, home equity loans, loans made for educational
purposes, small business loans, credit card loans and mortgage-backed
securities. Portfolio assets are defined as total assets less intangibles,
property used by a savings institution in its business and liquidity investments
in an amount not exceeding 20% of assets. A savings institution shall be deemed
a Qualified Thrift Lender as long as its percentage of Qualified Thrift
Investments continues to equal or exceed 65% in at least nine out of each 12
months. A savings institution that fails to maintain QTL status will be
permitted to requalify once, and if it fails the QTL Test a second time, it will
become immediately subject to all penalties as if all time limits on such
penalties had expired. At December 31, 1996, the Bank was in compliance with
the QTL Test.
DIVIDEND LIMITATIONS. Under OTS regulations, the Bank may not pay
dividends on its capital stock if its regulatory capital would thereby be
reduced below the amount then required for the liquidation account established
for the benefit of certain depositors of the Bank at the time of its conversion
to stock form. In addition, savings association subsidiaries of savings and
loan holding companies are required to give the OTS 30 days prior notice of any
proposed declaration of dividends to the holding company.
Federal regulations impose additional limitations on the payment of
dividends and other capital distributions (including stock repurchases and cash
mergers) by the Bank. Under these regulations, a savings association that,
immediately prior to, and on a pro forma basis after giving effect to, a
proposed capital distribution, has total capital (as defined by OTS regulation)
that is equal to or greater than the amount of its fully phased-in capital
requirements (a "Tier 1 Association") is generally permitted without OTS
21
<PAGE>
approval to make capital distributions during a calendar year in the amount
equal to the higher of (i) 75% of its net income over the most recent four-
quarter period or (ii) up to 100% of its net income to date during the calendar
year plus an amount that would reduce by one-half the amount by which its total
capital to assets ratio exceeded its fully phased-in capital requirement to
assets ratio at the beginning of the calendar year. A savings association with
total capital in excess of current minimum capital requirements but not in
excess of the fully phased-in requirements (a "Tier 2 Association") is permitted
to make capital distributions without OTS approval of up to 75% of its net
income for the previous four quarters, less dividends already paid for such
period depending on the savings association's level of risk-based capital. A
savings association that fails to meet current minimum capital requirements (a
"Tier 3 Association") is prohibited from making any capital contributions
without the prior approval of the OTS. Tier 1 Associations that have been
notified by the OTS that they are in need of more than normal supervision will
be treated as either a Tier 2 or Tier 3 Association. At December 31, 1996, the
Bank was a Tier 1 Association.
The Bank is prohibited from making any capital distributions if, after
making the distribution, it would be undercapitalized as defined in the OTS'
prompt corrective action regulations. See " -- Prompt Corrective Regulatory
Action." After consultation with the FDIC, the OTS may permit a savings
association to repurchase, redeem, retire or otherwise acquire shares or
ownership interests if the repurchase, redemption, retirement or other
acquisition: (i) is made in connection with the issuance of additional shares or
other obligations of the institution in at least an equivalent amount; and (ii)
will reduce the institution's financial obligations or otherwise improve the
institution's financial condition.
In addition to the foregoing, earnings of the Bank appropriated to bad debt
reserves and deducted for federal income tax purposes are not available for
payment of cash dividends or other distributions to the Company without payment
of taxes at the then current tax rate by the Bank on the amount of earnings
removed from the reserves or such distributions. See "Taxation."
REGULATORY CAPITAL REQUIREMENTS. Under OTS regulations, savings
associations must maintain "tangible" capital equal to 1.5% of adjusted total
assets, "core" capital equal to 3.0% of adjusted total assets and a combination
of core and "supplementary" capital equal to 8.0% of "risk-weighted" assets. In
addition, the OTS has recently adopted regulations which impose certain
restrictions on savings associations that have a total risk-based capital ratio
that is less than 8.0%, a ratio of Tier 1 capital to risk-weighted assets of
less than 4.0% or a ratio of Tier 1 capital to adjusted total assets of less
than 4.0% (or 3.0% if the institution is rated composite 1 under the OTS
examination rating system). For purposes of these regulations, Tier 1 capital
has the same definitions as core capital. See "-- Prompt Corrective Regulatory
Action." Core capital is defined as common stockholders' equity (including
retained earnings), noncumulative perpetual preferred stock and related surplus,
minority interests in the equity accounts of fully consolidated subsidiaries,
certain nonwithdrawable accounts and pledged deposits and "qualifying
supervisory goodwill." Tangible capital is given the same definition as core
capital but does not include qualifying supervisory goodwill and is reduced by
the amount of all the savings association's intangible assets with only a
limited exception for purchased mortgage servicing rights and purchased credit
card relationships.
Both core and tangible capital are further reduced by an amount equal to
savings association's debt and equity investments in subsidiaries engaged in
activities not permissible to national banks other than subsidiaries engaged in
activities undertaken as agent for customers or in mortgage banking activities
and subsidiary depository institutions or their holding companies. Investments
in and extensions of credit to such subsidiaries as of April 12, 1989, to the
extent still outstanding, however, were not required to be deducted from core
and tangible capital until July 1, 1990. As of December 31, 1996, the Bank had
no significant investments in or extensions of credit to subsidiaries engaged in
activities not permitted to national banks.
"Adjusted total assets" are a savings association's total assets as
determined under generally accepted accounting principles ("GAAP"), increased by
certain goodwill amounts and by a pro-rated portion of the assets of
subsidiaries in which the savings association holds a minority interest and
which are not engaged in activities for which the capital rules require the
savings association to net its debt and equity investments in such subsidiaries
22
<PAGE>
against capital, as well as a pro-rated portion of the assets of other
subsidiaries for which deduction is not fully required under phase-in rules.
Adjusted total assets are reduced by the amount of assets that have been
deducted from capital, the portion of savings association's investments in
subsidiaries that must be deducted from capital under the capital rules and, for
purposes of the core capital requirement, qualifying supervisory goodwill.
In determining compliance with the risk-based capital requirement, a
savings association is allowed to use both core capital and supplementary
capital provided the amount of supplementary capital used does not exceed the
savings association's core capital. Supplementary capital is defined to include
certain preferred stock issues, nonwithdrawable accounts and pledged deposits
that do not qualify as core capital, certain approved subordinated debt, certain
other capital instruments and a portion of the savings association's general
loss allowances. Total core and supplementary capital are reduced by the amount
of capital instruments held by other depository institutions pursuant to
reciprocal arrangements and by the amount of the savings association's high
loan-to-value ratio land loans and non-residential construction loans and equity
investments other than those deducted from core and tangible capital. At
December 31, 1996, the Bank had no high ratio land or nonresidential
construction loans or equity investments for which OTS regulations require
deduction from total capital.
The risk-based capital requirement is measured against risk-weighted assets
which equal the sum of each asset and the credit-equivalent amount of each off-
balance sheet item after being multiplied by an assigned risk weight. Under the
OTS risk-weighting system, one- to four-family first mortgages not more than 90
days past due with loan-to-value ratios under 80% are assigned a risk weight of
50%. Consumer and residential construction loans are assigned a risk weight of
100%. Mortgage-backed securities issued, or fully guaranteed as to principal
and interest, by the FHLMC are assigned a 20% risk weight. Cash and U.S.
Government securities backed by the full faith and credit of the U.S. Government
are given a 0% risk weight.
The OTS risk-based capital regulations have been amended to require savings
institutions with more than a "normal" level of interest rate risk to maintain
additional total capital. A savings institution's interest rate risk is
measured in terms of the sensitivity of its "net portfolio value" to changes in
interest rates. Net portfolio value is defined, generally, as the present value
of expected cash inflows from existing assets and off-balance sheet contracts
less the present value of expected cash outflows from existing liabilities. A
savings institution is considered to have a "normal" level of interest rate risk
exposure if the decline in its net portfolio value after an immediate 200 basis
point increase or decrease in market interest rates (whichever results in the
greater decline) is less than two percent of the current estimated economic
value of its assets. A savings institution with a greater than normal interest
rate risk would be required to deduct from total capital, for purposes of
calculating its risk-based capital requirement, an amount (the "interest rate
risk component") equal to one-half the difference between the institution's
measured interest rate risk and the normal level of interest rate risk,
multiplied by the economic value of its total assets. At December 31, 1996, the
Bank was not required to deduct an interest rate component from their capital.
23
<PAGE>
The table below presents the Bank's capital position at December 31, 1996,
relative to its various minimum regulatory capital requirements.
<TABLE>
<CAPTION>
At December 31, 1996
-------------------------
Percent of
Amount Assets(1)
--------- --------------
(Dollars in thousands)
<S> <C> <C>
Tangible Capital................ $11,967 19.9%
Tangible Capital Requirement.... 893 1.50
------- ----
Excess........................ $11,074 18.4%
======= ====
Core Capital.................... $11,967 19.9%
Core Capital Requirement........ 1,787 3.00
------- ----
Excess........................ $10,180 16.9%
======= ====
Risk-Based Capital.............. $12,074 35.4%
Risk-Based Capital Requirement.. 2,730 8.00
------- ----
Excess........................ $ 9,344 27.4%
======= ====
- --------------------
</TABLE>
(1) Based upon adjusted total assets of $59.6 million for purposes of the
tangible and core capital requirements, and risk-weighted assets of $34.1
million for purposes of the risk-based capital requirements.
In addition to requiring generally applicable capital standards for savings
associations, the Director of OTS may establish the minimum level of capital for
a savings association at such amount or at such ratio of capital-to-assets as
the Director determines to be necessary or appropriate for such association in
light of the particular circumstances of the association. The Director of OTS
may treat the failure of any savings association to maintain capital at or above
such level as an unsafe or unsound practice and may issue a directive requiring
any savings association which fails to maintain capital at or above the minimum
level required by the Director to submit and adhere to a plan for increasing
capital. Such an order may be enforced in the same manner as an order issued by
the FDIC.
Under FIRREA, the capital standards applicable to savings associations must
be no less than those applicable to national banks. On September 17, 1990, the
Office of the Comptroller of the Currency ("OCC") announced the adoption,
effective December 31, 1990, of regulations implementing more stringent core
capital requirements for national banks. The OCC regulations establish a new
minimum core capital ratio of 3% for the most highly rated banks, with at least
an additional 100 to 200 basis point "cushion" amount of additional capital
required on a case-by-case basis, considering the quality of risk management
systems and the overall risk in individual banks.
The OTS requires savings institutions with more than a "normal" level of
interest rate risk to maintain additional total capital. A savings
institution's interest rate risk will be measured in terms of the sensitivity of
its "net portfolio value" to changes in interest rates. Net portfolio value is
defined, generally, as the present value of expected cash inflows from existing
assets and off-balance sheet contracts less the present value of expected cash
outflows from existing liabilities. A savings institution will be considered to
have a "normal" level of interest rate risk exposure if the decline in its net
portfolio value after an immediate 200 basis point increase or decrease in
market interest rates (whichever results in the greater decline) is less than
two percent of the current estimated economic value of its assets. A savings
institution with a greater than normal interest rate risk will be required to
deduct from total capital, for purposes of calculating its risk-based capital
requirement, an amount (the "interest rate risk component") equal to one-half
the difference between the institution's measured interest rate risk and the
normal level of interest rate risk, multiplied by the economic value of its
total assets.
24
<PAGE>
The OTS will calculate the sensitivity of a savings institution's net
portfolio value based on data submitted by the institution in a schedule to its
quarterly Thrift Financial Report and using the interest rate risk measurement
model adopted by the OTS. The amount of the interest rate risk component, if
any, to be deducted from a savings institution's total capital will be based on
the institution's Thrift Financial Report filed two quarters earlier. The Bank
has determined that, on the basis of current financial data, it would not be
deemed to have more than normal level of interest rate risk under the new rule
and believes that it will not be required to increase its total capital as a
result of the rule.
PROMPT CORRECTIVE REGULATORY ACTION. Under the Federal Deposit Insurance
Corporation Improvement Act ("FDICIA"), the federal banking regulators are
required to take prompt corrective action if an insured depository institution
fails to satisfy certain minimum capital requirements. All institutions,
regardless of their capital levels, are restricted from making any capital
distribution or paying any management fees if the institution would thereafter
fail to satisfy the minimum levels for any of its capital requirements. An
institution that fails to meet the minimum level for any relevant capital
measure (an "undercapitalized institution") may be: (i) subject to increased
monitoring by the appropriate federal banking regulator; (ii) required to submit
an acceptable capital restoration plan within 45 days; (iii) subject to asset
growth limits; and (iv) required to obtain prior regulatory approval for
acquisitions, branching and new lines of businesses. The capital restoration
plan must include a guarantee by the institution's holding company that the
institution will comply with the plan until it has been adequately capitalized
on average for four consecutive quarters, under which the holding company would
be liable up to the lesser of 5% of the institution's total assets or the amount
necessary to bring the institution into capital compliance as of the date it
failed to comply with its capital restoration plan. A "significantly
undercapitalized" institution, as well as any undercapitalized institution that
did not submit an acceptable capital restoration plan, may be subject to
regulatory demands for recapitalization, broader application of restrictions on
transactions with affiliates, limitations on interest rates paid on deposits,
asset growth and other activities, possible replacement of directors and
officers, and restrictions on capital distributions by any bank holding company
controlling the institution. Any company controlling the institution could also
be required to divest the institution or the institution could be required to
divest subsidiaries. The senior executive officers of a significantly
undercapitalized institution may not receive bonuses or increases in
compensation without prior approval and the institution is prohibited from
making payments of principal or interest on its subordinated debt. In their
discretion, the federal banking regulators may also impose the foregoing
sanctions on an undercapitalized institution if the regulators determine that
such actions are necessary to carry out the purposes of the prompt corrective
action provisions. If an institution's ratio of tangible capital to total
assets falls below a "critical capital level," the institution will be subject
to conservatorship or receivership within 90 days unless periodic determinations
are made that forbearance from such action would better protect the deposit
insurance fund. Unless appropriate findings and certifications are made by the
appropriate federal bank regulatory agencies, a critically undercapitalized
institution must be placed in receivership if it remains critically
undercapitalized on average during the calendar quarter beginning 270 days after
the date it became critically undercapitalized. If a savings association is in
compliance with an approved capital plan on the date of enactment of FDICIA,
however, it will not be required to submit a capital restoration plan if it is
undercapitalized or become subject to the statutory prompt corrective action
provisions applicable to significantly and critically undercapitalized
institutions prior to July 1, 1994.
Under regulations jointly adopted by the federal banking regulators, a
depository institution's capital adequacy for purposes of the FDICIA prompt
corrective action rules is determined on the basis of the institution's total
risk-based capital ratio (the ratio of its total capital to risk-weighted
assets), Tier 1 risk-based capital ratio (the ratio of its core capital to risk-
weighted assets) and leverage ratio (the ratio of its core capital to adjusted
total assets). Under the regulations, a savings association that is not subject
to an order or written directive to meet or maintain a specific capital level
will be deemed "well capitalized" if it also has: (i) a total risk-based capital
ratio of 10% or greater; (ii) a Tier 1 risk-based capital ratio of 6.0% or
greater; and (iii) a leverage ratio of 5.0% or greater. An "adequately
capitalized" savings association is a savings association that does not meet the
definition of well capitalized and has: (i) a total risk-based capital ratio of
8.0% or greater; (ii) a Tier 1 capital risk-based ratio of 4.0% or greater; and
(iii) a leverage ratio of 4.0% or greater (or 3.0% or greater if the savings
association has a composite 1 CAMEL rating). An "undercapitalized institution"
is a savings association that has (i) a total risk-based capital ratio less than
25
<PAGE>
8.0%; or (ii) a Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a
leverage ratio of less than 4.0% (or 3.0% if the association has a composite 1
CAMEL rating). A "significantly undercapitalized" institution is defined as a
savings association that has: (i) a total risk-based capital ratio of less than
6.0%; or (ii) a Tier 1 risk-based capital ratio of less than 3.0%; or (iii) a
leverage ratio of less than 3.0%. A "critically undercapitalized" savings
association is defined as a savings association that has a ratio of "tangible
equity" to total assets of less than 2.0%. Tangible equity is defined as core
capital plus cumulative perpetual preferred stock (and related surplus) less all
intangibles other than qualifying supervisory goodwill and certain purchased
mortgage servicing rights. The OTS may reclassify a well capitalized savings
association as adequately capitalized and may require an adequately capitalized
or undercapitalized association to comply with the supervisory actions
applicable to associations in the next lower capital category if the OTS
determines, after notice and an opportunity for a hearing, that the savings
association is in an unsafe or unsound condition or that the association has
received and not corrected a less-than-satisfactory rating for any CAMEL rating
category. The Bank is classified as "well-capitalized" under the new
regulations.
The table below presents the Bank's capital position at December 31, 1996,
relative to its various minimum regulatory capital requirements under the prompt
corrective action regulations.
<TABLE>
<CAPTION>
At December 31, 1996
--------------------------
Percent of
Amount Assets(1)
--------- --------------
(Dollars in thousands)
<S> <C> <C>
Tangible Equity......................... $11,967 19.9%
Tangible Equity Requirement............. 1,191 2.0
------- ----
Excess................................ $10,776 17.9%
======= ====
Tier 1 or Leverage Capital.............. $11,967 19.9%
Tier 1 or Leverage Capital Requirement.. 2,382 4.0
------- ----
Excess................................ $ 9,585 15.9%
======= ====
Tier 1 Risk-Based Capital............... $12,074 35.4%
Tier 1 Risk-Based Capital Requirement... 1,365 4.0
------- ----
Excess................................ $10,709 31.4%
======= ====
Risk-Based Capital...................... $12,074 35.4%
Risk-Based Capital Requirement.......... 2,730 8.0
------- ----
Excess................................ $ 9,344 27.4%
======= ====
- --------------------
</TABLE>
(1) Based upon adjusted total assets for purposes of the tangible equity and
Tier 1 or leverage capital requirements, and risk-weighted assets for
purposes of the Tier 1 risk-based and risk-based capital requirements.
DEPOSIT INSURANCE. The Bank is required to pay assessments based on a
percent of its insured deposits to the FDIC for insurance of its deposits by the
SAIF. Under the Federal Deposit Insurance Act, the FDIC is required to set
semi-annual assessments for SAIF-insured institutions to maintain the designated
reserve ratio of the SAIF at 1.25% of estimated insured deposits or at a higher
percentage of estimated insured deposits that the FDIC determines to be
justified for that year by circumstances raising a significant risk of
substantial future losses to the SAIF.
The assessment rate for an insured depository institution is determined by
the assessment risk classification assigned to the institution by the FDIC based
on the institution's capital level and supervisory evaluations. Based on the
data reported to regulators for date closest to the last day of the seventh
month preceding the semi-annual
26
<PAGE>
assessment period, institutions are assigned to one of three capital groups --
well capitalized, adequately capitalized or undercapitalized -- using the same
percentage criteria as in the prompt corrective action regulations. See "--
Prompt Corrective Regulatory Action." Within each capital group, institutions
are assigned to one of three subgroups on the basis of supervisory evaluations
by the institution's primary supervisory authority and such other information as
the FDIC determines to be relevant to the institution's financial condition and
the risk posed to the deposit insurance fund.
For the past several semi-annual periods, institutions with SAIF-assessable
deposits, like the Bank, have been required to pay higher deposit insurance
premiums than institutions with deposits insured by the BIF. In order to
recapitalize the SAIF and address the premium disparity, the recently-enacted
Deposit Insurance Funds Act of 1996 authorized the FDIC to impose a one-time
special assessment on institutions with SAIF-assessable deposits based on the
amount determined by the FDIC to be necessary to increase the reserve levels of
the SAIF to the designated reserve ratio of 1.25% of insured deposits.
Institutions were assessed at the rate of 65.7 basis points based on the amount
of their SAIF-assessable deposits as of March 31, 1995. As a result of the
special assessment the Company incurred an after-tax expense of $181,000 during
the quarter ended September 30, 1996.
The FDIC has adopted a new assessment schedule for SAIF deposit insurance
pursuant to which the assessment rate for well-capitalized institutions with the
highest supervisory ratings would be reduced to zero and institutions in the
lowest risk assessment classification will be assessed at the rate of .027% of
insured deposits. Until December 31, 1999, however, all SAIF-insured
institutions, will be required to pay assessments to the FDIC at the rate of 6.5
basis points to help fund interest payments on certain bonds issued by the
Financing Corporation ("FICO") an agency of the federal government established
to finance takeovers of insolvent thrifts. During this period, BIF members will
be assessed for these obligations at the rate of 1.3 basis points. After
December 31, 1999, both BIF and SAIF members will be assessed at the same rate
for FICO payments.
FEDERAL RESERVE SYSTEM. Pursuant to regulations of the Federal Reserve
Board, a thrift institution must maintain average daily reserves equal to 3% on
the first $49.3 million of transaction accounts. On balances exceeding $49.3
million, the reserve requirement increases to 10%. This percentage is subject
to adjustment by the Federal Reserve Board. Because required reserves must be
maintained in the form of vault cash or in a non-interest bearing account at a
Federal Reserve Bank, the effect of the reserve requirement is to reduce the
amount of the institution's interest-earning assets. As of December 31, 1996,
the Bank met its reserve requirements.
TRANSACTIONS WITH AFFILIATES. Transactions between savings institutions
and any affiliate are governed by Sections 23A and 23B of the Federal Reserve
Act. An affiliate of a savings institution is any company or entity which
controls, is controlled by or is under common control with the savings
institution. In a holding company context, the parent holding company of a
savings institution (such as the Company) and any companies which are controlled
by such parent holding company are affiliates of the savings institution.
Generally, Sections 23A and 23B (i) limit the extent to which the savings
institution or its subsidiaries may engage in "covered transactions" with any
one affiliate to an amount equal to 10% of such institution's capital stock and
surplus, and contain an aggregate limit on all such transactions with all
affiliates to an amount equal to 20% of such capital stock and surplus, and (ii)
require that all such transactions be on terms substantially the same, or at
least as favorable, to the institution or subsidiary as those provided to a non-
affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and similar other types of
transactions. In addition to the restrictions imposed by Sections 23A and 23B,
no savings institution may (i) loan or otherwise extend credit to an affiliate,
except for any affiliate which engages only in activities which are permissible
for bank holding companies, or (ii) purchase or invest in any stocks, bonds,
debentures, notes or similar obligations of any affiliate, except for affiliates
which are subsidiaries of the savings institution. Section 106 of the BHCA
which also applies to the Bank prohibits the Bank from extending credit to or
offering any other services, or fixing or varying the consideration for such
extension of credit or service, on the condition that the customer obtain some
additional service from the institution or certain of its affiliates or not
obtain services of a competitor of the institution, subject to certain
exceptions.
27
<PAGE>
LOANS TO DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL STOCKHOLDERS. Savings
institutions are also subject to the restrictions contained in Section 22(h) of
the Federal Reserve Act on loans to executive officers, directors and principal
stockholders. Under Section 22(h), loans to an executive officer and to a
greater than 10% stockholder of a savings institution, and certain affiliated
entities of either, may not exceed, together with all other outstanding loans to
such person and affiliated entities the institution's loan to one borrower limit
(generally equal to 15% of the institution's unimpaired capital and surplus and
an additional 10% of such capital and surplus for loans fully secured by certain
readily marketable collateral). Section 22(h) also prohibits loans, above
amounts prescribed by the appropriate federal banking agency, to directors,
executive officers and greater than 10% stockholders of a savings institution,
and their respective affiliates, unless such loan is approved in advance by a
majority of the board of directors of the institution with any "interested"
director not participating in the voting. The Federal Reserve Board has
prescribed the loan amount (which includes all other outstanding loans to such
person), as to which such prior board of director approval is required, as being
the greater of $25,000 or 5% of capital and surplus (up to $500,000). Further,
the Federal Reserve Board pursuant to Section 22(h) requires that loans to
directors, executive officers and principal stockholders be made on terms
substantially the same as offered in comparable transactions to other persons.
Section 22(h) also generally prohibits a depository institution from paying the
overdrafts of any of its executive officers or directors. Section 22(g) of the
Federal Reserve Act requires that loans to executive officers of depository
institutions not be made on terms more favorable than those afforded to other
borrowers, requires approval for such extensions of credit by the board of
directors of the institution, and imposes reporting requirements for and
additional restrictions on the type, amount and terms of credits to such
officers. In addition, Section 106 of the BHCA prohibits extensions of credit
to executive officers, directors, and greater than 10% stockholders of a
depository institution by any other institution which has a correspondent
banking relationship with the institution, unless such extension of credit is on
substantially the same terms as those prevailing at the time for comparable
transactions with other persons and does not involve more than the normal risk
of repayment or present other unfavorable features.
REGULATION OF THE COMPANY
GENERAL. The Company is a unitary savings and loan holding company within
the meaning of the Home Owners' Loan Act. As such, the Company is registered
with the OTS and subject to OTS regulations, examinations, supervision and
reporting requirements.
ACTIVITIES RESTRICTIONS. The Board of Directors of the Company presently
intends to operate the Company as a unitary savings and loan holding company.
There are generally no restrictions on the activities of a unitary savings and
loan holding company. However, if the director of OTS determines that there is
reasonable cause to believe that the continuation by a savings and loan holding
company of an activity constitutes a serious risk to the financial safety,
soundness, or stability of its subsidiary savings association, the Director of
OTS may impose such restrictions as deemed necessary to address such risk and
limiting (i) payment of dividends by the savings association, (ii) transactions
between the savings association and its affiliates, and (iii) any activities of
the savings association that might create a serious risk that the liabilities of
the holding company and its affiliates may be imposed on the savings
association. Notwithstanding the above rules as to permissible business
activities of unitary savings and loan holding companies, if the savings
association subsidiary of such a holding company fails to meet the QTL Test,
then such unitary holding company shall also presently become subject to the
activities restrictions applicable to multiple holding companies and unless the
savings association requalifies as a Qualified Thrift Lender within one year
thereafter, register as, and become subject to, the restrictions applicable to a
bank holding company.
If the Company were to acquire control of another savings association,
other than through merger or other business combination with the Bank, the
Company would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the authority to approve emergency
thrift acquisitions and where each subsidiary savings association meets the QTL
Test, the activities of the Company and any of its subsidiaries (other than the
Bank or other subsidiary savings institutions) would thereafter be subject to
further restrictions. The Home Owners' Loan Act, as amended by FIRREA, provides
that, among other things, no multiple savings and loan holding company or
subsidiary thereof which is not a savings association shall commence or continue
for a limited period of time after becoming a multiple savings and loan holding
28
<PAGE>
company or subsidiary thereof, any business activity, upon prior notice to, and
no objection by the OTS, other than (i) furnishing or performing management
services for a subsidiary savings association, (ii) conducting an insurance
agency or escrow business, (iii) holding, managing, or liquidating assets owned
by or acquired from a subsidiary savings institution, (iv) holding or managing
properties used or occupied by a subsidiary savings institution, (v) acting as
trustee under deeds of trust, (vi) those activities previously directly
authorized by the Federal Savings and Loan Insurance Corporation ("FSLIC") by
regulation as of March 5, 1987 to be engaged in by multiple holding companies or
(vii) those activities authorized by the Federal Reserve Board as permissible
for bank holding companies, unless the Director of OTS by regulation prohibits
or limits such activities for savings and loan holding companies. Those
activities described in (vii) above must also be approved by the Director of OTS
prior to being engaged in by a multiple holding company.
RESTRICTIONS ON ACQUISITIONS. Savings and loan holding companies are
prohibited from acquiring, without prior approval of the Director of OTS, (i)
control of any other savings association or savings and loan holding company or
substantially all the assets thereof or (ii) more than 5% of the voting shares
of a savings association or holding company thereof which is not a subsidiary.
Under certain circumstances, a registered savings and loan holding company is
permitted to acquire, with the approval of the Director of OTS, up to 15% of the
voting shares of an under-capitalized savings association pursuant to a
"qualified stock issuance" without that savings association being deemed
controlled by the holding company. In order for the shares acquired to
constitute a "qualified stock issuance," the shares must consist of previously
unissued stock or treasury shares, the shares must be acquired for cash, the
savings and loan holding company's other subsidiaries must have tangible capital
of at least 6-1/2% of total assets, there must not be more than one common
director or officer between the savings and loan holding company and the issuing
savings association and transactions between the savings association and the
savings and loan holding company and any of its affiliates must conform to
Sections 23A and 23B of the Federal Reserve Act. Except with the prior approval
of the Director of OTS, no director or officer of a savings and loan holding
company or person owning or controlling by proxy or otherwise more than 25% of
such company's stock, may also acquire control of any savings association, other
than a subsidiary savings association, or of any other savings and loan holding
company.
The Director of OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
associations in more than one state if: (i) the multiple savings and loan
holding company involved controls a savings institution which operated a home or
branch office in the state of the association to be acquired as of March 5,
1987; (ii) the acquiror is authorized to acquire control of the savings
association pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act; or (iii) the statutes of the state in which the
association to be acquired is located specifically permit institutions to be
acquired by state-chartered associations or savings and loan holding companies
located in the state where the acquiring entity is located (or by a holding
company that controls such state-chartered savings institutions).
OTS regulations permit federal associations to branch in any state or
states of the United States and its territories. Except in supervisory cases or
when interstate branching is otherwise permitted by state law or other statutory
provision, a federal association may not establish an out-of-state branch unless
(i) the federal association qualifies as a "domestic building and loan
association" under Section 7701(a)(19) of the Internal Revenue Code of 1986,
as amended (the "Code") and the total assets attributable to all branches of the
association in the state would qualify such branches taken as a whole for
treatment as a domestic building and loan association and (ii) such branch would
not result in (a) formation of a prohibited multi-state multiple savings and
loan holding company or (b) a violation of certain statutory restrictions on
branching by savings association subsidiaries of banking holding companies.
Federal associations generally may not establish new branches unless the
association meets or exceeds minimum regulatory capital requirements. The OTS
will also consider the association's record of compliance with the Community
Reinvestment Act of 1977 in connection with any branch application.
The Bank Holding Company Act of 1956 authorizes the Federal Reserve Board
to approve an application by a bank holding company to acquire control of any
savings association. Pursuant to rules promulgated by the Federal Reserve
Board, owning, controlling or operating a savings association is a permissible
activity for bank holding companies if the savings association engages only in
deposit-taking activities and lending and other activities
29
<PAGE>
that are permissible for bank holding companies. In approving such an
application, the Federal Reserve Board may not impose any restriction on
transactions between the savings association and its holding company affiliates
except as required by Sections 23A and 23B of the Federal Reserve Act.
A bank holding company that controls a savings association may merge or
consolidate the assets and liabilities of the savings association with, or
transfer assets and liabilities to, any subsidiary bank which is a member of the
BIF with the approval of the appropriate federal banking agency and the Federal
Reserve Board. The resulting bank will be required to continue to pay
assessments to the SAIF at the rates prescribed for SAIF members on the deposits
attributable to the merged savings association plus an annual deposit growth
increment. In addition, the transaction must comply with the restrictions on
interstate acquisitions of commercial banks under the Bank Holding Company Act
of 1956.
TAXATION
GENERAL. The Company and the Bank file a consolidated tax return for
federal income tax purposes, based on a fiscal year ending December 31.
Consolidated returns have the effect of eliminating intercompany distributions,
including dividends, from the computation of consolidated taxable income for the
taxable year in which the distributions occur.
FEDERAL INCOME TAXATION. Thrift institutions are subject to the provisions
of the Code in the same general manner as other corporations. However, for tax
years prior to December 31, 1996, institutions such as Central Kentucky Federal
which meet certain definitional tests and other conditions prescribed by the
Code may benefit from certain favorable provisions regarding their deductions
from taxable income for annual additions to their bad debt reserve. For
purposes of the bad debt reserve deduction, loans were separated into
"qualifying real property loans," which generally are loans secured by interests
in certain real property, and nonqualifying loans, which are all other loans.
The bad debt reserve deduction with respect to nonqualifying loans must be based
on actual loss experience. The amount of the bad debt reserve deduction with
respect to qualifying real property loans may be based upon actual loss
experience (the "experience method") or a percentage of taxable income
determined without regard to such deduction (the "percentage of taxable income
method").
Earnings appropriated to an institution's bad debt reserve and claimed as a
tax deduction are not available for the payment of cash dividends or for
distribution to shareholders (including distributions made on dissolution or
liquidation), unless such amount is included in taxable income, along with the
amount deemed necessary to pay the resulting federal income tax.
On August 20, 1996, the President signed into law the Small Business Jobs
Protection Act. Included within this act were provisions repealing the
percentage of taxable income method of calculating a thrift's bad debt reserve
for tax purposes. This method had permitted thrift institutions, such as the
Bank, who satisfied certain definitional tests and other conditions prescribed
by the Internal Revenue Code, to deduct an annual addition to their bad debt
reserve calculated as a percentage of taxable income. Other financial
institutions generally were required to calculate their bad debt deduction based
upon actual loss experience (the "experience method"). As a result of the
elimination of the percentage of taxable income method, institutions that have
utilized such method will be required to recapture into taxable income post-1987
reserves in excess of the reserves calculated under the experience method, over
period of six years commencing in the first taxable year beginning after
December 31, 1995. An institution will be able to defer recapture until up to
the third taxable year after December 31, 1995 if the dollar amount of the
institution's residential loan originations in each year is not less than the
average dollar amount of residential loan originations originated in each of the
six most recent years disregarding the years with the highest and lowest
originations during such period. For purposes of this test, residential loan
originations would not include refinancings and home equity loans.
Beginning with the first taxable year beginning after December 31, 1995
(fiscal 1996 for the Bank), savings institutions, such as the Bank, will be
treated the same as commercial banks. Institutions with $500 million or more in
30
<PAGE>
assets will only be able to take a tax deduction when a loan is actually charged
off. Institutions with less than $500 million in assets will still be permitted
to make deductible bad debt additions to reserves, but only using the experience
method. The Bank has provided deferred taxes on its post-1987 additions to the
bad debt reserve and, as a result, the recapture of the Bank's post-1987
reserves did not have a material adverse effect on the Bank's operations.
Accumulated tax bad debt reserves prior to January 1, 1988 were not
required to be recaptured. These tax bad debt reserves for the Bank total
approximately $1.5 million and are subject to being taxed at a later date under
certain circumstances such as the Bank converting to a type of institutions that
is not considered a bank for tax purposes. See Note 10 of Notes to Consolidated
Financial Statements.
The Company's and the Bank's corporate federal income tax returns have not
been audited in the last five years.
STATE INCOME TAXATION. The Commonwealth of Kentucky imposes no income or
franchise taxes on savings institutions. Central Kentucky Federal is subject to
an annual Kentucky ad valorem tax. This tax is 0.1% of the Bank's savings
accounts, common stock, capital and retained income with certain deductions
allowed for amounts borrowed by depositors and for securities guaranteed by the
U.S. Government or certain of its agencies. For the fiscal year ended December
31, 1996, the amount of such expense for the Bank was $49,100.
ITEM 2. PROPERTIES
- -------------------
The following table sets forth the location and certain additional
information regarding the Bank's sole office at December 31, 1996.
<TABLE>
<CAPTION>
Year Owned or Square
Opened Leased Footage Net Book Value
------ -------- ------- --------------
<S> <C> <C> <C> <C>
340 West Main Street
Danville, Kentucky 1968 Owned 5,832 $455,864
</TABLE>
The Bank also installed an automated teller machine ("ATM") at its present
location that became operational during the fourth quarter of 1995.
Intrieve, Incorporated, Cincinnati, Ohio, performs data processing and
record keeping for Central Kentucky Federal.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
Although Central Kentucky Federal, from time to time, is involved in
various legal proceedings in the normal course of business, there are no
material legal proceedings to which Central Kentucky Federal or its subsidiary
is a party or to which any of their property is subject.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
- ----------------------------------------------------------
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended December 31, 1996.
31
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- ------------------------------------------------------------------------------
The information contained under the section captioned "Market and
Dividend Information" in the Company's Annual Report to Stockholders for the
Fiscal Year Ended December 31, 1996 (the "Annual Report") filed as Exhibit 13
hereto is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
The information contained in the table captioned "Selected Financial
and Other Data" on pages 2 and 3 in the Annual Report is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
- -------------
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
pages 4 through 14 in the Annual Report is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
The consolidated financial statements contained on pages 16 through 20
in the Annual Report, which are listed under Item 14 herein, are incorporated
herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------------------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
For information concerning the Board of Directors and executive
officers who are not directors of the Company, the information contained under
the section captioned "Proposal I -- Election of Directors" in the Company's
definitive proxy statement for the Company's 1997 Annual Meeting of Stockholders
(the "Proxy Statement") is incorporated herein by reference.
Information regarding delinquent Form 3, 4 or 5 filers is incorporated
herein by reference to the section entitled "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
The information contained under the section captioned "Proposal I --
Election of Directors -- Executive Compensation and Other Benefits" in the Proxy
Statement is incorporated herein by reference.
32
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by reference
to the section captioned "Security Ownership of Certain Beneficial
Owners and Management" in the Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by reference
to the sections captioned "Security Ownership of Certain Beneficial
Owners and Management" and "Proposal I -- Election of Directors" in
the Proxy Statement.
(c) Changes in Control
Management of the Company knows of no arrangements, including any
pledge by any person of securities of the Company, the operation of
which may at a subsequent date result in a change in control of the
registrant.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
The information required by this item is incorporated herein by reference
to the section captioned "Proposal I -- Election of Directors" in the Proxy
Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- -------------------------------------------------------------------------
(a) List of Documents Filed as Part of this Report
(1) Financial Statements. The following financial statements are
incorporated by reference from Item 8 hereof:
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1996 and 1995
Consolidated Statements of Income for Each of the Years in the Three-
Year Period Ended December 31, 1996
Consolidated Statements of Changes in Stockholders' Equity for Each of
the Years in the Three-Year Period Ended December 31, 1996
Consolidated Statements of Cash Flows for Each of the Years in the
Three-Year Period Ended December 31, 1996
Notes to Consolidated Financial Statements.
(2) Financial Statement Schedules. All schedules are omitted because of
the absence of conditions under which they are required or because the required
information is included in the consolidated financial statements or related
notes.
33
<PAGE>
(3) Exhibits. The following is a list of exhibits filed as part of this
Annual Report on Form 10-K and is also the Exhibit Index.
<TABLE>
<CAPTION>
Page in
Sequentially
No. Exhibits Numbered Copy
<S> <C> <C>
3.1 Certificate of Incorporation of CKF Bancorp, Inc. *
3.2 Bylaws of CKF Bancorp, Inc. *
10.1 CKF Bancorp, Inc. 1995 Stock Option and Incentive Plan **
10.2 (a) Severance Agreements between Central Kentucky Federal **
Savings Bank and Thomas R. Poland and Ann L. Hooks
(b) Severance Agreements between CKF Bancorp, Inc. and **
Thomas R. Poland and Ann L. Hooks
10.3 (a) Employment Agreement between Central Kentucky **
Federal Savings Bank and John H. Stigall
(b) Employment Agreement between CKF Bancorp, Inc. **
and John H. Stigall
10.4 CKF Bancorp, Inc. Employee Recognition Plan **
13 1996 Annual Report to Stockholders
21 Subsidiaries of the Registrant
23 Consent of Accountants
27 Financial Data Schedule
</TABLE>
- --------------------
* Incorporated by reference to the Company's Registration Statement on Form
S-1 (File No. 33-83972).
** Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995 (Commission File No. 0-25180).
(b) Reports on Form 8-K. No reports on Form 8-K were filed by the
Company during the last quarter of the fiscal year covered by this report on
Form 10-K.
(c) Exhibits. The exhibits required by Item 601 of Regulation S-K are
either filed as part of this Annual Report on Form 10-K or incorporated herein
by reference.
(d) Financial Statements and Financial Statement Schedules Excluded From
Annual Report. There are no financial statements and financial statement
schedules which were excluded from the Annual Report pursuant to Rule 14a-
3(b)(1) which are required to be included herein.
34
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
CKF BANCORP, INC.
March 17, 1997 By: /s/ John H. Stigall
-------------------------------------
John H. Stigall
President and Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934,
as amended, this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
/s/ John H. Stigall March 17, 1997
- -------------------------------------------------
John H. Stigall
President, Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Ann L. Hooks March 17, 1997
- -------------------------------------------------
Ann L. Hooks
Vice President and Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
/s/ Jack L. Bosley, Jr. March 17, 1997
- -------------------------------------------------
Jack L. Bosley, Jr.
(Director)
/s/ W. Irvine Fox, Jr. March 17, 1997
- -------------------------------------------------
W. Irvine Fox, Jr.
(Director)
/s/ J. T. Goggans March 17, 1997
- -------------------------------------------------
J. T. Goggans
(Director)
/s/ W. Banks Hudson, III March 17, 1997
- -------------------------------------------------
W. Banks Hudson, III
(Director)
/s/ Warren O. Nash March 17, 1997
- -------------------------------------------------
Warren O. Nash
(Director)
/s/ Thomas R. Poland March 17, 1997
- -------------------------------------------------
Thomas R. Poland
Vice President and Secretary
(Director)
<PAGE>
- --------------------------------------------------------------------------------
1996 ANNUAL REPORT
- --------------------------------------------------------------------------------
CKF Bancorp, Inc.
<PAGE>
CKF BANCORP, INC.
- --------------------------------------------------------------------------------
CKF Bancorp, Inc., a Delaware statements and related data, relates
corporation (the "Company"), was primarily to the Bank and its
organized by Central Kentucky subsidiary.
Federal Savings Bank, formerly
Central Kentucky Federal Savings and Central Kentucky Federal was formed
Loan Association ("Central Kentucky in 1886 as a Kentucky-chartered
Federal" or the "Bank") to be a mutual building and loan association.
savings institution holding company In December 1960, the Bank obtained
whose only subsidiaries are the Bank federal insurance of accounts and
and its subsidiary. On December 29, became a member of the Federal Home
1994, the Bank converted from mutual Loan Bank ("FHLB") of Cincinnati.
to stock form as a wholly owned The Bank converted to a federal
subsidiary of the Company. In mutual savings and loan association
conjunction with the conversion, the in 1969 and changed its name to
Company issued 1,000,000 shares of Central Kentucky Federal Savings and
its common stock (the "Common Loan Association. Upon its
Stock") to the public. conversion to stock form in December
1994, the Bank adopted its present
The Company is classified as a name. The Bank operates through one
unitary savings and loan holding full service office in Danville,
company subject to regulation by the Kentucky.
Office of Thrift Supervision ("OTS")
of the Department of the Treasury. The executive offices of the Company
The primary activity of the Company and the Bank are located at 340 West
is holding the stock of the Bank and Main Street, Danville, Kentucky
operating the Bank. Accordingly, 40422, and its telephone number is
the information set forth in this (606) 236-4181.
report, including financial
MARKET AND DIVIDEND INFORMATION
- --------------------------------------------------------------------------------
MARKET FOR THE COMMON STOCK
Since January 4, 1995, the Common Stock has been listed for trading under the
symbol "CKFB" on the National Association of Securities Dealers, Inc. Automated
Quotation ("Nasdaq") SmallCap Market. As of March 1, 1997, there were 950,000
shares of the Common Stock issued and outstanding, held by approximately 447
stockholders of record, excluding beneficial owners in nominee or street name.
For further information regarding stock prices and dividends paid, see stock
prices and dividends on page 3.
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
CKF Bancorp, Inc..............................................Inside Front Cover
Market and Dividend Information...............................Inside Front Cover
Letter to Stockholders.........................................................1
Selected Financial and Other Data..............................................2
Management's Discussion and Analysis of
Financial Condition and Results of Operations................................4
Financial Statements..........................................................15
Corporate Information..........................................Inside Back Cover
<PAGE>
LETTER TO STOCKHOLDERS
- --------------------------------------------------------------------------------
To Our Stockholders,
We are pleased to report the results of the CKF Bancorp, Inc.'s operations
for 1996, our second full year as a public company.
The consolidated net income for 1996 was $760,258 or $.83 a share compared
to $745,568 or $.81 a share for 1995. For the year ended December 31, 1996, the
Company and Bank, on a consolidated basis, had $4.3 million in interest income,
$2.1 million in interest expense, and $2.2 million in net interest income. Non-
interest income increased to $334,000 in 1996, compared to $43,000 in 1995, due
primarily to a gain on sale of investment securities of $282,000. Non-interest
expense increased to $1.3 million in 1996 compared to $1.0 million in 1995, due
primarily to a one time Savings Association Insurance Fund (SAIF) special
assessment of $274,000. The income tax expense in 1996 was $409,000 compared to
$398,000 in 1995.
Total assets at December 31, 1996 were $60.0 million compared to $56.5
million at December 31, 1995. Deposits were $42.8 million at December 31, 1996,
compared to $39.4 million at December 31, 1995. Stockholders equity was $15.1
million at December 31, 1996, compared to $16.1 million at December 31, 1995.
During 1996, $1.5 million of equity was used for stock repurchases. Stockholders
equity represented 25.2% of assets at December 31, 1996 as compared to 28.5% of
assets at December 31, 1995. On December 31, 1996 stockholders equity was $17.02
per common share as compared to $16.92 per common share on December 31, 1995,
based on the common shares and common share equivalents outstanding of 887,167
and 953,119, respectively.
The new services that have been implemented continue to be well received by
our customers. The number of safe deposit and automated teller machine customers
more than doubled during 1996. To expand our electronic banking services, we now
offer business customers the Electronic Federal Tax Payment System. In addition,
near the end of 1996, we added automobile and other secured consumer loans to
our list of available lending services.
We appreciate your interest in CKF Bancorp, Inc. and your continued
support.
Sincerely,
John H. Stigall
President and Chief Executive Officer
<PAGE>
SELECTED FINANCIAL AND OTHER DATA
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FINANCIAL CONDITION DATA:
AT DECEMBER 31,
---------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Total amount of:
Assets $60,002 $56,549 $56,375 $50,050 $48,352
Loans receivable, net 53,182 49,638 45,143 41,712 42,133
Cash and investment securities 5,663 5,898 10,391 7,418 5,269
Deposits 42,832 39,356 40,287 43,599 42,313
FHLB advances 1,252 288 323 491 648
Stockholders' equity 15,099 16,129 15,273 5,664 5,104
- --------------------------------------------------------------------------------------
Number of:
Real estate loans outstanding/1/ 1,229 1,196 1,001 992 1,017
Savings accounts 3,933 3,696 3,764 3,653 3,709
Offices open 1 1 1 1 1
</TABLE>
____________________
/1/ Includes home equity loans.
<TABLE>
<CAPTION>
OPERATING DATA:
YEARS ENDED DECEMBER 31,
------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C> <C>
Interest income $4,328 $4,088 $3,417 $3,455 $3,747
Interest expense 2,153 1,930 1,832 1,890 2,254
------ ------ ------ ------ ------
Net interest income before
provision for loan losses 2,175 2,158 1,585 1,565 1,493
Provision for loan losses 7 24 -- -- --
Non-interest income 334 43 36 36 36
Non-interest expense 1,334 1,033 800 611 569
------ ------ ------ ------ ------
Income before federal income tax
expense and cumulative effect of
change in accounting principle 1,168 1,144 821 990 960
Federal income tax expense 408 398 279 356 330
------ ------ ------ ------ ------
Income before cumulative effect of
change in accounting principle 760 746 542 634 630
Cumulative effect of change in
accounting principle (1) -- -- -- 74 --
------ ------ ------ ------ ------
Net income $ 760 $ 746 $ 542 $ 560 $ 630
====== ====== ====== ====== ======
</TABLE>
___________________
(1) Reflects adoption of Statement of Financial Accounting Standards ("SFAS")
No. 109, "Accounting for Income Taxes."
2
<PAGE>
<TABLE>
<CAPTION>
KEY OPERATING RATIOS:
AT OR FOR THE
YEARS ENDED DECEMBER 31,
---------------------------------------------------
1996 1995 1994 1993 1992
------ ------ ----- ------ ------
<S> <C> <C> <C> <C> <C>
PERFORMANCE RATIOS:
Return on assets (net income divided
by average total assets)........................ 1.29% 1.34% 1.02% 1.14% 1.34%
Return on average equity (net income
divided by average stockholders' equity)........ 4.90 4.76 (1) 9.10 10.40 13.15
Interest rate spread (combined weighted average
interest rate earned less combined weighted
weighted average interest rate cost)............ 2.44 2.57 2.65 2.80 2.78
Net yield on interest-earning assets (net
interest income as a percentage of average
balance of interest-earning assets)............. 3.77 3.95 3.14 3.22 3.25
Ratio of non-interest expense to average
total assets.................................... 2.26 1.85 1.56 1.24 1.21
ASSET QUALITY RATIOS:..............................
Nonperforming assets to total assets at
end of period(3)................................ 1.12 .97 1.12 .91 .81
Allowance for loan losses to nonperforming
loans at end of period.......................... 23.99 18.28 12.04 18.05 21.23
Allowance for loan losses to total loans
receivable, net................................. .20 .20 .17 .18 .18
CAPITAL RATIOS:
Equity to total assets at end of period.......... 25.16 28.52 27.09 11.32 10.56
Average equity to average assets................. 26.30 28.07 (1) 12.50 11.04 10.22
Ratio of average interest-earning assets to
average interest-bearing liabilities............ 135.72 139.12 (2)113.70 110.80 109.63
</TABLE>
- -----------------------
(1) Reflects increase in equity from initial public offering that was
consummated on December 29, 1994.
(2) Reflects increase in interest-earning assets funded by the net proceeds
from the initial public offering.
(3) Nonperforming assets include loans 90 days past due, non-accrual loans and
foreclosed real estate.
STOCK PRICES AND DIVIDENDS:
The following table sets forth the range of high and low sales prices for the
common stock as well as dividends declared in each quarter for 1996 and 1995.
Such over-the-counter market quotations reflect inter-dealer prices, without
retail mark-up, mark-down, or commission and may not necessarily represent
actual transactions.
<TABLE>
<CAPTION>
QUARTERLY STOCK INFORMATION
- -----------------------------
1996 1995
------------------------------ -------------------------------
STOCK PRICE RANGE PER SHARE STOCK PRICE RANGE PER SHARE
QUARTER LOW HIGH DIVIDEND LOW HIGH DIVIDEND
- ----------------------------- --------- --------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
1st $18.50 $20.25 $.20 $11.00 $13.63 $ --
2nd 19.50 20.25 12.50 13.75 --
3rd 19.50 20.75 .22 12.75 19.00 0.20
4th 19.50 20.75 18.00 20.50 --
- ----------------------------- --------- --------- -------- --------- --------- --------
Total $.42 $ 0.20
======== ========
</TABLE>
3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
GENERAL
The primary business of the Company is the operation of the Bank. The assets
of the Company consist of a portion of the net cash proceeds from the initial
public offering of the common stock on December 29, 1994, all of the Bank's
outstanding capital stock, and a note receivable from the Company's Employee
Stock Ownership Plan ("ESOP").
Historically, the Bank has functioned as a financial intermediary, attracting
deposits from the general public and using such deposits, to make mortgage loans
and, to a lesser extent, consumer loans and to purchase investment securities.
As such, its earnings have depended primarily on its net interest income, or
"spread", which is the difference between the amount it receives from interest
earned on loans and investments ("interest-earning assets") and the amount it
pays in interest on its deposits ("interest-bearing liabilities"). Results of
operations are also dependent upon the level of the Bank's non-interest income,
including fee income and service charges and by the level of its non-interest
expenses, the most significant component of which is salaries and employee
benefits.
The operations of the Bank are significantly affected by prevailing economic
conditions and the monetary, fiscal and regulatory policies of governmental
agencies. Lending activities are influenced by the demand for and supply of
housing, competition among lenders, the level of interest rates and the
availability of funds. Deposit flows and costs of funds are likewise heavily
influenced by prevailing market rates of interest on competing investment
alternatives, account maturities and the levels of personal income and savings
in the Bank's market areas.
The Bank was organized as a Kentucky building and loan association in 1886.
In 1969, it converted to a federally-chartered, mutually-owned savings and loan
association and, in 1994, it converted to a federally-chartered stock savings
bank and adopted its current name. The Bank's interest-earning assets have
historically concentrated in real estate-collateralized instruments, principally
one- to four-family loans and, to a lesser extent, loans secured by multi-family
residential and commercial properties, construction loans, home equity lines of
credit, second mortgages on single-family residences and consumer loans, both
secured and unsecured, including loans secured by savings accounts. The Bank
also invests in investment securities, primarily U.S. Government Treasury and
agency securities and in interest-bearing deposits, primarily with the FHLB of
Cincinnati. Its source of funding for these investments has principally been
deposits placed with the Bank by consumers in the market areas it serves.
ASSET/LIABILITY MANAGEMENT
Net interest income, the primary component of Bank's net income, is
determined by the difference or "spread" between the yield earned on the Bank's
interest-earning assets and the rates paid on its interest-bearing liabilities
and the relative amounts of such assets and liabilities. Key components of a
successful asset/liability strategy are the monitoring and managing of interest
rate sensitivity of both the interest-earning asset and interest-bearing
liability portfolios. The Bank has employed various strategies intended to
minimize the adverse effect of interest rate risk on future operations by
providing a better match between the interest rate sensitivity between its
assets and liabilities. In particular, the Bank's strategies are intended to
stabilize net interest income for the long-term by protecting its interest rate
spread against increases in interest rates. Such strategies include the
origination for portfolio of adjustable-rate mortgage loans secured by one- to
four-family residential real estate, and, to a lesser extent, multi-family and
commercial real estate loans and the origination of other loans with greater
interest rate sensitivities than long-term, fixed-rate residential mortgage
loans. For the year ended December 31, 1996, the Bank originated approximately
$9.5 million of the one- to four-family residential loans, of which $9.4 million
were adjustable rate loans. The Bank's origination of multi-family and
commercial loans amounted to approximately $1.9 million or 12.4% of total loan
originations during the same period. Although customers typically prefer fixed-
rate mortgage loans in a decreasing interest rate environment, the Bank has been
successful in originating adjustable-rate loans in recent years. In addition,
4
<PAGE>
the Bank has used excess funds to invest in various short-term investments as
well as U.S. Government Treasury and agency securities with one to five year
maturities. At December 31, 1996, the Bank had approximately $5.1 million of
funds so invested, including $728,000 in capital stock of the Federal Home Loan
Mortgage Corporation and $2.7 million in U.S. government and agency securities
with an average yield of 4.99%.
Asset/liability management in the form of structuring cash instruments
provide greater flexibility to adjust exposure to interest rates. During
periods of high interest rates, management believes it is prudent to offer
competitive rates on short-term deposits and less competitive rates for long-
term liabilities. This posture allows the Bank to benefit quickly from declines
in interest rates. Likewise, offering more competitive rates on long-term
deposits during the low interest rate periods allows the Bank to extend the
repricing and/or maturity of its liabilities thus reducing its exposure to
rising interest rates. At December 31, 1996, the Bank's interest-bearing
deposit base was comprised of $8.9 million in interest-bearing demand deposits
with an average rate of 3.3% and $33.9 million in time deposits with an average
rate of 5.6%. Time deposits with maturities of one year or less at December 31,
1996 totaled $21.1 million, or 62% of total time deposits at such date. In
addition to its focus on the repricing period of its deposit liabilities,
management also seeks to lengthen the repricing period of its interest-bearing
liabilities through borrowings from the FHLB. Such borrowings totaled $1.3
million at December 31, 1996, with monthly principal and interest payments due
through the year 2002.
INTEREST RATE SENSITIVITY ANALYSIS
The Bank's future financial performance depends to a large extent on how
successful it is in limiting the sensitivity of earnings and net asset value to
changes in interest rates. Such sensitivity may be analyzed by examining the
amount by which the market value of the Bank's portfolio equity changes given an
immediate and sustained change in interest rates. Based on financial
information provided by savings institutions, the OTS provides a quarterly
report which shows the amounts by which the net present value of an
institution's cash flows from assets, liabilities, and off balance sheet items
(the institution's net portfolio value, or "NPV") would change in the event of a
range of assumed changes in market interest rates. The OTS incorporates an
interest rate risk ("IRR") component in determining the risk-based capital
requirement of certain savings institutions. The IRR component is a dollar
amount that will be deducted from total capital for the purpose of calculating
an institution's risk-based capital requirement and is measured in terms of the
sensitivity of its NPV to changes in interest rates. An institution's IRR is
measured as the change to its NPV as a result of a hypothetical 200 basis point
change in market interest rates. A resulting change in NPV of more than 2% of
the estimated market value of its assets will require the institution to deduct
from its capital 50% of that excess change.
The following table sets forth the interest rate sensitivity of the Bank's
net portfolio value as of December 31, 1996 in the event of 1%, 2%, 3%, and 4%
instantaneous and permanent increases and decreases in market interest rates,
respectively. These changes are set forth below as basis points, where 100
basis points equals one percentage point.
<TABLE>
<CAPTION>
CHANGE NET PORTFOLIO VALUE NPV AS % OF PORTFOLIO VALUE OF ASSETS
-------------------------------- --------------------------------------
IN RATES $ AMOUNT $ CHANGE % CHANGE NPV RATIO BASIS POINT CHANGE
- ---------- -------- ---------- ---------- --------- ------------------
<S> <C> <C> <C> <C> <C>
+400 bp $11,515 (370) (3%) 20.16% +13 bp
+300 bp 11,785 (100) (1%) 20.39% +35 bp
+200 bp 11,925 40 .8% 20.42% +39 bp
+100 bp 11,950 65 1% 20.29% +26 bp
0 11,885 - - 20.24% --
- -100 bp 11,752 (133) (1%) 19.68% (35) bp
- -200 bp 11,694 (191) (2%) 19.43% (61) bp
- -300 bp 11,823 (62) (1%) 19.41% (63) bp
- -400 bp 11,995 110 1% 19.44% (60) bp
</TABLE>
5
<PAGE>
The following table sets forth the interest rate risk capital component for
the Bank at December 31, 1996 (the most recent date for which such information
is available to the Bank from the OTS) given a hypothetical 200 basis point rate
change in market interest rates.
DECEMBER 31, 1996
-----------------
Pre-shock NPV Ratio: NPV as % of Portfolio Value of Assets..... 20.04%
Exposure Measure: Post-Shock NPV Ratio......................... 19.43%
Sensitivity Measure: Change in NPV Ratio....................... (61) bp
Change in NPV as % of Portfolio Value of Assets................. 2%
Interest Rate Risk Capital Component ($000)..................... 0
Computations of prospective effects of hypothetical interest rate changes are
based on numerous assumptions, including relative levels of market interest
rates, loan prepayments, and deposit run-offs, and should not be relied upon as
indicative of actual results. Further, the computations do not contemplate any
actions the Bank may undertake in response to changes in interest rates.
Certain shortcomings are inherent in the method of analysis presented in both
the computation of NPV and in the analysis presented in prior tables setting
forth the maturing and repricing of interest-earning assets and interest-bearing
liabilities. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in differing degrees
to changes in market interest rates. The interest rates on certain types of
assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as adjustable rate loans, which
represent the Bank's primary loan product, have features which restrict changes
in interest rates on a short-term basis and over the life of the asset. In
addition, the proportion of adjustable rate loans in the Bank's portfolios could
decrease in future periods if market interest rates remain at or decrease below
current levels due to refinance activity. Further, in the event of a change in
interest rates, prepayment and early withdrawal levels would likely deviate
significantly from those assumed in the tables. Finally, the ability of many
borrowers to service their adjustable-rate debt may decrease in the event of an
interest rate increase.
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS
Net interest income is affected by (i) the difference ("interest rate
spread") between rates of interest earned on interest-earning assets and rates
of interest paid on interest-bearing liabilities and (ii) the relative amounts
of interest-earning assets and interest-bearing liabilities. When interest-
earning assets approximate or exceed interest-bearing liabilities, any positive
interest rate spread will generate net interest income. Savings institutions
have traditionally used interest rate spreads as a measure of net interest
income. Another indication of an institution's net interest income is its "net
yield on interest-earning assets" which is net interest income divided by
average interest-earning assets. The following table sets forth certain
information relating to the Bank's average interest-earning assets and interest-
bearing liabilities and reflects the average yield on assets and average cost of
liabilities for the periods indicated. Such yields and costs are derived by
dividing income or expense by the average monthly balance of assets or
liabilities, respectively, for the periods presented. During the periods
indicated, nonaccruing loans are included in the net loan category. Average
balances are derived from month-end average balances. Management does not
believe that the use of month-end average balances instead of average daily
balances has caused any material difference in the information presented.
6
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------
1996 1995 1994
--------------------------- ---------------------------- ----------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
------- -------- ------- ------- -------- ------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable............ $52,470 $4,072 7.76% $47,994 $3,705 7.72% $43,103 $3,111 7.22%
Investment securities....... 2,973 141 4.74 2,579 148 5.74 1,775 109 6.14
Mortgage-backed
securities............... 407 24 5.90
Other interest-earning
assets................... 1,786 91 5.10 4,095 235 5.74 5,574 197 3.53
------- -------- ------- -------- ------- --------
Total interest-earning
assets................... 57,636 4,328 7.51 54,668 4,088 7.48 50,542 3,417 6.77
-------- -------- --------
Non-interest-earning assets... 1,373 1,132 1,081
------- ------- --------
Total assets.............. $59,009 $55,800 $51,533
======= ======= ========
Interest-bearing liabilities:
Deposits.................... $42,114 $2,135 5.07 $38,992 $1,909 4.90 $43,997 $1,801 4.09
Borrowings.................. 352 18 5.11 304 21 6.91 457 32 6.85
------- -------- ------- -------- ------- --------
Total interest-bearing
liabilities.............. 42,466 2,153 5.07 39,296 1,930 4.91 44,454 1,833 4.12
-------- -------- --------
Non-interest-bearing
liabilities.................. 1,025 839 615
------- ------- --------
Total liabilities......... 43,491 40,135 45,069
Stockholders' equity.......... 15,518 15,665 6,464
------- ------- --------
Total liabilities and
stockholders' equity..... $59,009 $55,800 $51,533
======= ======= ========
Net interest income........... $2,175 $2,158 $1,584
======= ======= ========
Interest rate spread (1)...... 2.44% 2.57% 2.65%
======= ======= =======
Net yield on interest-
earning assets (2)........... 3.77% 3.95% 3.14%
======= ======= =======
Ratio of average
interest-earning assets to
average interest-bearing
liabilities................ 135.72% 139.12% 113.70%
======= ======= =======
</TABLE>
____________________
(1) Represents the difference between the average yield on interest-earning
assets and the average cost of interest-bearing liabilities.
(2) Represents net interest income as a percentage of the average balance of
interest-earning assets for the same period, and is also referred to as the
net interest margin.
7
<PAGE>
The net interest margin is a key indicator used in determining the Bank's
income performance. The Bank's net interest margin was 3.77% for the year ended
December 31, 1996 compared to 3.95% and 3.14% for the years ended December 31,
1995 and 1994, respectively. The net interest income increased by $17,000
during the year ended December 31, 1996 compared to the same period in 1995, and
increased by $574,000 in 1995 compared to 1994.
The increase in net interest income of $17,000 between 1996 and 1995 was
due to the increase in the volume of average net interest-earning assets of
approximately $3.0 million in 1996 compared to 1995 offset by the average
interest rates paid on deposits increasing at a greater rate than the average
interest yield on interest earning assets.
The increase in net interest income of $574,000 between 1995 and 1994 was
primarily due to the increase in the volume of average net interest-earning
assets of approximately $4.1 million in 1995 compared to 1994 offset by the
average interest rates paid on deposits, increasing at a slightly greater rate
than the average interest yield on interest earning assets.
RATE/VOLUME ANALYSIS
The table below sets forth certain information regarding changes in
interest income and interest expense of the Bank for the periods indicated. For
each category of interest-earning asset and interest-bearing liability,
information is provided on changes attributable to (i) changes in volume
(changes in volume multiplied by old rate) and (ii) changes in rate (changes in
rate multiplied by old volume); (iii) changes in rate-volume (changes in rate
multiplied by the change in average volume). Average balances are derived from
month-end balances. Management does not believe that the use of month-end
balances instead of average daily balances has caused any material difference in
the information presented.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1996 VS. 1995 1995 VS. 1994
------------------------------- ----------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO
------------------------------- ----------------------------------
RATE/ RATE/
VOLUME RATE VOLUME TOTAL VOLUME RATE VOLUME TOTAL
------ ---- ------ ----- ------ ---- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Loans $ 345 $ 19 $ 2 $ 366 $ 354 $216 $ 24 $594
Investment securities 23 (26) (4) (7) 49 (7) (3) 39
Mortgage-backed securities - - 24 24 - - - -
Other interest-earning assets (133) (26) 15 (144) (52) 123 (33) 38
------ ---- --- ----- ------ ---- ---- ----
Total interest-earning assets 235 (33) 37 239 351 332 (12) 671
------ ---- --- ----- ------ ---- ---- ----
Interest expense:
Deposits 154 66 5 225 (207) 356 (41) 108
Borrowings 3 (5) (1) (3) (11) -- -- (11)
------ ---- --- ----- ------ ---- ---- ----
Total interest-bearing liabilities 157 61 4 222 218 356 (41) 97
------ ---- --- ----- ------ ---- ---- ----
Change in net interest income $ 78 $(94) $33 $ 17 $ 569 $(24) $ 29 $574
====== ==== === ===== ====== ==== ==== ====
</TABLE>
8
<PAGE>
COMPARISON OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AS OF AND FOR THE
YEARS ENDED DECEMBER 31, 1996 AND 1995
FINANCIAL CONDITION.
The Company's consolidated assets increased $3.5 million or 6.1% to $60.0
million at December 31, 1996 compared to $56.5 million at December 31, 1995. The
net increase of $3.5 million was due to an increase of $3.5 million in loans
receivable, an increase of $649,000 in the investment portfolio and an increase
of $227,000 in foreclosed real estate offset by a decrease of $82,000 in accrued
interest receivable and fixed assets and an aggregate decrease of $884,000 in
cash, interest bearing deposits and certificates of deposit.
The Company's investment portfolio increased $649,000. Securities classified
as available-for-sale per SFAS No. 115 decreased $90,000 due to the sale of
3,204 shares of Federal Home Loan Mortgage Corporation stock, which had a
carrying value of $274,000, offset by an increase of $184,000 in the market
value of the remaining securities. Securities held-to-maturity increased
$739,000 due to the purchase of a mortgage-backed security and a U.S. Treasury
Note for approximately $1.0 million offset by the proceeds of a maturing U.S.
Treasury Note in the amount of $250,000.
Loans receivable increased $3.5 million or 7.1% to $53.1 million at December
31, 1996 from $49.6 million at December 31, 1995. The increase in loans during
the year ended December 31, 1996 is the result of management becoming more
active in loan solicitation, a continuation of the policy initiated in March of
1994, whereby the Bank offers more flexible options regarding the initial rate
adjustment period on adjustable rate loans, plus a stable interest rate
environment in 1996.
The allowance for loan losses totaled $107,000 and $100,000, respectively at
December 31, 1996 and 1995. The allowance for loan losses as a percentage of
non-performing loans was 23.99% and 18.28% as of December 31, 1996 and 1995,
respectively. During these periods there were no loans charged off or
recoveries of previous loan losses. The determination of the allowance for loan
losses is based on management's analysis, done no less than on a quarterly
basis, of various factors, including market value of the underlying collateral,
growth and composition of the loan portfolio, the relationship of the allowance
for loan losses to outstanding loans, historical loss experience, delinquency
trends and prevailing economic conditions. Although management believes its
allowance for loan losses is in accordance with generally accepted accounting
principles and reflects current regulatory and economic considerations, there
can be no assurance that additional losses will not be incurred, or that the
Bank's regulators or changes in the Bank's economic environment will not require
further increases in the allowance.
Deposits increased $3.4 million or 8.8% from $39.4 million at December 31
1995 to $42.8 million at December 31, 1996. The increase in deposits reflects
management's continued success in attracting depositors within the local market
area.
Stockholders' equity decreased by $1.0 million to $15.1 million at December
31, 1996 as compared to $16.1 million at December 31, 1995. During 1996, the
Company repurchased 76,125 shares of its common stock at a cost of $1.5 million,
which was charged to stockholders' equity. Other changes to stockholder equity
from 1995 to 1996 were an increase due to net income of $760,000, an increase of
$105,000 due to the release of ESOP shares from collateral, offset by decreases
of $380,000 from the payment of dividends and $51,000 due to the decrease of the
net unrealized gain on securities available-for-sale.
RESULTS OF OPERATIONS
Net Income. Net income increased by $15,000 or 2.0% to $760,000 for the year
ended December 31, 1996 as compared to $746,000 for the same period in 1995.
The net increase was due to a $240,000 increase in interest income, a $291,000
increase in other income plus a decrease of $17,000 in the provision for loan
losses offset by an increase of $223,000 in interest expense, an increase of
$300,000 in other expenses and an increase of $10,000 in income taxes for 1996
compared to 1995.
9
<PAGE>
Interest Income. Interest income was $4.3 million, or 7.51% of average
interest-earning assets, for the year ended December 31, 1996 as compared to
$4.1 million, or 7.48% of average interest-earning assets, for the year ended
December 31, 1995. Interest income increased by $240,000 or 5.89% from 1995 to
1996. The change was due primarily to a $3.0 million increase in the average
balance of interest-earning assets during the year ended December 31, 1996
compared to the year ended December 31, 1995.
Interest Expense. Interest expense was $2.1 million, or 5.07% of average
interest-bearing liabilities for the year ended December 31, 1996 as compared to
$1.9 million, or 4.90% of average interest-bearing liabilities for the
corresponding period in 1995. The increase in interest expense was the result
of an increase of 17 basis points in the average rate paid on deposits plus an
increase in the average interest bearing deposits of approximately $3.2 million
in 1996 compared to 1995.
Provision for Loan Losses. The provision for loan losses was approximately
$7,000 and $24,000 for the years ended December 31, 1996 and 1995, respectively.
Management considers many factors in determining the necessary levels of the
allowance for loan losses, including an analysis of specific loans in the
portfolio, estimated value of the underlying collateral, assessment of general
trends in the real estate market, delinquency trends, prospective economic and
regulatory conditions, inherent loss in the loan portfolio, and the relationship
of the allowance for loan losses to outstanding loans. At December 31, 1996 and
1995, the allowance for loan losses represented .20% of total loans.
Non-Interest Income. Non-interest income amounted to $334,000 and $43,000
for the years ended December 31, 1996 and 1995, respectively. The increase was
due primarily to a $282,000 gain resulting from the sale of investments
classified as available-for-sale.
Non-Interest Expense. Non-interest expense increased approximately $300,000
or 29.1% to $1,334,000 at December 31, 1996 compared to $1,033,000 at December
31, 1995. Non-interest expense was 2.26% of average assets for the year ended
December 31, 1996 as compared to 1.85% of average assets for the same period in
1995. The increase of $300,000 was due primarily to increases of $276,000 in
federal insurance premiums, $36,000 in losses on foreclosed real estate, $45,000
in other operating expenses, offset by a decrease of $53,000 in legal expenses.
The increase of $276,000 in federal insurance premiums was primarily due to a
one-time special assessment of $274,000, pursuant to legislation signed by the
President on September 30, 1996 to recapitalize the Savings Association
Insurance Fund (SAIF). As a result of this special assessment, the insurance
assessment rate on the Bank's deposits will be reduced beginning January 1, 1997
to a comparable rate charged to well capitalized commerical banks. The increase
of $36,000 in losses on foreclosed real estate was the result of a valuation
allowance established by management to reflect the fair value of the real estate
owned net of estimated selling expense. The increase of $45,000 in other
operating expenses was due to increases in franchise and license taxes,
accounting and regulatory fees associated with being a public company. The
decrease of $53,000 in legal expense was due to special services related to new
employee benefit plans provided in 1995, but not in 1996.
Income Taxes. The provision for income tax expense amounted to approximately
$409,000 and $399,000 for the years ended December 30, 1996 and 1995,
respectively. The provision for income tax expense as a percentage of income
before income tax expenses amounted to 34.9% and 34.8% for 1996 and 1995,
respectively (see Note 9 of Notes to Consolidated Financial Statements).
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995 AND
1994
Net Income. Net income increased by $204,000 or 37.6% to $746,000 for the
year ended December 31, 1995 as compared to $542,000 for the same period in
1994. The net increase was due to a $671,000 increase in interest income plus a
$7,000 increase in other income offset by an increase of $98,000 in interest
expense, an increase of $24,000 in the provision for loan losses, an increase of
$233,000 in other expenses and an increase of $119,000 in income taxes for 1995
compared to 1994.
10
<PAGE>
Interest Income. Interest income was $4.1 million, or 7.48% of average
interest-earning assets, for the year ended December 31, 1995 as compared to
$3.4 million, or 6.77% of average interest-earning assets, for the year ended
December 31, 1994. Interest income increase by $671,000 or 19.6% from 1994 to
1995. The change was due to a 71 basis point increase in the average rate earned
on the average interest-earning assets plus a $4.1 million increase in the
average balance of interest-earning assets during the year ended December 31,
1995 compared to the year ended December 31, 1994.
Interest Expense. Interest expense was $1.9 million, or 4.91% of average
interest-bearing liabilities for the year ended December 31, 1995 as compared to
$1.8 million, or 4.12% of average interest-bearing liabilities for the
corresponding period in 1994. The increase in interest expense was primarily the
result of an increase of 81 basis points in the average rate paid on deposits
offset by a decrease in the average interest-bearing deposits of approximately
$5.0 million in 1995 compared to 1994.
Provision for Loan Losses. The provision for loan losses was approximately
$24,000 and $-0- for the years ended December 31, 1995 and 1994, respectively.
Management considers many factors in determining the necessary levels of the
allowance for loan losses, including an analysis of specific loans in the
portfolio, estimated value of the underlying collateral, assessment of general
trends in the real estate market, delinquency trends, prospective economic and
regulatory conditions, inherent loss in the loan portfolio, and the relationship
of the allowance for loan losses to outstanding loans. At December 31, 1995 the
allowance for loan losses represented .20% of total loans compared to .17% at
December 31, 1994.
Non-Interest Income. Non-interest income amounted to $43,000 and $36,000 for
the years ended December 31, 1995 and 1994, respectively. The largest item in
non-interest income is service fees on loan and deposit accounts, which amounted
to $41,000 and $34,000 for 1995 and 1994, respectively. The increase in non-
interest income of $7,000 was primarily due to the increase in income from late
fees on delinquent loans and service charges on NOW accounts.
Non-Interest Expense. Non-interest expense increased approximately $233,000
or 29.2% to $1,033,000 at December 31, 1995 compared to $800,000 at December 31,
1994. Non-interest expenses was 1.85% of average assets for the year ended
December 31, 1995 as compared to 1.56% of average assets for the same period in
1994. The increase of $233,000 was due primarily to increases of $107,000 in
compensation and benefits, $71,000 in legal expenses, $10,000 in occupancy
expense and $45,000 in other operating expenses. The net increase of $107,000
from 1994 to 1995 in compensation and benefits resulted from $81,000 expense
pertaining to the Company's ESOP, $117,000 expenses related to the Directors
Retirement Plan approved in 1995, $26,000 additional salary expenses, primarily
from the addition of one new person in 1995 offset in part by a decrease in
director fees of $9,000 in 1995 compared to 1994, plus $108,000 expense in 1994
related to a defined benefit retirement plan which was terminated in 1994 (See
Note 10 of Notes to Consolidated Financial Statements). The increase in legal
fees was due to additional services related to new employee benefit plans,
issues related to stockholder matters and regulatory filings as a result of
being a public company. The increase in occupancy expense was due to increased
depreciation and maintenance expenses. Other operating expenses increased
$45,000 due to increases in accounting, regulatory fees, advertising, printing
and postage, all of which increased as a result of being a public company in
1995.
Income Taxes. The provision for income tax expense amounted to approximately
$399,000 and $279,000 for the years ended December 30, 1995 and 1994,
respectively. The provision for income tax expenses as a percentage of income
before income tax expenses and cumulative effect of the change in accounting
principle amounted to 34.8% and 34.0% for 1995 and 1994, respectively (see Note
9 of Notes to Consolidated Financial Statements).
LIQUIDITY AND CAPITAL RESOURCES
The liquidity of the Company depends primarily on the dividends paid to it as
the sole shareholder of the Bank, plus the portion of funds retained by the
Company from the stock issued in the initial public offering. The Bank is
subject to certain regulatory limitations with respect to the payment of
dividends to the Company. See Note 9 of Notes to Consolidated Financial
Statement.
11
<PAGE>
The Bank's principal sources of funds for operations are deposits from its
primary market area, principal and interest payments on loans and proceeds from
maturing investment securities. In addition, as a member of the FHLB of
Cincinnati, the Bank is eligible to borrow funds from the FHLB of Cincinnati in
the form of advances.
The Bank is required by OTS regulations to maintain minimum levels of
specified liquid assets which are currently equal to 5% of deposits and
borrowings. Central Kentucky Federal's liquidity ratio at December 31, 1996,
was approximately 8.72%. A higher liquidity ratio can result in a reduced
return on the investment of such assets due to the lower interest rates usually
prevailing on shorter-term investments.
The Bank's most liquid assets are cash and cash equivalents, which are short
term, highly liquid investments with original maturities of less than three
months. The level of this asset is dependent on the Bank's operating, financing
and investing activities during any given period. At December 31, 1996 and
1995, cash and cash equivalents totaled approximately $2.2 million and $2.1
million, respectively.
The primary operating activity of the Bank is accepting deposits from the
general public and the origination of residential mortgage and other loans.
Cash flow from this activity is generally derived from net income, as increased
or decreased in part by the income attributable to FHLB stock dividends,
depreciation expense, interest accruals, deferred income taxes, and the change
in prepaid expenses as amounts paid in prior periods are applied to subsequently
incurred expenses. The Bank's operating activities produced positive cash flows
for 1996 and 1995. The primary investing activities of the Bank are origination
of loans and purchases of investment securities. For the year ended December
31, 1996 and 1995, respectively, the Bank's origination of loans exceeded
repayments by $3.5 million and $4.5 million. The excess of originations over
repayments during 1996 and 1995 reflected the success of management's strategy
of offering more flexible options related to adjustable rate mortgage loans.
The Bank's primary financing activities arise from certificates of deposits and
from other deposit accounts, and from the issuance and repurchase of the
Company's common stock. During the year ended December 31, 1996, the Bank had a
net increase in other deposit accounts of approximately $367,000 and a net
increase in certificates of deposit of $3.1 million. In addition, the Company
repurchased 76,125 shares of its stock at a cost of $1.5 million.
The Bank's capital ratios are substantially in excess of current regulatory
capital requirements. At December 31, 1996, the Bank's tangible and core
capital amounted to 19.9% of adjusted total assets, or 18.4% and 16.9%,
respectively, in excess of the Bank's current 1.5% tangible and 3.0% core
capital requirements. Additionally, the Bank's risk-weighted assets ratio was
35.4% at December 31, 1996, or 27.4% in excess of the Bank's 8.0% risk-based
capital requirement (See Note 9 of Notes to Consolidated Financial Statements).
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements, and Notes thereto, presented herein
have been prepared in accordance with generally accepted accounting principles,
which require the measurement of financial position and operating results in
terms of historical dollars without considering the changes in the relative
purchasing power of money over time due to inflation. The impact of inflation
is reflected in the increased cost of the Bank's operations. Unlike most
industrial companies, nearly all the assets and liabilities of the Bank are
monetary in nature. As a result, interest rates have a greater impact on the
Bank's performance than do the effects of general levels of inflation. Interest
rates do not necessarily move in the same direction or to the same extent as the
price of goods and services.
OTHER DEVELOPMENTS - SPECIAL DEPOSIT INSURANCE ASSESSMENT; BAD DEBT RESERVE
RECAPTURE
On September 30, 1996, the President signed legislation, which among other
things, recapitalized the Savings Associations Insurance Fund through a special
assessment on most savings financial institutions, such as the Bank. The special
assessment amounted to 65.7 basis points applied to the Bank's insured deposits
as of March 31, 1995, and amounted to $274,000. The expense was recognized in
the consolidated financial statements for the year ended December 31, 1996, and
the after tax impact was to reduce net income by $181,000 or $0.20 per share of
common stock.
12
<PAGE>
As a result of this special assessment, the insurance assessment rate on the
Bank's deposits will be reduced beginning January 1, 1997 to a comparable rate
charged to well capitalized commercial banks.
In addition, during 1996 legislation was enacted that repealed the bad debt
deduction under the percentage of taxable income method of the Internal Revenue
Code for savings banks. Savings banks, like the Bank, which have previously used
the percentage of taxable income method in computing its bad debt deduction for
tax purposes are required to recapture into taxable income post-1987 reserves
over a six-year period beginning with the 1996 taxable year. The start of such
recapture may be delayed until the 1998 taxable year if the dollar amount of the
institution's residential loan originations in each year is not less than the
average dollar amount of residential loans originated in each of the nine most
recent years disregarding the years with the highest and lowest originations
during such period. For purposes of this test, residential loan originations
would not include refinancing and home equity loans. The impact of this
legislation will not have a material impact on the financial statements of the
Company.
IMPACT OF RECENT ACCOUNTING STANDARDS
ACCOUNTING FOR MORTGAGE SERVICING. In May 1995, the FASB issued SFAS No.
122, "Accounting for Mortgage Servicing Rights." SFAS No. 122 requires that the
Company recognizes as separate assets rights to service mortgage loans for
others, regardless of how those servicing rights were acquired. An institution
that acquires mortgage servicing rights through either the purchase or
origination of mortgage loans and sells those loans with servicing rights
retained would allocate some of the cost of the loans to the mortgage servicing
rights. SFAS No. 122 also requires that an enterprise allocate the cost of
purchasing or originating the mortgage loans between the mortgage servicing
rights and the loans, when mortgage loans are securitized, if it is practicable
to estimate the fair value of mortgage servicing rights. Additionally, SFAS No.
122 requires that capitalized mortgage servicing rights and capitalized excess
servicing receivables be assessed for impairment. Impairment would be measured
based on fair value. SFAS No. 122 is to be applied prospectively to transactions
in which an entity acquires mortgage servicing rights and to impairment
evaluations of all capitalized mortgage servicing rights and capitalized excess
servicing receivables whenever acquired. Retroactive application is prohibited.
Management adopted SFAS No. 122 on January 1, 1996, as required, without
material effect on the Company's consolidated financial position or results of
operations.
ACCOUNTING FOR STOCK-BASED COMPENSATION. In October 1994, the FASB issued
SFAS No. 123 entitled "Accounting for Stock-Based Compensation." SFAS No. 123
establishes a fair value based method of accounting for stock-based compensation
paid to employees. SFAS No. 123 recognizes the fair value of an award of stock
or stock options on the grant date and is effective for transactions occurring
after December 1995. Companies are allowed to continue to measure compensation
cost for those plans using the intrinsic value based method of accounting, which
generally does not result in compensation expense recognition for most plans.
Companies that elect to remain with the existing accounting are required to
disclose in a footnote to the financial statements pro forma net earnings, and
if presented, earnings per share, as if SFAS No. 123 had been adopted. The
Company has elected to continue using the intrinsic value based method of
accounting for stock options in accordance with SFAS No. 123 with no effect on
the Company's consolidated financial condition or results of operations.
ACCOUNTING FOR TRANSFERS OF FINANCIAL ASSETS. In June 1996, the FASB
issued SFAS No. 125, "Accounting for Transfers of Financial Assets, Servicing
Rights, and Extinguishment of Liabilities," that provides accounting guidance on
transfers of financial assets, servicing of financial assets, and extinguishment
of liabilities. SFAS No. 125 supersedes SFAS No. 122 and introduces an approach
to accounting for transfers of financial assets that provides a means of dealing
with more complex transactions in which the seller disposes of only a partial
interest in the assets, retains rights or obligations, makes use of special
purpose entities in the transaction, or otherwise has continuing involvement
with the transferred assets. The new accounting method, the financial components
approach, provides that the carrying amount of the financial assets transferred
be allocated to components of the transaction based on their relative fair
values. SFAS No. 125 provides criteria for determining whether control of assets
has been relinquished and whether a sale has occurred. If the transfer does not
qualify as a sale, it is accounted for as secured borrowing. Transactions
subject to the provisions of SFAS No. 125 include, among others, transfers
involving repurchase
13
<PAGE>
agreements, securitizations of financial assets, loan participations, factoring
arrangements, and transfers of receivables with recourse.
An entity that undertakes an obligation to service financial assets
recognizes either a servicing asset or liability for the servicing contract
(unless related to a securitization of assets, and all the securitized assets
are retained and classified as held-to-maturity). A servicing asset or liability
that is purchased or assumed is initially recognized at its fair value.
Servicing assets and liabilities are amortized in proportion to and over the
period of estimated net servicing income or net servicing loss and are subject
to subsequent assessments for impairment based on fair value.
SFAS No. 125 provides that a liability is removed from the balance sheet
only if the debtor either pays the creditor and is relieved of its obligation
for the liability or is legally released from being the primary obligor.
SFAS No. 125 is effective for transfers and servicing of financial assets
and extinguishment of liabilities occurring after December 31, 1996, and is to
be applied prospectively. Earlier or retroactive application is not permitted.
Management does not believe that adoption of SFAS No. 125 will have a material
adverse effect on the Company's consolidted financial position or results of
operations.
14
<PAGE>
LETTERHEAD OF
MILLER, MAYER, SULLIVAN & STEVENS LLP
CERTIFIED PUBLIC ACCOUNTANTS
"INNOVATORS OF SOLUTION TECHNOLOGY"
INDEPENDENT AUDITORS' REPORT
Board of Directors
CKF Bancorp, Inc.
Danville, Kentucky
We have audited the accompanying consolidated balance sheets of CKF Bancorp,
Inc. and Subsidiary as of December 31, 1996 and 1995, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the years in the three year period ended December 31, 1996.
These consolidated financial statements are the responsibility of the management
of CKF Bancorp, Inc. (Company). Our responsibility is to express an opinion on
these consolidated 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 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CKF Bancorp, Inc.
and Subsidiary as of December 31, 1996 and 1995, and the consolidated results of
their operations and their cash flows for each of the years in the three year
period ended December 31, 1996 in conformity with generally accepted accounting
principles.
Lexington, Kentucky
January 24, 1997
(606) 223-3095
2365 HARRODSBURG ROAD LEXINGTON, KENTUCKY 40504-3399 FAX: (606) 223-2143
15
<PAGE>
CKF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
----------------------
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------
ASSETS 1996 1995
------------ ------------
<S> <C> <C>
Cash and due from banks $ 564,003 $ 500,944
Interest bearing deposits 1,655,589 1,602,813
Certificates of deposit 1,000,000
Investment securities:
Securities available-for-sale 728,475 818,634
Securities held-to-maturity (market values of $2,711,205
and $1,997,758 for 1996 and 1995, respectively) 2,714,723 1,975,941
Loans receivable, net 53,181,509 49,638,263
Foreclosed real estate, net of allowance of $36,000 227,340
Accrued interest receivable 378,405 440,314
Office property and equipment, net 540,638 560,968
Other assets 11,778 11,401
------------ ------------
Total assets $60,002,460 $56,549,278
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $42,832,354 $39,355,841
Federal income taxes payable 641,014 680,256
Advance from Federal Home Loan Bank 1,252,179 288,040
Advance payment by borrowers for taxes and insurance 18,944 4,183
Other liabilities 159,040 92,048
------------ ------------
Total liabilities 44,903,531 40,420,368
------------ ------------
Commitments and contingencies
Stockholders' equity
Common stock, $.01 par value, 4,000,000 shares authorized;
1,000,000 shares issued and outstanding 10,000 10,000
Additional paid-in capital 9,612,331 9,583,408
Retained earnings, substantially restricted 7,147,931 6,767,215
Treasury stock, 50,000 shares, at cost (986,388)
Stock Option Trust, 22,725 shares, at cost (455,344)
Net unrealized appreciation on securities available-for-sale 463,732 514,955
Unearned Employee Stock Ownership Plan (ESOP) shares (693,333) (746,668)
------------ ------------
Total stockholders' equity 15,098,929 16,128,910
------------ ------------
Total liabilities and stockholders' equity $60,002,460 $56,549,278
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
16
<PAGE>
CKF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
-----------------------
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
INTEREST INCOME:
Interest on loans $4,072,208 $3,704,999 $3,110,850
Interest and dividends on investments 165,018 148,264 108,977
Other interest income 91,251 234,554 197,047
---------- ---------- ----------
Total interest income 4,328,477 4,087,817 3,416,874
---------- ---------- ----------
INTEREST EXPENSE:
Interest on deposits 2,134,724 1,909,031 1,800,717
Other interest 18,577 20,795 31,596
---------- ---------- ----------
Total interest expense 2,153,301 1,929,826 1,832,313
---------- ---------- ----------
Net interest income 2,175,176 2,157,991 1,584,561
Provision for loan losses 7,000 24,000
---------- ----------
Net interest income after provision for loan losses 2,168,176 2,133,991 1,584,561
---------- ---------- ----------
NON-INTEREST INCOME:
Loan and other service fees 50,032 41,364 33,614
Gain on sale of investments 281,616
Other, net 2,627 1,907 2,599
---------- ---------- ----------
Total non-interest income 334,275 43,271 36,213
---------- ---------- ----------
NON-INTEREST EXPENSE:
Compensation and benefits 538,634 543,510 436,300
Federal insurance premium 373,439 97,939 99,857
Legal 20,945 73,903 3,578
State franchise tax 49,094 50,240 48,064
Occupancy expense, net 44,792 41,406 31,296
Data processing 41,832 42,615 41,952
Loss on foreclosed real estate 36,000
Other operating expenses 228,871 183,729 138,897
---------- ---------- ----------
Total non-interest expense 1,333,607 1,033,342 799,944
---------- ---------- ----------
Income before income tax expense 1,168,844 1,143,920 820,830
Provision for income taxes 408,586 398,352 279,093
---------- ---------- ----------
Net income $ 760,258 $ 745,568 $ 541,737
========== ========== ==========
Earnings per share $ .83 $ .81 $ N/A
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
17
<PAGE>
CKF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
-----------------------
<TABLE>
<CAPTION> Net Unrealized
Appreciation On
Additional Securities Stock Unearned Total
Common Paid-in Retained Available Treasury Option ESOP Stockholders'
Stock Capital Earnings For-Sale Stock Trust Shares Equity
------- ------------ ----------- --------------- ---------- ---------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 $ $ $5,663,910 $ $ $ $ $ 5,663,910
Issuance of common stock 10,000 9,555,708 (800,000) 8,765,708
Net income 541,737 541,737
Cumulative effect of change
in accounting principle, net
unrealized gain on securities
available-for-sale 297,379 297,379
Change in net unrealized gain
on securities available-for-sale 4,045 4,045
------- ------------ ----------- --------------- -------- --------- --------- --------------
Balance, December 31, 1994 10,000 9,555,708 6,205,647 301,424 (800,000) 15,272,779
Net income 745,568 745,568
Change in net unrealized gain
on securities available-for-sale 213,531 213,531
Dividend declared (184,000) (184,000)
ESOP shares earned in 1995 27,700 53,332 81,032
------- ------------ ----------- --------------- -------- ---------- --------- --------------
Balance, December 31, 1995 10,000 9,583,408 6,767,215 514,955 (746,668) 16,128,910
Net income 760,258 760,258
Change in net unrealized gain
on securities available-for-sale (51,223) (51,223)
Dividend declared (379,542) (379,542)
ESOP shares earned in 1996 51,448 53,335 104,783
Purchase of common stock,
76,125 shares (1,049,588) (459,294) (1,508,882)
Shares issued upon exercise
of options (22,525) 63,200 3,950 44,625
------- ------------ ----------- --------------- ---------- ---------- ---------- -------------
Balance, December 31, 1996 $10,000 $9,612,331 $7,147,931 $ 463,732 $(986,388)$(455,344) $(693,333) $15,098,929
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
18
<PAGE>
CKF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
----------------------
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 760,258 $ 745,568 $ 541,737
Adjustments to reconcile net income to net
cash provided by operating activities:
Loss on termination of retirement plan 123,305
ESOP benefit expense 104,783 81,032
Provision for loan losses 7,000 24,000
Provisions for losses on foreclosed real estate 36,000
Amortization of loan fees (7,593) (9,172) (4,392)
Realized gain on sale of investment (281,616)
Provision for depreciation 27,457 23,837 21,017
FHLB stock dividend (32,100) (29,100) (23,000)
Deferred income taxes (12,856) 160,539 4,428
Amortization of investment premium
and (discount) 9,156 3,021 1,621
Changes in:
Interest receivable 61,909 (118,350) (39,751)
Other liabilities 65,315 41,365 7,801
Prepaid expense (378) (1,094) (14,158)
Interest payable 1,678 1,034 1,472
----------- ----------- -----------
Net cash provided by operating activities 739,013 922,680 620,080
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loan originations and principal payment on loans, net (3,473,994) (4,474,324) (3,208,304)
Purchase of loans (332,000) (36,000) (185,250)
Proceeds from maturities of securities held-to-maturity 250,000 251,310
Purchase of securities held-to-maturity (1,017,807) (256,651) (1,010,196)
Purchase of certificates of deposit (2,400,000)
Proceeds from maturities of certificates of deposit 1,000,000 1,400,000
Proceeds from sale of securities available-for-sale 294,167
Principle repayment on mortgage back securities 51.969
Purchase of fixed assets (7,127) (109,237) (16,231)
----------- ----------- -----------
Net cash provided (used) for investing activities (3,234,792) (5,624,902) (4,419,981)
----------- ----------- -----------
</TABLE>
(Continued)
The accompanying notes are an integral part of the
consolidated financial statements.
19
<PAGE>
CKF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits,
NOW accounts and savings accounts 366,519 (352,046) (1,058,082)
Net increase (decrease) in certificate of deposits 3,109,995 (579,055) (2,253,706)
Proceeds from FHLB advance 1,000,000
Payments on FHLB advances (35,862) (34,961) (168,420)
Net increase (decrease) in custodial accounts 14,761 4,183
Proceeds from issuance of common stock 9,565,708
ESOP loan (800,000)
Purchase of common stock (1,508,882)
Payment of dividends (379,542) (184,000)
Exercise of stock options 44,625
----------- ----------- -----------
Net cash provided (used) by financing activities 2,611,614 (1,145,879) 5,285,500
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents 115,835 (5,848,101) 1,485,599
Cash and cash equivalents, beginning of period 2,103,757 7,951,858 6,466,259
----------- ----------- -----------
Cash and cash equivalents, end of period $ 2,219,592 $ 2,103,757 $ 7,951,858
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for income taxes $ 421,445 $ 237,810 $ 300,385
Cash paid for interest $2,151,623 $1,929,289 $ 1,830,842
SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES:
Transfer of real estate to loans $ 32,810
ESOP shares earned $ 104,783 $ 81,032
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
20
<PAGE>
CKF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
On December 29, 1994, Central Kentucky Federal Savings and Loan Association
completed a conversion from a federal mutual savings and loan association to a
federal stock savings bank, Central Kentucky Federal Savings Bank (Bank). All
stock of the Bank was issued to CKF Bancorp, Inc. (Company), a holding company
formed in connection with the conversion. Simultaneously, the Company completed
an offering and sale of its common stock.
CKF Bancorp, Inc. is a corporation organized under the laws of Delaware. The
Company is a unitary savings and loan holding company which, under existing
laws, generally is not restricted in the types of business activities in which
it may engage provided that the Bank retains a specified amount of its assets in
housing-related investments. The Company's operations consist primarily of
those of the Bank.
The Bank is a federally chartered stock savings bank located in Danville,
Kentucky. The Bank is a member of the Federal Home Loan Bank System. As a
member of this system, the Bank is required to maintain an investment in capital
stock of the Federal Home Loan Bank of Cincinnati (FHLB) in an amount equal to
at least the greater of 1% of its outstanding loan and mortgage-backed
securities or .3% of total assets as of December 31 of each year. The Bank's
operations consist of attracting deposits from the general public and using such
deposits to originate loans primarily in the Bank's market area. The bank's
profitability is significantly dependent on net interest income which is the
difference between income generated from interest-earning assets (i.e. loans and
investments) and the interest expense paid on interest-bearing liabilities (i.e.
customer deposits and borrowed funds). Net interest income is affected by the
relative amount of interest-earning assets and interest-bearing liabilities and
the interest received or paid by the Bank can be significantly influenced by a
number of environmental factors, such as governmental monetary policy, that are
outside of management's control.
The consolidated financial information presented herein has been prepared in
accordance with generally accepted accounting principles (GAAP) and general
accounting practices within the financial services industry. In preparing the
consolidated financial statements in accordance with GAAP, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and revenues and expenses during the
reporting period. Actual results could differ from such estimates.
The following is a summary of the Company's significant accounting policies
which have been consistently applied in the preparation of the accompanying
consolidated financial statements.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the
accounts of CKF Bancorp, Inc. and its subsidiary, Central Kentucky Federal
Savings Bank. All significant intercompany balances and transactions have been
eliminated.
CASH AND CASH EQUIVALENTS. For purposes of reporting consolidated cash flows,
the Bank considers cash, balances with banks, and interest bearing deposits in
other financial institutions with original
(Continued)
21
<PAGE>
CKF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------
maturities of three months or less to be cash equivalents. Cash and cash
equivalents include approximately $93,000 on deposit with other banks which is
not covered by FDIC insurance.
INVESTMENT SECURITIES. On January 1, 1994, the Bank adopted Statement of
Financial Accounting Standards (SFAS) No. 115 "Accounting for Certain
Investments in Debt and Equity Securities." SFAS No. 115 requires that all
investments in debt securities and all investments in equity securities that
have readily determinable fair values be classified into three categories.
Securities that management has positive intent and ability to hold until
maturity will be classified as held to maturity. Securities that are bought and
held specifically for the purpose of selling them in the near term will be
classified as trading securities. All other securities will be classified as
available for sale. Securities classified as trading and available for sale
will be carried at market value. Unrealized holding gains and losses for trading
securities will be included in current income. Unrealized holding gains and
losses for available for sale securities will be reported as a net amount in a
separate component of stockholders' equity until realized. Investments
classified as held to maturity will be carried at amortized cost. The cumulative
effect of this change, as of January 1, 1994, was to increase stockholder's
equity by $297,379, after a provision for deferred taxes of $153,196.
Investment securities that management has the intent and ability to hold to
maturity are classified as held to maturity, and carried at cost, adjusted for
amortization of premium or accretion of discount over the term of the security,
using the level yield method. Included in this category of investments is FHLB
stock which is a restricted stock carried at cost. Investment securities
available for sale are carried at market value. Adjustments from amortized cost
to market value are recorded in stockholder's equity net of deferred income tax
until realized. The identified security method is used to determine gains or
losses on sales of investment securities.
Regulations require the Bank to maintain an amount of cash and U. S. government
and other approved securities equal to a prescribed percentage (5% at December
31, 1996 and 1995) of deposit accounts (net of loans on deposits) plus short-
term borrowings. At December 31, 1996 and 1995, the Bank was in compliance with
these requirements.
OFFICE PROPERTY AND EQUIPMENT. Office properties and equipment are stated at
cost less accumulated depreciation computed principally by the straight-line
method. The estimated useful lives used to compute depreciation are; office
buildings and improvements, ten to fifty years; and furniture and equipment,
five to ten years. The gain or loss on the sale of property and equipment is
recorded in the year of disposition.
LOAN FEES. Loan fees are accounted for in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 91. SFAS No. 91 requires loan
origination fees and certain related direct loan origination costs be offset and
the resulting net amount be deferred and amortized over the contractual life of
the related loans as an adjustment to the yield of such loans.
FORECLOSED REAL ESTATE. Real estate properties acquired through, or in lieu of,
loan foreclosures are to be sold and are initially recorded at fair value less
estimated selling expenses at the date of foreclosure establishing a new cost
basis. After foreclosure, valuations are periodically performed
(Continued)
22
<PAGE>
CKF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
by management, and the real estate is carried at the lower of the carrying
amount or fair value less cost to sell. Revenue and expenses from operations and
changes in the valuation allowance are included in loss on foreclosed real
estate.
LOANS. Loans receivable are stated at unpaid principal balances, less the
allowance for loan losses and net deferred loan fees. The Bank has adequate
liquidity and capital, and it is management's intention to hold such assets to
maturity.
An allowance for loan losses is provided to reduce the recorded balances of
loans to estimated net realizable value. The allowance for loan losses is
increased by charges to income and decreased by charge-offs (net of recoveries).
Managements's periodic evaluation of the adequacy of the allowance is based on
the Bank's past loan loss experience, known and inherent risks in the portfolio,
adverse situations that may affect the borrower's ability to pay, estimated
value of any underlying collateral, and current economic conditions. While
management uses the best information available, future adjustments may be
necessary if conditions differ substantially from assumptions used in
management's evaluation.
Effective January 1, 1995, the Company implemented SFAS No. 114 "Accounting by
Creditors for Impairment of a Loan," as amended by SFAS No. 118. A loan is
defined under SFAS No. 114 as impaired when, based on current information and
events, it is probable that a creditor will be unable to collect all amounts due
according to the contractual terms of the loan agreement. In applying the
provisions of SFAS No. 114, the Bank considers its investment in one-to-four
family residential loans and consumer installment loans to be homogenous and
therefore excluded from separate identification for evaluation of impairment.
With respect to the Bank's investment in impaired multi-family and
nonresidential loans, such loans are collateral dependent, and as a result, are
carried as a practical expedient at the lower of cost or fair value.
Collateral dependent loans when put in non-accrual status are considered to
constitute more than a minimum delay in repayment and are evaluated for
impairment under SFAS No. 114 at that time.
INCOME RECOGNITION ON NONACCRUAL AND IMPAIRED LOANS. Loans are generally
classified as nonaccrual (impaired loans) if they are past due as to maturity or
payment of principal and interest for a period of more than 90 days, unless such
loans are well secured and in the process of collection. Loans that are on a
current payment status or past due less than 90 days may also be classified as
nonaccrual if repayment in full of principal and/or interest is in doubt.
Loans may be returned to accrual status when all principal and interest amounts
due (including arrearages) are reasonably assured of repayment within an
acceptable period of time, and there is a sustained period of repayment
performance by the borrower, in accordance with the contractual terms of
interest and principal.
While a loan is in nonaccrual status, interest income is generally recognized on
a cash basis.
DEPOSITS. The Bank's deposits are insured by the Savings Association Insurance
Fund ("SAIF"), which is administered by the Federal Deposit Insurance
Corporation ("FDIC"). On September 30,
(Continued)
23
<PAGE>
CKF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------------
1996, the President signed legislation, which among other things, recapitalized
the Savings Association Insurance Fund through a special assessment on savings
financial institutions, such as the Bank. The special assessment amounted to
$274,421 for the Bank and is included in the Federal and other insurance premium
expense for the year ended December 31, 1996. As a result of the
recapitalization of the SAIF, the Bank's assessment rate for insurance on
deposits, beginning in 1997, is expected to decrease from .23% on customer
deposit balances under $100,000 to approximately .4% on customer deposit
balances under $100,000.
INCOME TAXES. The Company files a consolidated federal income tax return with
its subsidiary. The current income tax benefit or liability is allocated to each
corporation included in the consolidated return based on their tax benefit or
liability computed on a separate return basis. The provision for federal and
state taxes on income is based on earnings reported in the financial statements.
Timing differences exist between income and expense recognition for financial
reporting and income tax purposes. Deferred income taxes have been provided for
these temporary differences.
FEDERAL HOME LOAN MORTGAGE CORPORATION STOCK. On December 6, 1984, the Federal
Home Loan Mortgage Corporation created a new class of participating preferred
stock. The preferred stock was distributed to the twelve district banks of the
Federal Home Loan Banking System for subsequent distribution to their member
institutions. The Bank received 817 shares of the stock and recorded it at its
fair value of $40 per share as of December 31, 1984. The fair value of the
stock recognized as of December 31, 1984 became its cost. The stock has been
subsequently classified as available for sale and carried at market value.
ESOP AND STOCK OPTION AND COMPENSATION PLANS. Shares of common stock issued to
the Company's employee stock ownership plan (ESOP) are initially recorded as
unearned ESOP shares in stockholders' equity at the fair value of the shares at
the date of issuance to the plan. As shares are committed to be released as
compensation to employees, the Company reduces the carrying value of the
unearned shares and records compensation expense equal to the current value of
the shares.
Compensation cost of stock option plan awards is measured by the difference
between the fair value of the Company's common stock at the date of the award
and the price to be paid by the employee.
Shares of common stock awarded under the Company's stock compensation plan are
recorded initially as unearned compensation in stockholders' equity at the fair
value of the shares at the date of the award. The total compensation cost is
recognized over the vesting period.
EARNINGS PER SHARE. Earnings per share for 1996 and 1995 are computed on the
basis of the weighted average number of shares of common stock and common stock
equivalents outstanding of 917,807 and 926,747 shares, respectively. Shares of
common stock held by the ESOP are considered outstanding when they are committed
to be released. Earnings per share is not presented for 1994 because the Company
did not issue stock until December 29, 1994.
(Continued)
24
<PAGE>
CKF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------
RECLASSIFICATIONS. Certain presentations of accounts previously reported
have been reclassified in these consolidated financial statements. Such
reclassification had no effect on net income or retained income as
previously reported.
2. INVESTMENT SECURITIES
Investment securities held by the Company at December 31, 1996 and 1995 are
summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Securities available for-sale:
Federal Home Loan Mortgage
capital stock-6,600 shares $ 25,850 $ 702,625 $ $ 728,475
========== ========== ========== ===========
Securities held-to-maturity:
U. S. Treasury securities and
obligations of U. S. Government
corporations and agencies $1,753,321 $ 2,494 $ $ 1,755,815
Mortgage backed securities 464,902 6,012 458,890
Federal Home Loan Bank of
Cincinnati capital stock - 4,815
shares 481,500 481,500
Intrieve Incorporated capital
stock - 10 shares 15,000 15,000
---------- ---------- ---------- -----------
$2,714,723 $ 2,494 $ 6,012 $ 2,711,205
========== ========== ========== ===========
</TABLE>
(Continued)
25
<PAGE>
CKF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED REALIZED MARKET
COST GAINS LOSSES VALUE
---------- ---------- -------- ---------
<S> <C> <C> <C> <C>
Securities available for-sale:
Federal Home Loan Mortgage
capital stock-9,804 shares $ 38,399 $780,235 $ $ 818,634
========== ======== ========== ==========
Securities held-to-maturity:
U. S. Treasury securities and
obligations of U. S. Government
corporations and agencies $1,511,541 $ 22,050 $ 233 $1,533,358
Federal Home Loan Bank of
Cincinnati capital stock - 4,494
shares 449,400 449,400
Intrieve Incorporated capital
stock - 10 shares 15,000 15,000
---------- -------- ---------- ----------
$1,975,941 $ 22,050 $ 233 $1,997,758
========== ======== ========== ==========
</TABLE>
The amortized cost and estimated market value of debt securities at December 31,
1996, by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET
COST VALUE
---------- ----------
<S> <C> <C>
December 31, 1996:
Due in one year or less $ 500,466 $ 501,795
Due after one year through five years 1,252,855 1,254,020
---------- ----------
$1,753,321 $1,755,815
========== ==========
</TABLE>
Investment securities with a carrying value of approximately $500,000 at
December 31, 1996 and 1995, respectively, were pledged as collateral for
certain municipal deposits.
(Continued)
26
<PAGE>
CKF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------
For the year ended December 31, 1996, the Bank received $294,167 from the
sell of an equity security, which was classified as available for sale.
There were no sales of debt or equity securities for the years ended
December 31, 1995 and 1994.
At December 31, 1996 and 1995 the unrealized appreciation on investment
securities available-for-sale in the amount of $702,625 and $780,235 net of
the deferred tax liability of $238,893 and $265,280, respectively, is
reflected as a separate component of stockholders' equity.
Accrued interest receivable includes $8,555 and $66,520 as of December 31,
1996 and 1995, respectively, related to investment securities and term
deposits.
3. LOANS RECEIVABLE, NET
The Bank's loan portfolio consists principally of long-term conventional
loans collateralized by first mortgages on single-family residences.
Loans receivable, net at December 31, 1996 and 1995 consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1995
----------- -----------
<S> <C> <C>
Real estate mortgage secured by one-to-four family
residential property $44,041,525 $40,649,332
Real estate mortgage secured by multi-family
residential property 1,255,191 1,323,390
Real estate mortgage secured by other properties 6,509,812 6,270,124
Consumer loans:
Loans to depositors, secured by savings 416,443 423,946
Other, principally unsecured 1,913,295 1,814,897
----------- -----------
54,136,266 50,481,689
Less:
Undisbursed portion of mortgage loans 784,066 690,661
Allowance for loan losses 107,000 100,000
Net deferred loan origination fees 63,691 52,765
----------- -----------
$53,181,509 $49,638,263
=========== ===========
</TABLE>
Accrued interest receivable includes $369,850 and $373,794 at December 31, 1996
and 1995, respectively, related to loans receivable.
(Continued)
27
<PAGE>
CKF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------
The following is a reconciliation of the allowance for loan losses:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
--------- --------- --------
<S> <C> <C> <C>
Balance, beginning of period $100,000 $ 76,000 $76,000
Additions charged to operations 7,000 24,000
Charge-offs
Recoveries --------- --------- --------
Balance, end of period $107,000 $100,000 $76,000
========= ========= ========
</TABLE>
The following is a summary of non-performing loans:
<TABLE>
<CAPTION>
AMOUNT (IN THOUSANDS)
-----------------------------------
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
----------- ----------- ---------
<S> <C> <C> <C>
Loans past due 90 days or more $ 359 $ 489 $ 631
Non-accrual loans 87 58 -0-
----- ----- -----
Total nonperforming loan balances $ 446 $ 547 $ 631
===== ===== =====
Nonperforming loans as a percentage of loans .82% 1.10% 1.40%
===== ===== =====
</TABLE>
During the year ended December 31, 1996, the Bank restructured one loan as
defined under a "Troubled Debt Restructuring," which has a recorded
investment amount of $270,465 at December 31, 1996.
The Bank identified impaired loans as defined by SFAS No. 114 in the amount
of $270,465 at December 31, 1996 for which no allowance for loan losses has
been provided. There were no impaired loans at December 31, 1995. The
average recorded investment in impaired loans was $285,056 and $58,887
during the years ended December 31, 1996 and 1995, respectively. Interest
income on impaired loans of $5,480 and $4,350 was recognized for cash
payments received in 1996 and 1995, respectively.
(Continued)
28
<PAGE>
CFK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------
Loans to executive officers and directors, including loans to affiliated
companies of which executive officers and directors are principal owners,
and loans to members of the immediate family of such persons at December 31,
1996 and 1995, were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Balance at beginning of period $280,691 $249,325
New loans 22,722 51,331
Repayments (48,712) (19,965)
-------- --------
Balance at end of period $254,701 $280,691
======== ========
</TABLE>
These loans were incurred in the ordinary course of business on
substantially the same terms as those prevailing at the time for comparable
transactions with other persons and do not involve more than normal risk of
collectibility or present other unfavorable features.
4. FORECLOSED REAL ESTATE
Activity in the allowance for losses on foreclosed real estate for the year
ended December 31, 1996 is as follows:
<TABLE>
<CAPTION>
<S> <C>
Balance at January 1, 1996 $ -0-
Provision charged to income 36,000
Charge-offs, net of recoveries -
-------
Balance at December 31, 1996 $36,000
=======
</TABLE>
There was no allowance for losses on foreclosed real estate for the years
ended December 31, 1995 and 1994.
5. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK
The Bank is party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include mortgage commitments outstanding which
amounted to approximately $275,500 and $503,700 as of December 31, 1996 and
1995, respectively. In addition, the Bank had approximately $854,790 and
$575,795 of unused home equity lines of credit to customers at December 31,
1996 and 1995, respectively. These instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the consolidated balance sheets.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for loan commitments and home
equity lines of credit, is represented by the
(Continued)
29
<PAGE>
CKF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------
contractual amount of those instruments. The Bank uses the same credit
policies in making commitments and conditional obligations as it does for
on-balance sheet instruments. Since many of the loan commitments may
expire without being drawn upon, the total commitment amount does not
necessarily represent future requirements. The Bank evaluates each
customer's credit worthiness on a case-by-case basis. The amount of
collateral obtained upon extension of credit is based on management's
credit evaluation of the counterparty. Collateral held varies, but
primarily includes residential real estate.
The Bank has no significant concentrations of credit risk with any
individual counterparty to originate loans. The Bank lending is
concentrated in residential real estate mortgages in the Central Kentucky
area, within a 45 mile radius of Danville, Kentucky. A substantial portion
of its debtors' ability to honor their contract is dependent on the economy
of this area.
6. OFFICE PROPERTY AND EQUIPMENT
Office property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1995
-------- --------
<S> <C> <C>
Land, at cost $165,157 $165,157
Building, at cost 524,233 524,233
Furniture, fixtures and equipment 264,952 258,163
-------- --------
954,342 947,553
Less accumulated depreciation 413,704 386,585
-------- --------
$540,638 $560,968
======== ========
</TABLE>
(Continued)
30
<PAGE>
7. DEPOSITS
<TABLE>
<CAPTION>
Deposit accounts are summarized as follows:
DECEMBER 31,
------------------------
1996 1995
----------- -----------
<S> <C> <C>
Demand deposit accounts $ 229,086 $ 110,400
Passbook accounts with a weighted average rate of 3.00%,
at December 31, 1996 and 1995 3,539,268 3,700,005
NOW and MMDA deposits with a weighted average rate of
3.69% and 3.52% at December 31, 1996 and 1995,
respectively 5,167,136 4,758,567
----------- -----------
8,935,490 8,568,972
Certificate of deposits with a weighted average interest rate of
5.60% and 5.67% at December 31, 1996 and 1995,
respectively 33,896,864 30,786,869
----------- -----------
Total deposits $42,832,354 $39,355,841
=========== ===========
Jumbo certificates of deposit (minimum denomination
of $100,000) $ 8,865,282 $ 6,705,413
=========== ===========
Certificates of deposit by maturity at December 31, 1996 and 1995 are as follows:
DECEMBER 31,
------------------------
1996 1995
----------- -----------
(IN THOUSANDS)
Within 1 year $ 21,057 $ 17,899
1-2 years 6,711 5,709
2-3 years 3,378 3,752
Maturing in years thereafter 2,751 3,427
----------- -----------
$33,897 $ 30,787
=========== ===========
</TABLE>
(Continued)
31
<PAGE>
Certificates of deposit by maturity and interest rate category at December
31, 1996 are as follows:
<TABLE>
<CAPTION>
AMOUNT DUE
(THOUSANDS)
------------------------------------------------------------------
WITHIN AFTER
ONE YEAR 1-2 YEARS 2-3 YEARS 3 YEARS TOTAL
----------- ------------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
4.01 - 6.00% $ 19,143 $ 5,393 $ 2,530 $ 1,603 $ 28,669
6.01 - 8.00% 1,914 1,318 848 1,148 5,228
----------- ------------- ------------ ---------- ------------
$ 21,057 $ 6,711 $ 3,378 $ 2,751 $ 33,897
=========== ============= ============ ========== ============
</TABLE>
Interest expense on deposits for the periods indicated are as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------
1996 1995 1994
---------- ---------- -----------
<S> <C> <C> <C>
Money market and NOW accounts $198,329 $ 141,828 $ 146,590
Savings accounts 111,743 121,264 165,502
Certificates 1,824,652 1,645,939 1,488,625
---------- ---------- -----------
$2,134,724 $1,909,031 $1,800,717
========== ========== ===========
</TABLE>
The Bank maintains clearing arrangements for its NOW and MMDA accounts with
the Federal Home Loan Bank of Cincinnati. The Bank is required to maintain
adequate collected funds in its Demand Account to cover average daily
clearings. The Bank was in compliance with this requirement at December 31,
1996 and 1995.
8. ADVANCE FROM FEDERAL HOME LOAN BANK
The Bank has two notes payable to the Federal Home Loan Bank of Cincinnati
with a total balance outstanding of $1,252,179 at December 31, 1996. One
note matures on July 1, 2002 and bears interest at 6.85% per annum on the
unpaid balance, which was $252,179 at December 31, 1996. The Bank makes
monthly payments of $4,539.99 which includes principal and interest. The
other note, with an unpaid balance of $1,000,000 matures on March 28, 1997
and has a floating interest rate. These borrowings are collateralized by
qualified real estate first mortgages and Federal Home Loan Bank stock held
by the Bank, which had a book value of $2,359,768 and $881,460 at December
31, 1996 and 1995, respectively.
32
<PAGE>
CFK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATMENTS
--------------------
A schedule of the principal balance due over the remaining term of the note
as of December 31, 1996 follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $1,038,396
1998 41,111
1999 44,017
2000 47,128
2001 50,460
2002 and thereafter 31,067
----------
$1,252,179
==========
</TABLE>
9. STOCKHOLDERS' EQUITY
REGULATORY CAPITAL. The Bank is subject to minimum regulatory capital
requirements promulgated by the Office of Thrift Supervision (OTS). Such
minimum capital standards generally require the maintenance of regulatory
capital sufficient to meet each of three tests, hereinafter described as the
tangible capital requirements, the core capital requirement and the risk-
based capital requirement. The tangible capital requirement provides for
minimum tangible capital (defined as stockholders' equity less all
intangible assets) equal to 1.5% of adjusted total assets. The core capital
requirement provides for minimum core capital (tangible capital plus certain
forms of supervisory goodwill and other qualifying intangible assets such as
capitalized mortgage servicing rights) equal to 3.0% of adjusted total
assets. A recent OTS proposal, if adopted in present form, would increase
the core capital requirement to a range of 4%-5% of adjusted total assets
for substantially all savings institutions. Management anticipates no
material change to the Bank's present excess regulatory capital position as
a result of this change in the regulatory capital requirement. The risk-
based capital requirement provides for the maintenance core capital plus
general loss allowance equal to 8.0% of risk-weighted assets. In computing
risk-weighted assets, the Savings Bank multiplies the value of each asset on
its statement of financial condition by a defined risk-weight factor, e.g.,
one-to-four family residential loans carry a risk-weighted factor of 50%.
(Continued)
33
<PAGE>
CFK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------
As of December 31, 1996, the Bank's regulatory capital exceeded all minimum
regulatory capital requirements as shown in the following table:
<TABLE>
<CAPTION>
REGULATORY CAPITAL
------------------------------------------------------------------
TANGIBLE CORE RISK-BASED
CAPITAL PERCENT CAPITAL PERCENT CAPITAL PERCENT
------------ -------- -------- -------- ---------- ----------
in thousands
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Capital under generally
accepted accounting
principles $12,431 % $12,431 % $12,431 %
Adjustments:
Net unrealized appreciation
on securities available-for-sale (464) (464) (464)
General valuation allowances 107
--------- -------- -------- -------- ---------- -----------
Regulatory capital computed 11,967 19.9 11,967 19.9 12,074 35.4
Minimum capital requirement 893 1.5 1,787 3.0 2,730 8.0
--------- -------- -------- -------- ---------- -----------
Regulatory capital-excess $11,074 18.4% $10,180 16.9% $ 9,344 27.4%
========= ======== ======== ======== ========== ===========
</TABLE>
RETAINED EARNINGS RESTRICTION. In September of 1996, legislation was passed by
Congress which repealed the special provisions for thrift institutions, such as
the Bank, which allowed qualifying bad debt deductions to be computed under the
percentage of taxable income method. Post 1987 tax bad debt reserves in excess
of allowable tax bad debt reserves under the current Internal Revenue Service
Code provisions must be recaptured into taxable income beginning in 1996. Tax
bad debt reserves accumulated prior to December 31, 1987 are not subject to
being taxed except in certain circumstances, such as if the Bank converted to an
institution that did not qualify as a bank for tax purposes. Accordingly,
retained earnings at December 31, 1996 includes approximately $1,471,000 of tax
bad debt reserves accumulated prior to December 31, 1987 for which no Federal
income tax has been provided.
LIQUIDATION ACCOUNT. Upon conversion to a capital stock savings bank, eligible
account holders who continued to maintain their deposit accounts in the Bank
were granted priority in the event of the future liquidation of the Bank through
the establishment of a special "Liquidation Account" in an amount equal to the
consolidated net worth of the Bank at June 30, 1994. The June 30, 1994
Liquidation Account balance of $6,337,924 is reduced annually in proportion to
decreases in the accounts of the eligible account holders. The Liquidation
Account does not restrict the use or application of net worth, except with
respect to the cash payment of dividends. The Bank may not declare or pay a
cash dividend on or repurchase any of its common stock if the effect would cause
its regulatory capital to be reduced below the amount required for the
liquidation account.
DIVIDEND RESTRICTIONS: The payment of cash dividends by the Bank on its Common
Stock is limited by regulations of the OTS. Interest on savings accounts will
be paid prior to payments of dividends on Common Stock. The Bank may not
declare or pay a cash dividend to the Company in excess of 100% of its net
income to date during the current calendar year plus the amount that would
reduce by one-half the Bank's capital ratio at the beginning of the year without
prior OTS
(Continued)
34
<PAGE>
approval. Additional limitation on dividends declared or paid, or repurchases
of the Bank stock are tied to the Bank's level of compliance with its regulatory
capital requirements.
10. INCOME TAXES
The provision for income taxes for the periods indicated consist of the
following:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
----------- --------- ---------
<S> <C> <C> <C>
Federal income tax expense:
Current $ 612,292 $347,234 $274,665
Deferred (203,706) 51,118 4,428
---------- -------- --------
$ 408,586 $398,352 $279,093
========== ======== ========
</TABLE>
Deferred income taxes result from temporary differences in the
recognition of income and expenses for tax and financial statement
purposes. The source of these temporary differences and the tax effect
of each are as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- --------- ---------
<S> <C> <C> <C>
FHLB stock $ 10,914 $ 9,894 $ 7,820
Directors retirement plan (18,448) (27,014) -
Prepaid pension costs - (36,587)
Allowance for loan losses (171,523) 22,678 23,673
Net accrued income (23,499) 44,051 10,531
Other, net (1,150) 1,509 (1,009)
--------- --------- ---------
$(203,706) $ 51,118 $ 4,428
========= ========= =========
</TABLE>
For the periods indicated, total income tax expense differed from the
amounts computed by applying the U. S. Federal income tax rate of 34
percent to income before income taxes as a result of the following:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- --------- ---------
<S> <C> <C> <C>
Expected income tax expense at federal tax rate $397,407 $388,933 $279,093
Other, net 11,179 9,419
---------- --------- ---------
Total income tax expense $408,586 $398,352 $279,093
========== ========= =========
Effective income tax rate 34.9% 34.8% 34.0%
========== ========= =========
</TABLE>
35
<PAGE>
CKF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------
Deferred tax assets and liabilities as of December 31, 1996 and 1995
consisted of the following:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Deferred tax assets:
Deferred loan fee income $ 21,655 $ 17,940
Directors retirement plan 45,463 27,014
Allowance for loan losses 48,353
Reserve for uncollected interest 1,911
--------
117,382 44,954
-------- --------
Deferred tax liabilities:
Net accrued interest income 127,981 151,480
FHLB stock 105,039 94,125
Allowance for loan losses 133,649
Other, net 14,955 5,298
-------- --------
247,975 384,552
-------- --------
Net deferred tax liability $130,593 $339,598
======== ========
</TABLE>
In addition to the net deferred tax liability of $130,593 as of December 31,
1996 included in the preceding table, the financial statements include a
deferred tax liability of $238,893 that was charged against the unrealized
gain on securities available-for-sale of $702,625. The net amount of
$463,732 is recorded as a separate component of stockholders' equity at
December 31, 1996.
For the years ended December 31, 1995 and 1994, the Bank was allowed a
special bad debt deduction limited generally to eight percent (8%) of
otherwise taxable income and subject to certain limitations based on
aggregate loans and savings account balances at the end of the year. If the
amounts qualifying as deductions under the Internal Revenue Code provision
were later used for purposes other than bad debt losses, they would be
subject to Federal income tax at the then current corporation rate.
In 1996, the Internal Revenue Service repealed this special provision for
thrift institutions, such as the Bank, for determining the allowable tax bad
debt reserves. Effective for tax years ending December 31, 1996 all thrift
institutions will be taxed as other banking institutions. Institutions under
$500 million in assets are allowed to use the reserve method of determining
their bad debt deduction based on their actual experience while larger
institutions (over $500 million) must use the specific charge off method in
determining their deduction. Tax bad debt reserves accumulated since
December 31, 1987 must be included in taxable income of the Bank prorated
over a six year period, beginning in the tax year ended December 31, 1996.
This change did not have a material impact on the Bank, as a deferred tax
liability was provided for these accumulated reserves. The accumulated tax
bad debt reserves as of December 31, 1987, which amounts to approximately
$1,471,000 is only subject to being taxed at a later date under certain
circumstances, such as the Bank converting to a type of institution that is
not considered a bank for tax purposes. These financial statements do not
include any deferred tax liability related to the accumulated tax bad debt
reserves as of December 31, 1987.
(Continued)
36
<PAGE>
CKF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------
11. EMPLOYEE BENEFITS
RETIREMENT SAVINGS PLAN. Effective January 1, 1994, the Bank became a
participant in the Financial Institutions Thrift Plan. The Plan allows
participating employees to make contributions by salary reduction pursuant
to Section 401(K) of the Internal Revenue Code for all employees who meet
certain requirements as to age and length of service. The Bank makes 25%
matching contributions to each participant's account up to 6% of the
participant's compensation. The Bank contributions to the Plan amounted to
$2,094 and $290 for the years ended December 31, 1996 and 1995,
respectively. Employees vest immediately in their contributions and 100% in
the Bank's contributions after completing 5 years of service.
DIRECTORS RETIREMENT PLAN. On July 5, 1995, the stockholders of the Company
approved the establishment of a Director Retirement Plan. The Director
Retirement Plan, which was effective January 1, 1994, covers each member of
the Company's and the Bank's Board of Directors who at any time serves as a
non-employee director. Under the Director Retirement Plan, each
participating director will receive on a monthly basis for ten years
following his or her retirement from the Board, an amount equal to the
product of his or her "Benefit Percentage," his or her "Vested Percentage"
and 75% of the amount of the monthly fee he or she received for service on
the Board during the calendar year preceding his or her retirement from the
Board. All benefits vest immediately in the case of retirement after age 70
with 15 years of service, upon death or disability, or upon a change in
control of the Company. The Director Retirement Plan is a non-qualified
benefit plan and will be funded by the general assets of the Company, and
the Company will recognize the expense of providing these benefits as they
become vested. The Company recognized an expense of $54,260 and $116,596,
in connection with this plan for the years ended December 31, 1996 and 1995,
respectively.
OPTION PLAN. On July 5, 1995, the stockholders of the Company approved the
establishment of the CKF Bancorp, Inc. 1995 Stock Option and Incentive Plan.
Under the Option Plan, the Company may grant either incentive or non-
qualified stock options to Directors and key employees for an aggregate of
100,000 shares of the Company's common stock, with an exercise price equal
to the fair market value of the stock at the date of the award. Upon
exercise of the options, the Company may issue stock out of authorized
shares or purchase the stock in the open market. The option to purchase
shares expires ten years after the date of the grant. Effective with the
approval of the Option Plan, options to purchase 89,000 shares of common
stock were awarded to key employees and directors with an exercise price of
$13.13 per share. The options vest, and thereby become exercisable, at the
rate of 20% per year beginning July 5, 1996. The Options become vested
immediately in the case of death or disability, or upon a change in the
control of the Company.
During the year ended December 31, 1996, the Company purchased 22,925 shares
of its common stock at a cost of $459,294, which is being held in trust for
the purpose of issuing stock in connection with the exercise of options
under this Plan. For the year ended December 31, 1996, 200 shares were
issued from the Trust upon exercise of stock options, leaving a balance of
22,725 shares of common stock in the Trust at December 31, 1996.
(Continued)
37
<PAGE>
CKF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------
A summary of option transactions for the years indicated are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1996 1995
--------------------- ------------------
OPTION NUMBER OPTION NUMBER
PRICE OF UNITS PRICE OF UNITS
--------- -------- ------ ----------
<S> <C> <C> <C> <C>
Balance outstanding at beginning of year $ 13.13 89,000
Granted 20.00 2,000 $13.13 89,000
Exercised 13.13 3,400
------- --------
Balance outstanding at end of year $13.13-$20.00 87,600 $13.13 89,000
======= ========
Shares exercisable 14,400 -0-
======= ========
Shares available for grant 9,000 11,000
======= ========
</TABLE>
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123 "Accounting for Stock-Based Compensation," which was effective for
fiscal years beginning after December 15, 1995. The new standard defines a
fair value method of accounting for stock options and similar equity
instruments. Under the fair value method, compensation cost is measured at
the grant date, based on the fair value of the award and is recognized over
the service period, which is usually the vesting period.
Companies are not required to adopt the fair value method of accounting for
employee stock-based transactions, and may continue to account for such
transactions under Accounting Principles Based (APB) Opinion No. 25
"Accounting for Stock Issued to Employees." Under this method the
compensation cost is measured by the difference between the fair value of
the Company's stock at the date of the award, and the exercise price to be
paid by the employee. If a company chooses to report stock based
compensation under APB 25, they must disclose the pro forma net income and
earnings per share as if the Company had applied the new method of
accounting. Accordingly, the following table shows the Company's net income
and earnings per share on a pro forma basis as if the compensation cost for
the stock options awarded were accounted for in accordance with SFAS No. 123
for the years ended December 31, 1996 and 1995.
<TABLE>
<CAPTION>
REPORTED PER CONSOLIDATED
FINANCIAL STATEMENTS PRO FORMA AMOUNT
------------------------- ------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income $760,258 $745,568 $664,336 $698,425
======== ======== ======== ========
Earnings per share $ 0.83 $ 0.81 $ 0.72 $ 0.75
======== ======== ======== ========
</TABLE>
EMPLOYEE RECOGNITION PLAN. On July 5, 1995, the stockholders of the Company
approved the establishment of the Employee Recognition Plan (ERP). The
objective of the ERP is to enable the Bank to attract and retain personnel
of experience and ability in key positions of responsibility. Those eligible
to receive benefits under the ERP will be such employees as selected by
members of
(Continued)
38
<PAGE>
CKF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
a committee appointed by the Company's Board of Directors. The ERP is a
non-qualified plan that is managed through a separate trust. The Bank will
contribute sufficient funds to the ERP Trust for the purchase of up to
40,000 shares of common stock.
Awards made to employees will vest 20% on each anniversary date of the
award. Shares will be held by the trustee and are voted by the ERP trustee
in the same proportion as the trustee of the Company's ESOP plan votes
shares held therein. Any assets of the trust are subject to the general
creditors of the Company. All shares awarded vest immediately in the case
of a participant's retirement after age 65, death or disability, or upon a
change in control of the Company. The Company intends to expense ERP awards
over the years during which the shares are payable, based on the fair market
value of the common stock at the date of the grant to the employee. As of
December 31, 1996, no awards had been made under the ERP.
EMPLOYEE STOCK OWNERSHIP PLAN. In connection with the stock conversion
December 29, 1994, the Company established an internally leveraged Employee
Stock Ownership Plan (the "ESOP") which covers substantially all full time
employees. The ESOP borrowed $800,000 from the Company and purchased 80,000
shares of common stock of the Company at the date of conversion. The loan is
to be repaid in annual installments over a 15 year period with interest,
which is based on the published prime rate (currently 8.25%) per the Wall
Street Journal plus 1%.
The Company makes annual contributions to ESOP equal to the ESOP's debt
service less dividends, if any, received by the ESOP and used for debt
service. Dividends received by the ESOP on shares held as collateral are to
be used to pay debt service; dividends on allocated shares may be credited
to participants' accounts or used for debt service. Dividends of $33,600
were used in fiscal year 1996 to pay ESOP debt service. The ESOP shares are
pledged as collateral on the debt. As the debt is repaid, shares are
released from collateral and allocated to active participants based on a
formula specified in the ESOP agreement.
ESOP compensation was $104,783 and $81,030 for the years ended December 31,
1996 and 1995, respectively. During 1996 and 1995, 5,333 shares were
released from collateral each year. At December 31, 1996, there were 69,333
unallocated ESOP shares having a fair value of $1,351,994.
DEFINED BENEFIT PLAN. The Bank maintained a noncontributory defined benefit
pension plan (Plan) during 1994, which covered all employees who met certain
age and length of service requirements. In August of 1994 the Board of
Directors approved the termination of this Plan effective October 31, 1994.
In connection with the termination of the Plan, the Plan was amended to
allocate any excess assets at the date of termination to the participants of
the Plan. The net pension cost recognized by the Bank for the year ended
December 31, 1994 was $107,610, which includes the settlement cost of
$123,305 realized upon termination of the Plan at October 31, 1994.
12. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
In December 1991, the FASB issued SFAS No. 107, "Disclosures About Fair
Value of Financial Instruments." This statement extends the existing fair
value disclosure practices for some instruments by requiring all entities
to disclose the fair value of financial instruments (as defined),
(Continued)
39
<PAGE>
CKF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------
both assets and liabilities recognized and not recognized in the statements
of financial condition, for which it is practicable to estimate fair value.
There are inherent limitations in determining fair value estimates, as they
relate only to specific data based on relevant information at that time.
As a significant percentage of the Bank's financial instruments do not have
an active trading market, fair value estimates are necessarily based on
future expected cash flows, credit losses, and other related factors. Such
estimates are accordingly, subjective in nature, judgmental and involve
imprecision. Future events will occur at levels different from that in the
assumptions, and such differences may significantly affect the estimates.
The statement excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate
fair value amounts presented do not represent the underlying value of the
Company.
Additionally, the tax impact of the unrealized gains or losses has not been
presented or included in the estimates of fair value.
The following methods and assumptions were used by the Company 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 short-term instruments 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. No active market exists for the Federal Home Loan Bank
capital stock. The carrying value is estimated to be fair value since if
the Bank withdraws membership in the Federal Home Loan Bank, the stock must
be redeemed for face value.
LOANS RECEIVABLE. The fair value of loans was estimated by discounting the
future cash flows using the current rates at which similar loans would be
made to borrowers with similar credit ratings and for the same remaining
maturities.
DEPOSITS. The fair value of savings deposits and certain money market
deposits is the amount payable on demand at the reporting date. The fair
value of fixed-maturity certificates of deposit is estimated using the
rates currently offered for deposits of similar remaining maturities.
LOAN COMMITMENTS AND UNUSED HOME EQUITY LINES OF CREDIT. The fair value of
loan commitments and unused home equity lines of credit is estimated by
taking into account the remaining terms of the agreements and the present
credit-worthiness of the counterparties.
(Continued)
40
<PAGE>
CKF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------
The estimated fair value of the Company's financial instruments at December
31, 1996 are as follows:
<TABLE>
<CAPTION>
1996
------------------------
CARRYING FAIR
AMOUNT VALUE
----------- -----------
<S> <C> <C>
ASSETS
Cash and interest bearing deposits $ 2,219,592 $ 2,219,592
Securities available-for-sale 728,475 728,475
Securities held-to-maturity 2,714,723 2,711,205
Loans receivable, net 53,181,509 53,198,599
LIABILITIES
Deposits 42,832,354 43,001,334
FHLB advances 1,252,179 1,251,196
UNRECOGNIZED FINANCIAL INSTRUMENTS
Loan commitments 275,500
Unused home equity lines of credit 854,790
</TABLE>
13. RELATED PARTY TRANSACTIONS
Certain directors of the Bank perform legal services on behalf of the Bank
and appraise selected real estate properties for which they receive fees
paid by the Bank. A substantial portion of these fees are passed on to
customers of the Bank in the origination of mortgage loans. Legal fees
paid amounted to $30,025, $25,939 and $19,699 for the years ended December
31, 1996, 1995 and 1994, respectively. Appraisal fees paid by the Bank
amounted to $37,095, $31,213 and $31,525 for these same periods. In
addition, the Bank leases office space to a Director. Rent income received
by the Bank amounted to $7,800, $7,200 and $7,200 for the years ended
December 31, 1996, 1995 and 1994, respectively.
14. SERVICE CORPORATION SUBSIDIARY
During 1978, the Bank formed a wholly owned subsidiary for the principal
purpose of acquiring stock in a data processing service center. The data
processing center is a nonprofit corporation owned by user savings and loan
associations and provides data processing services solely to its members.
The subsidiary had no significant operations for the years ended December
31, 1996, 1995 and 1994, respectively.
(Continued)
41
<PAGE>
CKF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------
Summary balance sheets for the Bank's wholly owned subsidiary, Central
Kentucky Savings and Loan Service Corporation, follow:
CENTRAL KENTUCKY SAVINGS AND LOAN SERVICE CORPORATION
BALANCE SHEETS
--------------------
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------
1996 1995
------- -------
<S> <C> <C>
ASSETS
Investment, at cost $15,000 $15,000
======= =======
STOCKHOLDER'S EQUITY
Common stock $15,000 $15,000
======= =======
</TABLE>
15. STOCK PURCHASE
On December 16, 1995, the Board of Directors of the Company authorized the
repurchase of up to 5% or 50,000 shares of the Company's common stock.
Subsequently, 50,000 shares of common stock were repurchased at a total
cost of $986,388. In addition, the Company acquired 3,200 shares of common
stock at a cost of $63,200, which were issued in connection with the
exercise of stock options.
On September 10,1996, the Board of Directors of the Company authorized the
repurchase of 5% of the then outstanding shares or 47,500 shares to be held
by the 1995 Stock Option Plan Trust. For the year ended December 31, 1996,
22,925 shares were repurchased at a total cost of $459,294, of which 200
shares at a cost of $3,950 were issued in connection with the exercise of
stock options.
(Continued)
42
<PAGE>
CKF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
16. CKF BANCORP, INC. FINANCIAL INFORMATION (PARENT COMPANY ONLY)
The parent company's principal assets are its investment in the Bank, a
loan to the ESOP Trust, and cash balances on deposit with the Bank. The
following condensed statements summarize the financial position, operating
results, and cash flows of CKF Bancorp, Inc. (Parent Company only).
CONDENSED STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS:
Cash and due from banks $ 1,917,434 $ 3,770,562
Investment in subsidiary 13,123,375 12,295,396
Other assets 59,295 62,952
----------- -----------
$15,100,104 $16,128,910
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities $ 1,175 $
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock 10,000 10,000
Additional paid-in capital 9,612,331 9,583,408
Retained earnings, restricted 7,147,931 6,767,215
Treasury stock, 50,000 shares, at cost (986,388)
Stock Option Trust, 22,725 shares, at cost (455,344)
Net unrealized appreciation on securities available-for-sale 463,732 514,955
Unearned ESOP shares (693,333) (746,668)
----------- -----------
Total stockholders' equity 15,098,929 16,128,910
----------- -----------
$15,100,104 $16,128,910
=========== ===========
</TABLE>
CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
1996 1995
-------- --------
<S> <C> <C>
INCOME:
Miscellaneous income $ 15 $
-------- --------
EXPENSE:
Franchise and license tax 32,619 8,611
Other operating expenses 23,512 19,681
-------- --------
56,131 28,292
-------- --------
Net loss before tax expense (benefit) (56,116) (28,292)
Income tax (expense) benefit (11,374) 9,622
-------- --------
Net loss before equity in undistributed net income of subsidiary (67,490) (18,670)
Equity in undistributed net income of subsidiary 827,748 764,238
-------- --------
Net income $760,258 $745,568
======== ========
</TABLE>
(Continued)
43
<PAGE>
CKF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 760,258 $ 745,568
Adjustments to reconcile net income to cash provide by
operating activities:
Equity in undistributed net income of subsidiary (827,748) (764,238)
Change in other receivables 56,986 (6,931)
Change in other liabilities 1,175 (5,882)
----------- -----------
Net cash used by operating activities (9,329) (31,483)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITY:
Net cash used by investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (379,542) (184,000)
Purchase of common stock (1,508,882)
Exercise of stock options 44,625
----------- -----------
Net cash used By financing activities (1,843,799) (184,000)
----------- -----------
Net decrease in cash and cash equivalents (1,853,128) (215,483)
Cash and cash equivalents at beginning of period 3,770,562 3,986,045
----------- -----------
Cash and cash equivalents at end of period $ 1,917,434 $3,770,562
=========== ===========
</TABLE>
44
<PAGE>
CORPORATE INFORMATION
- --------------------------------------------------------------------------------
BOARD OF DIRECTORS
<TABLE>
<CAPTION>
<S> <C> <C>
W. IRVINE FOX, JR. J.T. GOGGANS WARREN O. NASH
Chairman of the Board General Contractor Veterinarian
Real Estate Developer/Partner
Charleston Green Townhouses
JOHN H. STIGALL W. BANKS HUDSON, III THOMAS R. POLAND
President and Chief Executive Attorney-at-Law Vice President and Secretary
Officer of the Bank and the Company of the Bank and the Company
JACK L. BOSLEY, JR. GUY P. RICHARDSON*
Farm Partner Owner of Danville
Viewpoint Farm *Director Emeritus Piggly-Wiggly Supermarket
</TABLE>
- --------------------------------------------------------------------------------
EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
<S> <C> <C>
JOHN H. STIGALL ANN L. HOOKS THOMAS R. POLAND
President and Chief Executive Vice President and Treasurer Vice President and Secretary
Officer of the Bank and the of of
Company the Bank and the Company the Bank and the Company
</TABLE>
- --------------------------------------------------------------------------------
OFFICE LOCATION
340 West Main Street
Danville, Kentucky 40422
- --------------------------------------------------------------------------------
GENERAL INFORMATION
<TABLE>
<CAPTION>
<S> <C> <C>
INDEPENDENT ACCOUNTANTS ANNUAL MEETING ANNUAL REPORT ON FORM 10-K
Miller, Mayer, Sullivan & Stevens, LLP The 1997 Annual Meeting of A COPY OF THE COMPANY'S 1996
2365 Harrodsburg Road Stockholders will be held on ANNUAL REPORT ON FORM 10-K
Lexington, Kentucky 40504-3399 April 15 1997 at 5:00 p.m. at WILL BE FURNISHED WITHOUT CHARGE
Central Kentucky Federal TO STOCKHOLDERS AS OF THE RECORD
Savings Bank, 340 West Main DATE FOR THE 1997 ANNUAL MEETING
Street, Danville, Kentucky UPON WRITTEN REQUEST TO JOHN H.
STIGALL, CKF BANCORP, INC., P.O.
BOX 400, 340 WEST MAIN STREET,
DANVILLE, KENTUCKY 40423
GENERAL COUNSEL TRANSFER AGENT
W. Banks Hudson, III Illinois Stock Transfer Company
Attorney at Law 223 West Jackson Boulevard
102 S. Fourth Street Suite 1210
Danville, Kentucky 40422 Chicago, Illinois 60606
SPECIAL COUNSEL
Housley Kantarian & Bronstein, P.C.
1220 19th Street, N.W., Suite 700
Washington, DC 20036
</TABLE>
45
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Parent
- ------
CKF Bancorp, Inc.
<TABLE>
<CAPTION>
State or Other
Jurisdiction of Percentage
Subsidiaries (1) Incorporation Ownership
- --------------- ------------- ---------
<S> <C> <C>
Central Kentucky Federal Savings Bank United States 100%
Subsidiary of Central Kentucky Federal Savings Bank (1)
- -------------------------------------------------------
Central Kentucky Savings and Loan Service Corporation Kentucky 100%
</TABLE>
- --------------------
(1) The assets, liabilities, and operations of the subsidiaries are included in
the consolidated financial statements contained in Item 8 herein.
<PAGE>
MILLER, MAYER, SULLIVAN & STEVENS LLP
CERTIFIED PUBLIC ACCOUNTANTS
"INNOVATORS OF SOLUTION TECHNOLOGY"
INDEPENDENT AUDITOR'S CONSENT
Board of Directors
CKF Bancorp, Inc.
We consent to incorporation by reference in the registration statement
(No. 33-83972) on Form S-8 of CKF Bancorp, Inc. of our report dated January 24,
1997, relating to the consolidated balance sheets of CKF Bancorp, Inc. and
subsidiary as of December 31, 1996 and 1995, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the years
in the three-year period ended December 31, 1996, which report is incorporated
by reference in the December 31, 1996 annual report on Form 10-K of CKF Bancorp,
Inc.
/s/ Miller, Mayer, Sullivan & Stevens
Lexington, Kentucky
January 24, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 564
<INT-BEARING-DEPOSITS> 1,656
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 728
<INVESTMENTS-CARRYING> 2,715
<INVESTMENTS-MARKET> 2,711
<LOANS> 53,289
<ALLOWANCE> 107
<TOTAL-ASSETS> 60,002
<DEPOSITS> 42,832
<SHORT-TERM> 1,000
<LIABILITIES-OTHER> 819
<LONG-TERM> 252
0
0
<COMMON> 10
<OTHER-SE> 15,089
<TOTAL-LIABILITIES-AND-EQUITY> 60,002
<INTEREST-LOAN> 4,072
<INTEREST-INVEST> 165
<INTEREST-OTHER> 91
<INTEREST-TOTAL> 4,328
<INTEREST-DEPOSIT> 2,135
<INTEREST-EXPENSE> 2,153
<INTEREST-INCOME-NET> 2,175
<LOAN-LOSSES> 7
<SECURITIES-GAINS> 282
<EXPENSE-OTHER> 1,334
<INCOME-PRETAX> 1,169
<INCOME-PRE-EXTRAORDINARY> 1,169
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 760
<EPS-PRIMARY> .83
<EPS-DILUTED> .83
<YIELD-ACTUAL> 3.71
<LOANS-NON> 87
<LOANS-PAST> 359
<LOANS-TROUBLED> 270
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 100
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 107
<ALLOWANCE-DOMESTIC> 107
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
