<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File 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
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
340 West Main Street, Danville, Kentucky 40422
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (606) 236-4181
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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
--- ---
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-KSB or any amendment to
this Form 10-KSB. [X]
For the fiscal year ended December 31, 1998, the registrant had $4.8 million in
revenues.
As of March 24, 1999, the aggregate market value of voting stock held by
non-affiliates was approximately $13.3 million based on the closing sales price
of $18.125 per share of the registrant's Common Stock on March 24, 1999, 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.
Number of shares of Common Stock outstanding as of March 24, 1999: 893,475
DOCUMENTS INCORPORATED BY REFERENCE
The following lists the documents incorporated by reference and the Part of
the Form 10-KSB into which the document is incorporated:
1. Portions of the Annual Report to Stockholders for the fiscal year
ended December 31, 1998. (Parts I and II)
2. Portions of Proxy Statement for the 1999 Annual Meeting of
Stockholders. (Part III)
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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 $1.6 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, 1998, the Company had total
assets of $65.6 million, deposits of $48.9 million, net loans receivable of
$57.9 million and stockholders' equity of $13.9 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.
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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, 1998, 90.6% 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 Bank originated $4.3 million in fixed-rate mortgage loans during
the year ended December 31, 1998. 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, 1998, the maximum amount that
the Bank could have loaned to any one borrower without prior OTS approval was
$2.1 million. At such date, the largest aggregate amount of loans that the Bank
had outstanding to any one borrower was $1.2 million.
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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, 1998, 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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1998 1997
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Amount % Amount %
-------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real estate loans:
One- to four-family residential (1)... $ 45,375 77.63% $ 44,394 78.75
Multi-family residential ............. 1,008 1.72 1,114 1.98
Non-residential ...................... 9,007 15.41 7,804(2) 13.84
Consumer loans:
Savings account ...................... 533 .91 459 .81
Other (3) ............................ 2,527 4.33 2,610 4.62
-------- ------- -------- -------
58,450 100.00% 56,381 100.00%
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Less:
Loans in process ..................... 322 299
Deferred loan fees ................... 68 62
Allowance for loan losses ............ 148 125
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Total ............................. $ 57,912 $ 55,895
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</TABLE>
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(1) Includes home equity loans. Also includes construction loans that will be
converted to permanent loans and which comprised $627,500 and $871,608 at
December 31, 1998 and 1997, respectively.
(2) Also includes a construction loan that will be converted to a permanent
loan and which amounted to $120,000 at December 31, 1997.
(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, 1998 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. The
tables below exclude deferred loan origination fees and the allowance for loan
losses, which are netted against outstanding loan balances at December 31, 1998.
<TABLE>
<CAPTION>
Due during the year ending Due after Due after Due after
December 31, 3 through 5 through 10 through Due after 20
------------------------- 5 years after 10 years after 20 years after years after
1999 2000 2001 12/31/98 12/31/98 12/31/98 12/31/98 Total
------- ------- ------- ------------- -------------- -------------- ------------ -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate mortgage(1) ......... $ 1,058 $ 80 $ 277 $ 1,208 $ 5,033 $23,509 $22,779 $53,944
Real estate construction ........ 305 -- -- -- -- -- -- 305
Consumer ........................ 1,510 195 235 638 -- -- -- 2,578
Commercial ...................... 595 6 -- 274 371 55 -- 1,301
------- ------- ------- ------- ------- ------- ------- -------
Total ....................... $ 3,468 $ 281 $ 512 $ 2,120 $ 5,404 $23,564 $22,779 $58,128
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
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(1) Includes home equity loans.
The following table sets forth at December 31, 1998, the dollar amount of
all loans due one year or more after December 31, 1998 which have predetermined
interest rates or have floating or adjustable interest rates.
Predetermined Floating or
Rate Adjustable Rates Total
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(In thousands)
Real estate mortgage .............. $ 5,256 $ 47,630 $ 52,886
Consumer .......................... 49 1,019 1,068
Commercial ........................ -- 706 706
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Total .......................... $ 5,305 $ 49,355 $ 54,660
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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,
1998, $45.4 million, or 77.63%, 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 20-year term, fixed rate mortgage loans and
ARMs. At December 31, 1998, $5.4 million, or 9.3%, of Central Kentucky Federal's
loan portfolio consisted of 20 year or less term, fixed rate loans.
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 20 years. Central Kentucky Federal originated $4.3
million in fixed rate single-family mortgage loans with a maximum term of 20
years during 1998 and such loans amounted to $5.4 million, or 9.3%, of the
Bank's loan portfolio at December 31, 1998. 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,
1998, the Bank's loan portfolio included $305,000 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 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
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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, 1998, loans on commercial real estate
properties constituted approximately $9.0 million, or 15.41%, 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, 1998, consumer loans amounted to $3.1 million, or
5.24%, of the Bank's gross loan portfolio.
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
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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 and
Vice President of Lending, or individually if less than $25,000, 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
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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.
Year Ended December 31,
-----------------------
1998 1997
------- -------
(In thousands)
Loans originated
Real estate:
Construction ............................... $ 1,317 $ 1,820
One- to four-family ........................ 12,186 7,044
Multi-family ............................... 306
Non-residential and other .................. 1,033 1,177
Consumer loans ............................... 3,401 3,015
------- -------
Total loans originated ................... $17,937 $13,362
======= =======
Loans purchased:
Real estate loans:
Conventional loans ......................... $ -- $ --
Other loans .................................. -- 890
------- -------
Total loans purchased .................... $ -- $ 890
======= =======
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, 1998, the Bank
had received $68,000 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
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<PAGE>
classification but which possesses weaknesses or deficiencies deserving close
attention is 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, 1998, management had no assets classified as special
mention, $472,000 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. These 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 3 of Notes
to Consolidated Financial Statements. At December 31, 1998, the Bank had
identified impaired loans, as defined by SFAS No. 114, totaling $65,000 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.
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 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.
Year Ended December 31,
-----------------------
1998 1997
---- ----
(Dollars in thousands)
Balance at beginning of period ..................... $ 125 $ 107
------ ------
Loans charged-off .................................. 1 --
Recoveries ......................................... --
------ ------
Net loans charged-off .............................. 1 --
------ ------
Provision for loan losses .......................... 24 18
------ ------
Balance at end of period ........................... $ 148 $ 125
====== ======
Ratio of net charge-offs to average
loans outstanding during the period .............. --% --%
====== ======
Ratio of allowance for loan losses
to non-performing loans .......................... 35.20% 42.80%
====== ======
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.
At December 31,
------------------------------------------
1998 1997
-------------------- -------------------
Percent of Percent of
Loans in Loans in
Category to Category to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
(Dollars in thousands)
Real estate - mortgage:
Residential (2) ................. $ 148 78.28% $ 125 77.20%
Commercial ...................... -- 15.41 -- 14.59
Real estate - construction ........ -- 1.07 -- 1.77
Commercial business ............... -- -- -- 1.01
Consumer (3) ...................... -- 5.24 -- 5.43
----- ------ ----- ------
Total allowance for loan losses $ 148 100.00% $ 125 100.00%
===== ====== ===== ======
- -------------
(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 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.
11
<PAGE>
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.
At December 31,
---------------
1998 1997
---- ----
(Dollars in thousands)
Loans accounted for on a non-accrual basis: (1)
Real Estate:
Residential ............................................ $ 27 $ 54
Consumer ............................................... 38 12
----- -----
Total ................................................ $ 65 $ 66
===== =====
Accruing loans which are contractually past due
90 days or more:
Real Estate:
Residential ........................................... $ 356 $ 227
Commercial ............................................ -- --
Consumer .............................................. -- --
----- -----
Total ............................................... $ 356 $ 227
===== =====
Total of non-accrual and 90 days past due loans ...... $ 421 $ 293
===== =====
Percentage of total loans .................................. .73% .52%
===== =====
Other non-performing assets (2) ............................ $ -- $ --
===== =====
Restructured loans ......................................... $ -- $ --
===== =====
(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.
During the year ended December 31, 1998, additional interest income of
$3,144 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, 1998 was $4,158.
12
<PAGE>
At December 31, 1998, 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, the Company classifies marketable equity
securities as investment securities held for sale. Investment securities in this
classification are recorded at market value. At December 31, 1998, the
unrealized holding gains of $625,000, less the applicable deferred tax of
$215,000, 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.
The following table sets forth the carrying value of the Bank's investment
securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
---------------
1998 1997
------ ------
(Dollars in thousands)
<S> <C> <C>
Investment securities available for sale:
FHLMC capital stock ................................. $ 635 $ 552
------ ------
Total investment securities available for sale .. $ 635 $ 552
====== ======
Investment securities held to maturity:
U.S. government and agency securities ............... $1,254 $1,252
Mortgage-backed securities .......................... 219 368
FHLB stock .......................................... 555 517
Common stock of subsidiary .......................... 15 15
------ ------
Total investment securities held to maturity .... $2,043 $2,152
====== ======
</TABLE>
13
<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, 1998.
<TABLE>
<CAPTION>
One Year or Less One to Five Years Five to Ten Years More than Ten Years
-------------------- --------------------- -------------------- --------------------
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield
------ -------- ------ -------- -------- -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities available
for sale:
FHLMC securities ................ $ 635 1.0% $ -- --% $ -- --% $ -- --%
Investment securities held-to-
maturity:
U.S. Government and agency
securities .................... 500 6.75 754 5.39 -- -- -- --
Mortgage-backed securities ...... -- -- 219 6.39 -- -- -- --
FHLB stock ...................... -- -- -- -- -- -- 555 7.12
Common stock of subsidiary ...... -- -- -- -- -- -- 15 --
------ -------- ------ -------- -------- -------- ------ --------
Total ......................... 500 6.75 973 5.62 -- -- 570 6.93
------ -------- ------ -------- -------- -------- ------ --------
Total Investment
securities .................. $1,135 3.53% $ 973 5.62% $ -- --% $ 570 6.93%
====== ======== ====== ======== ======== ======== ====== ========
<CAPTION>
Total Investment Portfolio
--------------------------------
Carrying Market Average
Value Value Yield
------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C>
Investment securities available
for sale:
FHLMC securities ................ $ 635 $ 635 1.0%
Investment securities held-to-
maturity:
U.S. Government and agency
securities .................... 1,254 1,258 5.93
Mortgage-backed securities ...... 219 220 6.39
FHLB stock ...................... 555 555 7.12
Common stock of subsidiary ...... 15 15 --
------ ------ ----
Total ......................... 2,043 2,048 6.26
------ ------ ----
Total Investment
securities .................. $2,678 $2,683 5.01%
====== ====== ====
</TABLE>
14
<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, 1998 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>
3.05% None NOW Accounts $ 50 $ 2,884 5.89%
3.05 None Passbook Statement Accounts 1 3,733 7.63
4.13 None Money Market Deposits Accounts 2,500 3,188 6.51
3.05 None Super NOW Accounts 2,500 220 .45
Certificates of Deposit
-----------------------
4.49 91 days 3-month Money Market 500 477 .97
4.94 182 days 6-month Money Market 500 5,232 10.69
5.28 12-month Fixed-Term, Fixed-Rate 500 5,919 12.09
5.59 14-month Fixed-Term, Fixed Rate 500 4,329 8.85
5.45 18 month Fixed-Term, Fixed-Rate 500 896 1.83
5.77 18 month 18 month IRA Accounts 500 4,879 9.97
5.58 24 month Fixed-Term, Fixed-Rate 500 2,786 5.69
5.57 30 month Fixed-Term, Fixed-Rate 500 1,634 3.35
5.60 36 month Fixed-Term, Fixed-Rate 500 3,361 6.87
5.78 42 month Fixed-Term, Fixed-Rate 500 534 1.09
5.85 48 month Fixed-Term, Fixed-Rate 500 1,231 2.52
6.05 60 month Fixed-Term, Fixed-Rate 500 7,635 15.60
--------- -------
$ 48,938 100.00%
========= ======
</TABLE>
- -----------
* Represents weighted average interest rate.
15
<PAGE>
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.
At December 31,
------------------------------------------------------
1998 1997
-------------------------- -------------------------
Interest- Interest-
Bearing Bearing
Demand Time Demand Time
Deposits Deposits Deposits Deposits
--------- -------- --------- ---------
(Dollars in thousands)
Average balance...... $ 9,656 $ 36,920 $ 9,031 $ 33,584
Average rate......... 2.72% 5.64% 2.95% 5.66%
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
December 31, % Increase December 31, % Increase
1998 Deposit (Decrease) 1997 Deposits (Decrease)
---- ------- ---------- ---- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
NOW accounts .................. $ 2,884 5.89% $ 623 $ 2,261 5.23% $ 136
Passbook and regular savings... 3,733 7.63 302 3,431 7.93 (108)
Money market deposit accounts.. 3,188 6.51 331 2,857 6.61 (313)
Super NOW accounts ............ 220 .45 76 144 .33 43
6-month Money Market .......... 5,232 10.69 433 4,799 11.10 (389)
1 year certificates ........... 5,919 12.09 (1,094) 7,013 16.21 (1,196)
18 month IRA accounts ......... 4,879 9.97 (88) 4,967 11.48 265
2 year certificate ............ 2,786 5.69 220 2,566 5.93 (192)
30 month certificates ......... 1,634 3.35 19 1,615 3.73 (160)
3 year certificates ........... 3,361 6.87 846 2,515 5.81 (197)
5 year certificates ........... 7,635 15.60 664 6,971 16.13 1,118
Other ......................... 7,467 15.26 3,353 4,114 9.51% 1,414
------- ------ ------- ------- ------ -------
Total .................... $48,938 100.00% $ 5,685 $43,253 100.00% $ 421
======= ====== ======= ======= ====== =======
</TABLE>
16
<PAGE>
The following table sets forth the time deposits in the Bank classified by
nominal rates at the dates indicated.
At December 31,
----------------------------
1998 1997
---------- ----------
(In thousands)
2.01 - 4.00%............................... $ -- $ --
4.01 - 6.00%............................... 34,021 28,419
6.01 - 8.00%............................... 4,892 6,142
8.01 - 10.00%.............................. -- --
---------- ----------
$ 38,913 $ 34,561
========== ==========
The following table sets forth the amount and maturities of time deposits
at December 31, 1998.
Amount Due
--------------------------------------------------------------
Less Than After
Rate One Year 1-2 Years 2-3 Years 3 Years Total
- ---- -------- --------- --------- ------- ---------
(In thousands)
4.01 - 6.00%... $ 22,491 $ 5,880 $ 2,893 $ 2,757 $ 34,021
6.01 - 8.00%... 1,779 1,234 87 1,792 4,892
--------- ---------- ---------- ---------- ----------
$ 24,270 $ 7,114 $ 2,980 $ 4,549 $ 38,913
========= ========== ========== ========== ==========
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,
1998.
Certificates
Maturity Period of Deposits
--------------- -----------
(In thousands)
Three months or less....................... $ 2,896
Over three through six months.............. 1,073
Over six through twelve months............. 3,835
Over twelve months......................... 4,574
----------
Total................................. $ 12,378
==========
The following table sets forth the savings deposit activities of the Bank
for the periods indicated.
Year Ended December 31,
-------------------------
1998 1997
----------- -----------
(In thousands)
Deposits.............................................. $ 55,392 $ 47,340
Withdrawals........................................... 51,296 48,424
---------- ----------
Net increase (decrease) before interest credited.. 4,096 (1,084)
Interest credited..................................... 1,589 1,505
---------- ----------
Net increase (decrease) in savings deposits....... $ 5,685 $ 421
========== ==========
17
<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.
At or For the
Year Ended December 31,
--------------------------
1998 1997
------ ------
(Dollars in thousands)
Amounts outstanding at end of period:
FHLB advances (1).......................... $ 2,120 $5,213
======= ======
Weighted average rate paid................. 5.83% 6.90%
At or For the
Year Ended December 31,
--------------------------
1998 1997
------ ------
(Dollars in thousands)
Maximum amount of borrowings outstanding
at any month end:
FHLB advances.............................. $ 3,210 $5,213
======= ======
At or For the
Year Ended December 31,
--------------------------
1998 1997
------ ------
(Dollars in thousands)
Approximate average borrowings outstanding
with respect to:
FHLB advances.............................. $ 1,915 $2,898
======= ======
Approximate weighted average rate paid..... 5.90% 5.28%
- -----------
(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 $119,932 at December 31, 1998. The other note for $2,000,000
matures in March of 1999.
18
<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, 1998 Central Kentucky Federal was authorized to
invest up to approximately $1.3 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, 1998.
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, 1998, Central Kentucky Federal had nine 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.
19
<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.
Liquidity Requirements. The Bank generally is required to maintain average
daily balances of liquid assets (generally, 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 4% of its net withdrawable
accounts plus short-term borrowings either at the end of the preceeding calendar
quarter or on an average daily basis during the preceding quarter. The Bank also
is required to maintain sufficient liquidity to ensure its safe and sound
operation. Monetary penalties may be imposed for failure to meet liquidity
requirements. The average daily balance of liquid assets ratio of the Bank for
December 31, 1998 was 8.19%.
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, 1998, the Bank was in compliance with the
QTL Test.
Dividend Limitations. 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
institution 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 approval after notice, to make capital distributions during a calendar year
in the amount equal to the greater of: (i) 75% of its net income for the
previous four quarters; 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 capital-to-assets ratio exceeded regulatory requirements at the beginning
20
<PAGE>
of the calendar year. A savings institution with total capital in excess of
current minimum capital ratio requirements (a "Tier 2 Association") is permitted
after notice 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. A savings institution that fails to meet current minimum capital
requirements (a "Tier 3 Association") is prohibited from making any capital
distributions without the prior approval of the OTS. A Tier 1 Association that
has been notified by the OTS that it is in need of more than normal supervision
will be treated as either a Tier 2 or Tier 3 Association. The Bank is a Tier 1
Association. Under the OTS' prompt corrective action regulations, the Bank is
also prohibited from making any capital distributions if after making the
distribution, the Bank would have: (i) a total risk-based capital ratio of less
than 8.0%; (ii) a Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a
leverage ratio of less than 4.0%. The OTS, after consultation with the FDIC,
however, may permit an otherwise prohibited stock repurchase if made in
connection with the issuance of additional shares in an equivalent amount and
the repurchase will reduce the institution's financial obligations or otherwise
improve the institution's financial condition. See "-- Prompt Corrective
Regulatory Action."
The OTS has proposed amendments to its capital distribution regulations
which would conform OTS regulations to the existing requirements of other
banking agencies, as well as simplify the existing OTS regulations. These
proposed rules would eliminate the requirement of notifying the OTS when cash
dividends of a certain amount will be paid for institutions that will remain at
least adequately capitalized. However, applications for capital distributions
will be required for all distributions over a specified amount. Notices will
still be required for distributions that would "reduce the amount of or retire
common or preferred stock, or debt instruments included in the capital.
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 for such distributions. See " -- Taxation."
Regulatory Capital Requirements. Under OTS capital standards, a savings
institution must maintain "tangible" capital equal to 1.5% of adjusted total
assets, "core" capital equal to 3% of adjusted total assets and a combination of
core and "supplementary" capital equal to 8% of "risk-weighted" assets. In
addition, the OTS regulations impose certain restrictions on savings
institutions that have a total risk-based capital ratio that is less than 8%, a
ratio of Tier 1 capital to risk-weighted assets of less than 4% or a ratio of
Tier 1 capital to adjusted total assets of less than 4% (or 3% if the
institution is rated Composite 1 under the OTS examination rating system). See
"-- Prompt Corrective Regulatory Action." For purposes of this regulation, Tier
1 capital has the same definition as core capital which 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." Core capital is generally
reduced by the amount of the savings institution's intangible assets for which
no market exists. Limited exceptions to the deduction of intangible assets are
provided for mortgage servicing rights, purchased credit card relationships and
qualifying supervisory goodwill held by an eligible savings institution.
Tangible capital is given the same definition as core capital but does not
include an exception for qualifying supervisory goodwill and is reduced by the
amount of all the savings institution's intangible assets with only a limited
exception for mortgage servicing rights and purchased credit card relationships.
Both core and tangible capital are further reduced by an amount equal to a
percentage of the savings institution's debt and equity investments in
subsidiaries engaged in activities not permissible for national banks, other
than subsidiaries engaged in activities undertaken as agent for customers or in
mortgage banking activities and subsidiary depository institutions or holding
companies therefor. At December 31, 1998, the Bank had no such investments.
Adjusted total assets are a savings institution's total assets as
determined under generally accepted accounting principles, increased for certain
goodwill amounts and by a pro-rated portion of the assets of subsidiaries in
which the savings institution holds a minority interest (and which are not
engaged in activities for which the capital rules require
21
<PAGE>
the savings institution to net its debt and equity investments in such
subsidiaries against capital), as well as a pro-rated portion of the assets of
other subsidiaries for which netting 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 institution's investments in
subsidiaries that must be netted against capital under the capital rules and,
for purposes of the core capital requirement, qualifying supervisory goodwill.
At December 31, 1998, the Bank's adjusted total assets for purposes of core
capital requirements were $65.0 million.
In determining compliance with the risk-based capital requirement, a
savings institution is allowed to include both core capital and supplementary
capital in its total capital, provided the amount of supplementary capital used
does not exceed the savings institution'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 institution'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 an increasing percentage of the savings institution's high
loan-to-value ratio land loans, non-residential construction loans and equity
investments other than those deducted from core and tangible capital. As of
December 31, 1998, the Bank had no high ratio land or non-residential
construction loans and no equity investments for which OTS regulations require a
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% and average annual
occupancy rates of at least 80% and certain qualifying loans for the
construction of one-to-four-family residences pre-sold to home purchasers 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 FNMA or 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 (such as mortgage-backed securities issued by
GNMA) are given a 0% risk weight.
For information with respect to the Bank's compliance with its regulatory
capital requirements at December 31, 1998, see Note 9 of Notes to Consolidated
Financial Statements.
The risk-based capital requirements of the OTS also require that 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 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.
The OTS calculates 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 is based on the
institution's Thrift Financial Report filed two quarters earlier. Savings
institutions with less than $300 million in assets and a risk-based capital
ratio above 12% are generally exempt from filing the interest rate risk schedule
with their Thrift Financial Reports. However, the OTS requires any exempt
savings institution that it determines may have a high level of interest rate
risk exposure to file such schedule on a quarterly basis and may be
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<PAGE>
subject to an additional capital requirement based upon its level of interest
rate risk as compared to its peers. The Bank is exempt from filing the interest
rate risk schedule with its Thrift Financial Reports and the OTS has not
required it to file such a schedule. The interest rate risk rule did not have a
material effect on the Bank's risk based capital at December 31, 1998.
The table below presents the Bank's capital position at December 31, 1998,
relative to its various minimum regulatory capital requirements.
<TABLE>
<CAPTION>
At December 31, 1998
-------------------------------
Percent of
Amount Assets (1)
------ -----------
(Dollars in thousands)
<S> <C> <C>
Core Capital.................................. $ 11,162 17.2%
Core Capital Requirement...................... 2,600 4.00
--------- -------
Excess ..................................... $ 8,562 13.2%
========= =======
Risk-Based Capital............................ $ 11,310 29.4%
Risk-Based Capital Requirement................ 3,070 8.00
--------- -------
Excess...................................... $ 8,240 21.4%
========= =======
</TABLE>
- -----------
(1) Based upon adjusted total assets of $65.0 million for purposes of the
tangible and core capital requirements, and risk-weighted assets of $38.4
million for purposes of the risk-based capital requirements.
In addition to requiring generally applicable capital standards for
savings institutions, the OTS is authorized to establish the minimum level of
capital for a savings institution at such amount or at such ratio of capital-to-
assets as the OTS determines to be necessary or appropriate for such institution
in light of the particular circumstances of the institution. Such circumstances
would include a high degree of exposure to interest rate risk, concentration of
credit risk and certain risks arising from non-traditional activity. The OTS may
treat the failure of any savings institution to maintain capital at or above
such level as an unsafe or unsound practice and may issue a directive requiring
any savings institution which fails to maintain capital at or above the minimum
level required by the OTS 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.
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
23
<PAGE>
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
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.
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<PAGE>
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 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.
Under the FDIC's assessment schedule for SAIF deposit insurance, the
assessment rate for well-capitalized institutions with the highest supervisory
ratings will be reduced to zero and institutions in the highest 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, all FDIC-insured depository institutions must maintain average daily
reserves against their transaction accounts. No reserves are required on the
first $4.9 million of transaction accounts maintained; reserves of 3% are
required on the next $46.5 million of transaction accounts and a reserve of 10%
must be maintained against all remaining transaction accounts. These reserve
requirements are 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.
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.
25
<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.
Proposed Legislative and Regulatory Changes. On May 13, 1998, the U.S.
House of Representatives passed H.R. 10 (the "Act"), the Financial Services
Competition Act of 1998, "which calls for a sweeping modernization of the
banking system that would permit affiliations between commercial banks,
securities firms, insurance companies and, subject to certain limitations, other
commercial enterprises. The stated purposes of the Act are to enhance consumer
choice in the financial services marketplace, level the playing field among
providers of financial services and increase competition. H.R. 10 removes the
restrictions contained in the Glass-Steagall Act of 1933 and the Bank Holding
Company Act of 1956, thereby allowing qualified financial holding companies to
control banks, securities firms, insurance companies, and other financial firms.
Conversely, securities firms, insurance companies and financial firms would be
allowed to own or affiliate with a commercial bank. Under the new framework, the
Federal Reserve would serve as an umbrella regulator to oversee the new
financial holding company structure. Securities affiliates would be required to
comply with all applicable federal securities laws, including registration and
other requirements applicable to broker-dealers. The Act also provides the
insurance affiliates be subject to applicable state insurance regulations and
supervision. The Act preserves the thrift charter and all existing thrift
powers, but restricts the activities of new unitary thrift holding companies.
At the adjournment of Congress in October 1998, the Senate had not voted on
the legislation and the Act had been returned to the Senate Banking Committee
for further review A bill similar to the Act was introduced for consideration by
Congress in 1999. At this time, it is unknown whether the Act will be enacted,
or if enacted, what form the final version of such legislation might take.
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.
26
<PAGE>
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
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
27
<PAGE>
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 (S)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 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").
28
<PAGE>
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 are 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, have been
treated the same as commercial banks. Institutions with $500 million or more in
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 institution 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, 1998, the amount of such expense for the Bank was $53,000.
Item 2. Properties
- -------------------
The following table sets forth the location and certain additional
information regarding the Bank's sole office at December 31, 1998.
Year Owned or Square
Opened Leased Footage Net Book Value
------ ------ ------- --------------
340 West Main Street
Danville, Kentucky 1968 Owned 5,832 $ 546,203
29
<PAGE>
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, 1998.
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, 1998 (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 16 in the Annual Report is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
The consolidated financial statements contained on pages 18 through 47 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.
30
<PAGE>
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 1999 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.
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.
31
<PAGE>
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, 1998 and 1997
Consolidated Statements of Income for Each of the Years in the Three-Year
Period Ended December 31, 1998
Consolidated Statements of Changes in Stockholders' Equity for Each of the
Years in the Three-Year Period Ended December 31, 1998
Consolidated Statements of Cash Flows for Each of the Years in the
Three-Year Period Ended December 31, 1998
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.
(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.
Page in
Sequentially
No. Exhibits Numbered Copy
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 1998 Annual Report to Stockholders
21 Subsidiaries of the Registrant
23 Consent of Accountants
27 Financial Data Schedule
- ----------
* 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-KSB for
the fiscal year ended December 31, 1995 (Commission File No. 0-25180).
32
<PAGE>
(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-KSB.
(c) Exhibits. The exhibits required by Item 601 of Regulation S-K are
either filed as part of this Annual Report on Form 10-KSB 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.
33
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CKF BANCORP, INC.
March 24, 1999 By: /s/ John H. Stigall
--------------------
John H. Stigall
President and Chief Executive Officer
(Duly Authorized Representative)
In accordance with the Exchange Act, 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 24, 1999
- -------------------
John H. Stigall
President, Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Ann L. Hooks March 24, 1999
- ----------------
Ann L. Hooks
Vice President and Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
/s/ Jack L. Bosley, Jr. March 24, 1999
- -----------------------
Jack L. Bosley, Jr.
(Director)
/s/ W. Irvine Fox, Jr.
- ---------------------- March 24, 1999
W. Irvine Fox, Jr.
(Director)
/s/ J. T. Goggans March 24, 1999
- -----------------
J. T. Goggans
(Director)
/s/ W. Banks Hudson, III March 24, 1999
- ------------------------
W. Banks Hudson, III
(Director)
/s/ Yvonne Y. Morley March 24, 1999
- --------------------
Yvonne Y. Morley
(Director)
/s/ Warren O. Nash March 24, 1999
- ------------------
Warren O. Nash
(Director)
<PAGE>
Exhibit 13
- --------------------------------------------------------------------------------
1998 ANNUAL REPORT
- --------------------------------------------------------------------------------
CKF Bancorp, Inc.
<PAGE>
CKF BANCORP, INC.
- --------------------------------------------------------------------------------
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. On December 29, 1994, the Bank converted from mutual to stock form
as a wholly owned subsidiary of the Company. 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. The primary activity of the Company is holding the stock of the
Bank and operating the Bank. Accordingly, the information set forth in this
report, including financial statements and related data, relates primarily to
the Bank and its subsidiary.
Central Kentucky Federal was formed in 1886 as a Kentucky-chartered mutual
building and loan association. In December 1960, the Bank obtained federal
insurance on deposit accounts and became a member of the Federal Home Loan Bank
("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 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.
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 Nasdaq SmallCap Market. As of March 1, 1999, there were
901,632 shares of the Common Stock issued and outstanding, held by approximately
445 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....................................................... 17
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
1998, our fourth full year as a public company.
The consolidated net income for 1998 was $774,000 and amounted to $.98 per
weighted average common share outstanding or $.96 per weighted average common
share - assuming dilution. This compares to $1.1 million net income and $1.33
per weighted average common share or $1.29 per weighted average common share -
assuming dilution, for the year ended December 31, 1997.
For the year ended December 31, 1998, the Company and the Bank, on a
consolidated basis, had $4.6 million in interest income, $2.5 million in
interest expense, and $2.1 million in net interest income compared to $2.2
million in net interest income for the year ended December 31, 1997.
Non-interest income decreased to $218,000 in 1998, compared to $484,000 in 1997,
due primarily to a decrease in the gain on sale of investments. Non-interest
expense increased to $1.1 million in 1998 compared to $1.0 million in 1997, due
primarily to an increase in legal and professional fees of $119,000. The income
tax expense in 1998 was $398,000 compared to $575,000 in 1997.
Total assets at December 31, 1998 were $65.6 million, compared to $62.9 million
at December 31, 1997. Deposits were $48.9 million at December 31, 1998, compared
to $43.3 million at December 31, 1997. Stockholders' equity was $13.9 million at
December 31, 1998, compared to $13.8 million at December 31, 1997. During 1998,
$697,000 of equity was used for stock repurchases, and $412,000 was paid out in
dividends. On December 31, 1998, stockholders equity was $17.47 per common
share, as compared to $17.11 per common share on December 31, 1997, based on the
common shares outstanding on those respective dates of 793,890 and 804,096.
Our newly implemented services have been well received by our customers. Our
Home Page on the Internet can be found at www.centralkyfsb.com. The Direct
Teller, a convenient automated voice response service brings Central Kentucky
Federal as close as your telephone. You may call toll free (800) 436-5142 from
anywhere, 24 hours a day, 7 days a week, to access your account information and
transfer funds between accounts.
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
- --------------------------------------------------------------------------------
Financial Condition Data:
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------- ------------- ------------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Total amount of:
Assets..................................... $ 65,580 $ 62,865 $ 60,002 $ 56,549 $ 56,375
Loans receivable, net...................... 57,912 55,895 53,182 49,638 45,143
Cash and investment securities............. 6,681 5,977 5,663 5,898 10,391
Deposits................................... 48,938 43,253 42,832 39,356 40,287
FHLB advances.............................. 2,120 5,214 1,252 288 323
Stockholders' equity....................... 13,867 13,763 15,099 16,129 15,273
- -------------------------------------------------------------------------------------------------------------------
Number of:
Real estate loans outstanding/1/........... 1,160 1,267 1,229 1,196 1,001
Savings accounts........................... 3,644 3,922 3,933 3,696 3,764
Offices open............................... 1 1 1 1 1
</TABLE>
- --------------------
/1/ Includes home equity loans.
Operating Data:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ----------- ------------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest income............................. $ 4,608 $ 4,586 $ 4,328 $ 4,088 $ 3,417
Interest expense............................ 2,506 2,335 2,153 1,930 1,832
------------ ------------ ----------- ------------- -------------
Net interest income before
provision for loan losses................. 2,102 2,251 2,175 2,158 1,585
Provision for loan losses................... 24 18 7 24 --
Non-interest income......................... 218 484 334 43 36
Non-interest expense........................ 1,124 1,025 1,334 1,033 800
------------ ------------ ----------- ------------- -------------
Income before federal income tax
expense................................... 1,172 1,692 1,168 1,144 821
Federal income tax expense.................. 398 575 408 398 279
------------ ------------ ----------- ------------- -------------
Net income.................................. $ 774 $ 1,117 $ 760 $ 746 $ 542
============ ============ =========== ============ ============
</TABLE>
2
<PAGE>
Key Operating Ratios:
<TABLE>
<CAPTION>
At or for the
Years Ended December 31,
----------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
Performance Ratios:
Return on assets (net income divided
by average total assets) ................. 1.23% 1.84% 1.29% 1.34% 1.02%
Return on average equity (net income
divided by average stockholders' equity) . 5.72 7.90 4.90 4.76 (1) 9.10
Interest rate spread (combined weighted
average interest rate earned less
combined weighted weighted average
interest rate cost) ...................... 2.32 2.56 2.44 2.57 2.65
Net yield on interest-earning assets (net
interest income as a percentage of average
balance of interest-earning assets) ...... 3.42 3.78 3.77 3.95 3.14
Ratio of non-interest expense to average
total assets ............................. 1.79 1.69 2.26 1.85 1.56
Dividend payout ............................ 53.22 112.87 49.41 24.69
Asset Quality Ratios:
Nonperforming assets to total assets at
end of period(3) ......................... .64 .46 1.12 .97 1.12
Allowance for loan losses to nonperforming
loans at end of period ................... 35.20 42.80 23.99 18.28 12.04
Allowance for loan losses to total loans
receivable, net .......................... .26 .22 .20 .20 .17
Capital Ratios:
Equity to total assets at end of period .... 21.14 21.89 25.16 28.52 27.09
Average equity to average assets ........... 21.51 23.33 26.30 28.07 1 12.50
Ratio of average interest-earning assets to
average interest-bearing liabilities ..... 126.89 131.02 135.72 139.12 2 113.70
</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 1998 and 1997.
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.
Quarterly Stock Information
- ---------------------------
<TABLE>
<CAPTION>
1998 1997
------------------------------------ --------------------------------
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 $ 21.25 $ .25 $ 17.50 $ 19.75 $ 1.22
2nd 19.00 19.87 18.00 20.50
3rd 15.00 19.37 .27 19.00 20.00 .25
4th 15.12 17.25 17.50 19.25
- ------------------------------------------------------------------------------
Total $ .52 $ 1.47
============ ============
</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 primarily of all of the Bank's outstanding capital stock,
and a note receivable from the Company's Employee Stock Ownership Plan ("ESOP").
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 depend 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 are
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.
Forward-Looking Statements
When used in this Annual Report, the words or phrases "will likely result," "are
expected to," "will continue," "is anticipated," "estimate," "project," or
similar expressions are intended to identify "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties including changes in
economic conditions in the Company's market area, changes in policies by
regulatory agencies, fluctuations in interest rates, demand for loans in the
Company's market area, competition, and information provided by third-party
vendors that could cause actual results to differ materiality from historical
earnings and those presently anticipated and projected. The Company wishes to
caution readers not to place undue reliance on any such forward-looking
4
<PAGE>
statements, which speak only as of the date made. The Company wishes to advise
readers that the factors listed above could affect the Company's financial
performance and could cause the Company's actual results for future periods to
differ materially from any opinions or statements expressed with respect to
future periods in any current statements.
The Company does not undertake, and specifically disclaims any obligation, to
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
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, 1998, the Bank originated approximately
$12.2 million of one- to four-family residential loans, of which $7.9 million
were adjustable rate loans. The Bank's origination of multi-family and
commercial loans amounted to approximately $1.0 million or 5.8% 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, 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, 1998, the Bank had approximately $6.1
million of funds so invested, including $635,000 in capital stock of the Federal
Home Loan Mortgage Corporation and $2.0 million in U.S. government and agency
securities with an average yield of 4.86%.
Asset/liability management in the form of structuring cash instruments provides
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, 1998, the Bank's interest-bearing deposit base was comprised of $10.0
million in interest-bearing demand deposits with an average rate of 3.3% and
$38.9 million in time deposits with an average rate of 5.6%. Time deposits with
maturities of one year or less at December 31, 1998 totaled $24.3 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 $2.1 million at December 31, 1998, with
monthly principal and interest payments due through the year 2001.
5
<PAGE>
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, 1998 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 9,538 (317) (3%) 15.38% + 4 bp
+ 300 bp 9,751 (104) (1%) 15.56% + 22 bp
+ 200 bp 9,833 (22) 0% 15.56% + 21 bp
+ 100 bp 9,833 (22) 0% 15.44% + 9 bp
0 9,855 15.34%
- 100 bp 10,068 213 2% 15.50% + 15 bp
- 200 bp 10,312 457 5% 15.68% + 33 bp
- 300 bp 10,572 717 7% 15.87% + 53 bp
- 400 bp 10,608 754 8% 15.77% + 43 bp
</TABLE>
The following table sets forth the interest rate risk capital component for the
Bank at December 31, 1998 (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.
<TABLE>
<CAPTION>
December 31, 1998
-----------------
<S> <C>
Pre-shock NPV Ratio: NPV as % of Portfolio Value of Assets................ 15.34%
Exposure Measure: Post-Shock NPV Ratio ................................. 15.34%
Sensitivity Measure: Change in NPV Ratio.................................. 0 bp
Change in NPV as % of Portfolio Value of Assets............................ 0 to 5%
Interest Rate Risk Capital Component ($000)................................ 0
</TABLE>
6
<PAGE>
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 the
computation of NPV. 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.
7
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------
1998 1997
---------------------------------- ----------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
--------- ---------- --------- --------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable ........................ $56,673 $ 4,372 7.71% $55,128 $ 4,368 7.92%
Investment securities ................... 2,312 107 4.63 2,564 128 4.99
Mortgage-backed securities .............. 280 19 6.79 421 27 6.41
Other interest-earning assets ........... 2,229 110 4.93 1,480 62 4.19
--------- ---------- --------- ----------
Total interest-earning assets ......... 61,494 4,608 7.49 59,593 4,585 7.69
---------- ----------
Non-interest-earning assets ............... 1,380 1,015
--------- ---------
Total assets .......................... $ 62,874 $ 60,608
========= =========
Interest-bearing liabilities:
Deposits ................................ $46,546 $ 2,393 5.14% $42,587 $ 2,181 5.12%
Borrowings .............................. 1,915 113 5.90 2,898 153 5.28
--------- ---------- --------- ----------
Total interest-bearing
liabilities ......................... 48,461 2,506 5.17 45,485 2,334 5.13
---------- ----------
Non-interest-bearing liabilities .......... 888 982
--------- ---------
Total liabilities ..................... 49,349 46,467
Stockholders' equity ...................... 13,525 14,141
--------- ---------
Total liabilities and
stockholders' equity ................ $ 62,874 $ 60,608
========= =========
Net interest income ....................... $ 2,102 $ 2,251
========= =========
Interest rate spread (1) .................. 2.32% 2.56%
========= ========
Net yield on interest-earning assets (2) .. 3.42% 3.78%
========= ========
Ratio of average interest-earning assets to
average interest-bearing liabilities .... 126.89% 131.02%
========= ========
<CAPTION>
Year Ended December 31,
----------------------------------
1996
----------------------------------
Average
Average Yield/
Balance Interest Cost
--------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable ........................ $ 52,470 $ 4,072 7.76%
Investment securities ................... 2,973 141 4.74
Mortgage-backed securities .............. 407 24 5.90
Other interest-earning assets ........... 1,786 91 5.10
--------- ---------
Total interest-earning assets ......... 57,636 4,328 7.51
Non-interest-earning assets ............... 1,373 ---------
---------
Total assets .......................... $ 59,009
=========
Interest-bearing liabilities:
Deposits ............................... $ 42,114 $ 2,135 5.07
Borrowings ............................. 352 18 5.11
--------- -------
Total interest-bearing
liabilities ........................ 42,466 2,153 5.07
Non-interest-bearing liabilities ......... 1,025 -------
Total liabilities .................... 43,491
Stockholders' equity ..................... 15,518
Total liabilities and
stockholders' equity ............... $ 59,009
=========
Net interest income ...................... $ 2,175
=======
Interest rate spread (1) ................. 2.44%
=========
Net yield on interest-earning assets (2) . 3.77%
=========
Ratio of average interest-earning assets to
average interest-bearing liabilities .... 135.72%
=========
- --------------------
</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.
8
<PAGE>
The net interest margin is a key indicator used in determining the Bank's income
performance. The Bank's net interest margin was 3.42% for the year ended
December 31, 1998 compared to 3.78% and 3.77% for the years ended December 31,
1997 and 1996, respectively. The net interest income decreased by $149,000
during the year ended December 31, 1998 compared to the same period in 1997, and
increased by $76,000 in 1997 compared to 1996.
The decrease in net interest income of $149,000 between 1998 and 1997 was due to
the increase in the volume of average net interest-bearing liabilities growing
at a greater rate than the average balance of interest earning assets and by the
average interest rates paid on deposits increasing slightly to 5.14%, while the
average interest yield on interest earning assets declined to 7.49% in 1998 from
7.69% in 1997.
The increase in net interest income of $76,000 between 1997 and 1996 was due to
the increase in the volume of average net interest-earning assets of
approximately $2.0 million in 1997 compared to 1996 and the average interest
yield on interest earning assets increasing at a greater rate than the average
interest rates paid on deposits.
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,
------------------------------------------------------------------------------------------
1998 vs. 1997 1997 vs. 1996
------------------------------------------------------------------------------------------
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 ............................ $ 122 $(115) $ (3) $ 4 $ 209 $ 84 $ 4 $ 297
Investment securities ............ (13) (9) 1 (21) (19) 7 (1) (13)
Mortgage-backed securities ....... (9) 2 (1) (8) 1 2 - 3
Other interest-earning assets .... 31 11 6 48 (16) (16) 3 (29)
----- ----- ----- ----- ----- ----- ----- -----
Total interest-earning assets .. 131 (111) 3 23 175 77 6 258
----- ----- ----- ----- ----- ----- ----- -----
Interest expense:
Deposits ......................... 203 8 1 212 24 21 - 45
Borrowings ....................... (52) 18 (6) (40) 132 1 4 137
----- ----- ----- ----- ----- ----- ----- -----
Total interest-bearing
liabilities.................... 151 26 (5) 172 156 22 4 182
----- ----- ----- ----- ----- ----- ----- -----
Change in net interest income ...... $ (20) $(137) $ 8 $(149) $ 19 $ 55 $ 2 $ 76
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
9
<PAGE>
COMPARISON OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AS OF AND FOR THE
YEARS ENDED DECEMBER 31, 1998 AND 1997
Financial Condition.
The Company's consolidated assets increased $2.7 million or 4.32% to $65.6
million at December 31, 1998 compared to $62.9 million at December 31, 1997. The
net increase of $2.7 million primarily consists of an increase of $730,000
million in cash and interest bearing deposits, plus an increase of $2.0 million
in loans receivable.
The Company's investment portfolio decreased $27,000. Securities classified as
available-for-sale per SFAS No. 115 decreased $150,000 due to the sale of 3,200
shares of Federal Home Loan Mortgage Corporation stock, offset by an increase of
$232,000 in the market value of the remaining securities. Securities
held-to-maturity decreased $109,000 due primarily to principle repayment on a
mortgage back security.
Loans receivable increased $2.0 million or 3.6% to $57.9 million at December 31,
1998 from $55.9 million at December 31, 1997. The increase in loans during the
year ended December 31, 1998 is the result of management becoming more active in
loan solicitation on adjustable rate loans, plus a stable interest rate
environment in 1998.
The allowance for loan losses totaled $148,000 and $125,000, respectively at
December 31, 1998 and 1997. The allowance for loan losses as a percentage of
non-performing loans was 35.2% and 42.8% as of December 31, 1998 and 1997,
respectively. During these periods there was one loan charged off and no
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 $5.7 million or 13.1% from $43.2 million at December 31 1997
to $48.9 million at December 31, 1998. The increase in deposits reflects
management's continued success in attracting depositors within the local market
area.
Stockholders' equity increased by $104,000 to $13.9 million at December 31, 1998
as compared to $13.8 million at December 31, 1997. During 1998, the Company
repurchased 21,970 shares of its common stock at a cost of $697,000. Other
changes to stockholders' equity from 1997 to 1998 resulted from an increase of
$774,000 in net income, an increase of $114,000 due to the release of ESOP stock
from collateral, an increase of $55,000 in the net unrealized gain on securities
available-for-sale, an increase of $270,000 from the issuance of stock, offset
by a decrease of $412,000 from the payments of dividends.
Results of Operations
Net Income. Net income decreased $343,000 or 30.7% to $774,000 for the year
ended December 31, 1998 as compared to $1.1 million for the same period in 1997.
The net decrease was due to a $149,000 decrease in net interest income, a $6,000
increase in the provision for loan losses, a $266,000 decrease in non-interest
10
<PAGE>
income and a $99,000 increase in non-interest expense offset by the decrease of
$177,000 in income taxes for 1998 compared to 1997.
Interest Income. Interest income was $4.6 million, or 7.49% of average
interest-earning assets for the year ended December 31, 1998 as compared to $4.6
million, or 7.69% of average interest-earning assets for the year ended December
31, 1997. Interest income increased by $22,000 or .49% from 1997 to 1998. The
change was due to a $1.9 million increase in the average balance of
interest-earning assets offset by a 20 basis point decrease in the average rate
earned on the average interest-earning assets during the year ended December 31,
1998 compared to the year ended December 31, 1997.
Interest Expense. Interest expense was $2.5 million, or 5.17% of average
interest-bearing liabilities for the year ended December 31, 1998 as compared to
$2.3 million, or 5.13% of average interest-bearing liabilities for the
corresponding period in 1997. The increase in interest expense of $171,000 was
due primarily to a $3.0 million increase in the average balance of
interest-bearing liabilities for the year ended December 31, 1998 as compared to
the year ended December 31, 1997.
Provision for Loan Losses. The provision for loan losses was $24,000 and $18,000
for the years ended December 31, 1998 and 1997, 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, 1998 and 1997,
the allowance for loan losses represented .26% and .22% of total loans,
respectively.
Non-Interest Income. Non-interest income amounted to $218,000 and $484,000 for
the years ended December 31, 1998 and 1997, respectively. The decrease of
$266,000 was due primarily to a $420,000 gain resulting from the sale of
investments classified as available-for-sale in 1997 as compared to a $137,000
gain in 1998.
Non-Interest Expense. Non-interest expense increased approximately $99,000 or
9.62% to $1,124,000 for the year ended December 31, 1998 compared to $1,025,000
for the year ended December 31, 1997. Non-interest expenses was 1.79% of average
assets for the year ended December 31, 1998 as compared to 1.69% of average
assets for the same period in 1997. The increase of $99,000 was due primarily to
an increase of $119,000 in legal and professional fees. The net increase in
other non-interest categories for 1998 compared to 1997 was $17,000. The
increase of $119,000 in legal and professional fees was due to services provided
in connection with the Bank's exploration of strategic capital employment.
Income Taxes. The provision for income tax expense amounted to approximately
$398,000 and $575,000 for the years ended December 31, 1998 and 1997,
respectively. The provision for income tax expense as a percentage of income
before tax expense amounted to 34% for both 1998 and 1997 (see Note 10 of Notes
to Consolidated Financial Statements).
11
<PAGE>
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED
DECEMBER 31, 1997 AND 1996
Results of Operations
Net Income. Net income increased by $357,000 or 46.9% to $1.1 million for the
year ended December 31, 1997 as compared to $760,000 for the same period in
1996. The net increase was due to a $76,000 increase in net interest income, a
$150,000 increase in non-interest income and a $308,000 decrease in non-interest
expense offset by an increase of $11,000 in the provision for loan losses and an
increase of $166,000 in income taxes for 1997 compared to 1996.
Interest Income. Interest income was $4.6 million, or 7.69% of average
interest-earning assets, for the year ended December 31, 1997 as compared to
$4.3 million, or 7.51% of average interest-earning assets, for the year ended
December 31, 1996. Interest income increased by $258,000 or 5.94% from 1996 to
1997. The change was due to an 18 basis point increase in the average rate
earned on the average interest-earning assets plus a $2.0 million increase in
the average balance of interest-earning assets during the year ended December
31, 1997 compared to the year ended December 31, 1996.
Interest Expense. Interest expense was $2.3 million, or 5.13% of average
interest-bearing liabilities for the year ended December 31, 1997 as compared to
$2.1 million, or 5.07% of average interest-bearing liabilities for the
corresponding period in 1996. The increase in interest expense of $181,000 was
due primarily to a $3.0 million increase in the average balance of
interest-bearing liabilities for the year ended December 31, 1997 as compared to
the year ended December 31, 1996. Approximately $135,000 or 74.6% of the
increase in interest expense was due to an increase of $2.5 million in the
average balance of FHLB borrowings, which the Bank used to meet loan demand as
the competition for deposits increased.
Provision for Loan Losses. The provision for loan losses was $18,000 and $7,000
for the years ended December 31, 1997 and 1996, 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, 1997 and 1996,
the allowance for loan losses represented .22% and .20% of total loans,
respectively.
Non-Interest Income. Non-interest income amounted to $484,000 and $334,000 for
the years ended December 31, 1997 and 1996, respectively. The increase of
$150,000 was due primarily to additional gains resulting from the sale of shares
of Federal Home Loan Mortgage Corporation stock. The gain on the sale of
investments in 1996 was also due to the sale of shares of this same stock.
Non-Interest Expense. Non-interest expense decreased approximately $308,000 or
23.1% to $1,025,000 at December 31, 1997 compared to $1,333,000 at December 31,
1996. Non-interest expense was 1.69% of average assets for the year ended
December 31, 1997 as compared to 2.26% of average assets for the same period in
1996. The decrease of $308,000 was due primarily to a decrease of $351,000 in
federal insurance premiums offset by a $33,000 increase in compensation and
benefits and a net increase of $10,000 in all other operating expenses. The
decrease of $351,000 in federal insurance premiums was the result of a one-time
special assessment of $274,000 charged in 1996 to recapitalize the Savings
Association Insurance Fund (SAIF), and an additional $77,000 savings in 1997 due
to the reduction of the insurance assessment rate on
12
<PAGE>
the Bank's deposits as a result of the recapitalization of SAIF. The increase of
$33,000 in compensation and benefits was due primarily to the addition of one
new person for 1997 and normal salary increases.
Income Taxes. The provision for income tax expense amounted to approximately
$575,000 and $409,000 for the years ended December 31, 1997 and 1996,
respectively. The provision for income tax expense as a percentage of income
before tax expense amounted to 34.0% and 34.9% for 1997 and 1996, respectively.
(See Note 10 of Notes to Consolidated Financial Statements).
Year 2000 Readiness Disclosure
The Company's operations, like those of most financial institutions, are
substantially dependent upon computer systems for lending and deposit
activities. The Company is addressing the potential problems associated with the
possibility that the computers which control its data processing activities,
facilities, and networks may not be programmed to read four-digit dates, and
upon the arrival of the year 2000, may recognize the two-digit code "00" as the
year 1900 rather than 2000. If uncorrected, this could cause systems to fail to
function or generate erroneous information.
The following information is provided in accordance with the Year 2000
Information and Readiness Disclosure Act of 1998, a special law, which
encourages companies, like Central Kentucky Federal, to communicate information
about their Year 2000 readiness plan.
Central Kentucky Federal Savings Bank (CKF) began preparation for achieving Year
2000 compliance in May of 1997. All electronic data exchange systems, including
both in-house applications and service bureau providers, were inventoried and
assessed for Year 2000 compliance. Systems classified as mission critical have
either been verified as Y2K compliant, replaced with compliant updates or
scheduled for replacement and testing.
CKF is heavily dependent upon one major data processing service provider.
Intrieve, Inc. provides customer account records, check clearing, general
ledger, and ATM services to CKF. The majority of systems provided by Intrieve,
Inc. were certified Y2K ready by the end of 1998. Intrieve, Inc. has completed
migration of all core systems to a new Y2K ready mainframe computer. Proxy
testing was completed in October 1998 and end-to-end testing was completed in
November 1998. However, CKF will be replacing its on-line teller system with a
Y2K compliant network in March of 1999. This equipment will be tested and
certified upon completion of the installation. Similarly, the ATM network was
upgraded in September of 1998 and could not be tested in conjunction with other
systems at that time. CKF is working with Intrieve and the MAC ATM network to
schedule network authorization for end-to-end testing.
CKF has spent approximately $8,000 for Y2K compliance efforts through December
31, 1998. It expects to spend an additional $56,000 through the end of 1999.
These future costs are estimated at $24,000 for hardware changes, $27,000 for
software upgrades, and an additional $5,000 for labor. All of these funds will
come from budgeted operational and capital expenditure accounts.
The most critical element of CKF's Year 2000 preparation is the performance of
Intrieve, Inc. Should Intrieve not meet deadlines or fail to successfully modify
its systems, CKF would face the prospect of having to revert to manual posting
and processing of customer accounts. Based on the number of accounts and
activity volume, it is possible to continue operations for a reasonable period
of time.
13
<PAGE>
On August 1, 1998, the bank issued a Year 2000 contingency plan. Each core
business was evaluated and prioritized for Year 2000 impact. Those systems
identified as mission critical have a business recovery/contingency plan. The
majority of these systems can be dealt with in a manner that will result in
minimal impact to the customers or financial condition of the bank. However, if
Intrieve, Inc. should fail to function properly after the century change date, a
significant impact on customers, and operations would occur. Therefore, an
extensive set of plans have been prepared to continue operations as close to
normal as possible. Some of the key contingency items are: maintaining
machine-readable copies of master files, printed and microfiche copies of
records/trial balances, off-site storage of back-up records and computer
hardware redundancy. If mainframe processing is unavailable to the bank, a plan
for manual posting and processing is in place. With electronic records as of
December 29, 1999, downloaded via diskettes to a stand alone PC at the bank,
processing will continue through a spreadsheet (Excel) application. It is
expected that this manual process will be adequate to maintain operations during
the most likely worst case scenario.
The foregoing discussion, regarding the timing , effectiveness, implementation,
and cost of CKF's Year 2000 efforts, contains forward-looking statements, which
are based on management's best estimates derived using assumptions. These
forward-looking statements involve inherent risks and uncertainties, and actual
results could differ materially from those contemplated. Also, please note that
the CKF will periodically update and revise this Year 2000 Readiness Disclosure
as conditions warrant.
Liquidity and Capital Resources
The liquidity of the Company depends primarily on the dividends paid to it as
the sole shareholder of the Bank. 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.
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 4% of deposits and borrowings.
Central Kentucky Federal's liquidity ratio at December 31, 1998, was
approximately 8.19%. 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, 1998 and 1997,
cash and cash equivalents totaled approximately $4.0 million and $3.3 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 1998 and 1997. The primary investing activities of the Bank are origination
of loans and purchase of investment securities. For the year ended December 31,
1998 and 1997, respectively, the Bank's origination
14
<PAGE>
of loans exceeded repayments by $2.0 million and $1.8 million. The excess of
originations over repayments during 1998 and 1997 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 deposit and from other deposit accounts, and from the issuance
and repurchase of the Company's common stock. During the year ended December 31,
1998, the Bank had a net increase in other deposit accounts of approximately
$1.3 million and a net increase in certificates of deposit of $4.4 million. In
addition, the Company repurchased 21,970 shares of its stock at a cost of
$697,000.
The Bank's capital ratios are substantially in excess of current regulatory
capital requirements. At December 31, 1998, the Bank's core capital amounted to
17.2% of adjusted total assets, or 13.2%, in excess of the Bank's current 4%
core capital requirement. Additionally, the Bank's risk-weighted assets ratio
was 29.4% at December 31, 1998, or 21.4% 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.
Impact of Recent Accounting Standards
Accounting for Earnings Per Share. In February 1997, the FASB issued Statement
of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128"). SFAS
128 establishes standards for computing and presenting earnings per share (EPS)
and applies to entities with publicly held common stock or potential common
stock. This statement simplifies the standards for computing earnings per share
previously found in APB Opinion No. 15, Earnings Per Share, and makes them
comparable to international EPS standards. It replaces the presentation of
primary EPS with a presentation of basic EPS and requires dual presentation of
basic and diluted EPS on the face of the income statement for all entities with
complex capital structures, and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation.
SFAS 128 is effective for financial statements issued for periods ending after
December 15, 1997, including interim periods; earlier application is not
permitted. This statement requires restatement of all prior-period EPS data
presented. The Company adopted the provisions of SFAS 128 in December 1997 with
no material effect on the Company's financial statements.
Reporting of Comprehensive Income. In June 1997, the Financial Accounting
Standards Board issued Statements of Financial Accounting Standards No. 130,
Reporting of Comprehensive Income ("SFAS 130"), which establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of financial statements. This
statement also requires that all items that are required to be recognized under
accounting standards as components of comprehensive
15
<PAGE>
income be reported in a financial statement that is displayed with the same
prominence as other financial statements.
This statement was effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The Company adopted SFAS 130 with no material
effect on the Company.
Disclosure about Segments and Related Information. In June 1997, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 131, Disclosure about Segments of an Enterprise and Related Information
("SFAS 131"), which establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports issued to stockholders. This
statement also establishes standards for related disclosures about products and
services, geographic areas, and major customers. This statement requires the
reporting of financial and descriptive information about an enterprise's
reportable operating segments.
This statement was effective for financial statements for periods beginning
after December 15, 1997. In the initial year of application, comparative
information for earlier years is to be restated. The adoption of SFAS 131 had no
material effect on the Company.
16
<PAGE>
MILLER, MAYER, SULLIVAN & STEVENS LLP
CERTIFIED PUBLIC ACCOUNTANTS
"INNOVATORS OF SOLUTION TECHNOLOGY"/SM/
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, 1998 and 1997, 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, 1998.
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, 1998 and 1997, and the consolidated results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998 in conformity with generally accepted accounting
principles.
/s/ Miller, Mayer, Sullivan, & Stevens, LLP
Lexington, Kentucky
January 21, 1999
(606)223-3095
2365 Harrodsburg Road Lexington, Kentucky, 40504-3399 FAX: (606)223-2143
17
<PAGE>
CKF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
-----------------
<TABLE>
<CAPTION>
As of December 31,
--------------------------------
ASSETS 1998 1997
------------- -------------
<S> <C> <C>
Cash and due from banks $ 545,711 $ 134,032
Interest bearing deposits 3,458,161 3,139,525
Investment securities:
Securities available-for-sale 634,585 551,892
Securities held-to-maturity (market values of $2,047,776
and $2,154,037 for 1998 and 1997, respectively) 2,042,705 2,152,020
Loans receivable, net 57,911,846 55,894,813
Accrued interest receivable 431,153 430,290
Office property and equipment, net 546,203 548,923
Other assets 9,551 13,852
------------- -------------
Total assets $ 65,579,915 $ 62,865,347
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 48,938,374 $ 43,253,068
Advance from Federal Home Loan Bank 2,119,932 5,213,782
Advance payment by borrowers for taxes and insurance 39,737 30,188
Other liabilities 615,167 605,606
------------- -------------
Total liabilities 51,713,210 49,102,644
------------- -------------
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 9,555,017 9,638,682
Retained earnings, substantially restricted 7,366,006 7,004,137
Accumulated other comprehensive income 410,294 355,717
Treasury stock, 85,945 and 50,000 shares, respectively, at cost (1,683,489) (986,388)
Incentive Plan Trust, 62,500 and 83,000 shares, respectively, at cost (1,221,853) (1,619,433)
Unearned Employee Stock Ownership Plan (ESOP) stock (569,270) (640,012)
------------- -------------
Total stockholders' equity 13,866,705 13,762,703
------------- -------------
Total liabilities and stockholders' equity $ 65,579,915 $ 62,865,347
============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
18
<PAGE>
CKF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
-----------------
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Interest income:
Interest on loans $ 4,372,430 $ 4,368,261 $ 4,072,208
Interest and dividends on investments 125,697 154,938 165,018
Other interest income 110,002 62,497 91,251
------------- ------------- -------------
Total interest income 4,608,129 4,585,696 4,328,477
------------- ------------- -------------
Interest expense:
Interest on deposits 2,393,349 2,180,927 2,134,724
Other interest 112,968 153,599 18,577
------------- ------------- -------------
Total interest expense 2,506,317 2,334,526 2,153,301
------------- ------------- -------------
Net interest income 2,101,812 2,251,170 2,175,176
Provision for loan losses 24,000 18,000 7,000
------------- ------------- -------------
Net interest income after provision for loan losses 2,077,812 2,233,170 2,168,176
------------- ------------- -------------
Non-interest income:
Loan and other service fees 77,503 61,614 50,032
Gain on sale of investments 137,067 420,575 281,616
Other, net 3,514 2,234 2,627
------------- ------------- -------------
Total non-interest income 218,084 484,423 334,275
------------- ------------- -------------
Non-interest expense:
Compensation and benefits 554,619 571,771 538,634
Federal insurance premium 27,474 22,369 373,439
Legal and professional fees 135,058 15,857 20,945
State franchise tax 52,597 52,922 49,094
Occupancy expense, net 62,225 45,387 44,792
Data processing 54,978 46,506 41,832
Loss on foreclosed real estate 5,004 41,813 36,000
Other operating expenses 232,074 228,726 228,871
------------- ------------- -------------
Total non-interest expense 1,124,029 1,025,351 1,333,607
------------- ------------- -------------
Income before income tax expense 1,171,867 1,692,242 1,168,844
Provision for income taxes 398,254 575,361 408,586
------------- ------------- -------------
Net income $ 773,613 $ 1,116,881 $ 760,258
============= ============= =============
Earnings per common share $ .98 $ 1.33 $ .85
================ ================ =============
Earnings per common share - assuming dilution $ .96 $ 1.29 $ .83
============= ============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
19
<PAGE>
CKF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
for the years ended December 31, 1998, 1997, and 1996
----------------------------------
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Paid-in Retained Comprehensive
Stock Capital Earnings Income
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1995 $ 10,000 $ 9,583,408 $ 6,767,215 $ 514,955
Comprehensive income:
Net income 760,258
Other comprehensive income, net of tax (51,223)
Total comprehensive income
Dividend declared (379,542)
ESOP stock earned in 1996 51,448
Purchase of common stock, 76,125 shares
Stock issued upon exercise of options (22,525)
------------ ------------ ------------ ------------
Balance, December 31, 1996 10,000 9,612,331 7,147,931 463,732
Comprehensive income:
Net income 1,116,881
Other comprehensive income, net of tax (108,015)
Total comprehensive income
Dividend declared (1,260,675)
ESOP stock earned in 1997 49,944
Purchase of common stock, 63,975 shares
Stock issued upon exercise of options (23,593)
------------ ------------ ------------ ------------
Balance, December 31, 1997 10,000 9,638,682 7,004,137 355,717
Comprehensive income:
Net income 773,613
Other comprehensive income, net of tax,
increase in unrealized gains on securities,
net of reclassification adjustment
(see disclosure) 54,577
Total comprehensive income
Dividend declared (411,744)
ESOP stock earned in 1998 43,635
Purchase of common stock, 21,970 shares
Stock issued upon exercise of options (127,300)
Stock issued as compensation ------------ ------------ ------------ ------------
Balance, December 31, 1998 $ 10,000 $ 9,555,017 $ 7,366,006 $ 410,294
============ ============ ============ ============
Disclosure of reclassification amount:
Unrealized holding gains arising during the
period $ 153,841
Less: reclassification adjustment for gains
included in net income, net of tax (99,264)
------------
Net change in unrealized gains on securities $ 54,577
============
<CAPTION>
Incentive Unearned Total
Treasury Plan ESOP Stockholders'
Stock Trust Stock Equity
-------------- --------------- ------------- --------------
<S> <C> <C> <C> <C>
Balance, December 31, 1995 $ $ $ (746,668) $ 16,128,910
--------------
Comprehensive income:
Net income 760,258
Other comprehensive income, net of tax 51,223
--------------
Total comprehensive income 709,035
Dividend declared (379,542)
ESOP stock earned in 1996 53,335 104,783
Purchase of common stock, 76,125 shares (1,049,588) (459,294) (1,508,882)
Stock issued upon exercise of options 63,200 3,950 44,625
------------ ------------ ------------ --------------
Balance, December 31, 1996 (986,388) (455,344) (693,333) 15,098,929
--------------
Comprehensive income:
Net income 1,116,881
Other comprehensive income, net of tax (108,015)
--------------
Total comprehensive income 1,008,866
Dividend declared (1,260,675)
ESOP stock earned in 1997 53,321 103,265
Purchase of common stock, 63,975 shares (1,236,244) (1,236,244)
Stock issued upon exercise of options 72,155 48,562
------------ ------------ ------------ --------------
Balance, December 31, 1997 (986,388) (1,619,433) (640,012) 13,762,703
--------------
Comprehensive income:
Net income 773,613
Other comprehensive income, net of tax,
increase in unrealized gains on securities,
net of reclassification adjustment
(see disclosure) 54,577
-------------
Total comprehensive income 828,190
Dividend declared (411,744)
ESOP stock earned in 1998 70,742 114,377
Purchase of common stock, 21,970 shares (697,101) (697,101)
Stock issued upon exercise of options 389,800 262,500
Stock issued as compensation 7,780 7,780
------------ ------------ ------------ -------------
Balance, December 31, 1998 $ (1,683,489) $ (1,221,853) $ (569,270) $ 13,866,705
============ ============ ============ =============
Disclosure of reclassification amount:
Unrealized holding gains arising during the
period
Less: reclassification adjustment for gains
included in net income, net of tax
Net change in unrealized gains on securities
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
20
<PAGE>
CKF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
---------------
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 773,613 $ 1,116,881 $ 760,258
Adjustments to reconcile net income to net
cash provided by operating activities:
ESOP benefit expense 95,165 103,265 104,783
Provision for loan losses 24,000 18,000 7,000
Provisions for losses on foreclosed real estate 5,004 41,813 36,000
Amortization of loan fees (14,231) (10,273) (7,593)
Realized gain on sale of investment (137,067) (420,575) (281,616)
Provision for depreciation 31,452 27,480 27,457
FHLB stock dividend (38,000) (35,400) (32,100)
Amortization of investment premium and (discount) 3,301 3,014 9,156
Changes in:
Interest receivable (863) (51,885) 61,909
Other liabilities (47,298) (141,992) 52,459
Prepaid expense 4,301 (2,074) (378)
Interest payable (13,022) 3,186 1,678
------------- ------------- -------------
Net cash provided by operating activities 686,355 651,440 739,013
------------- ------------- -------------
Cash flows from investing activities:
Loan originations and principal payment on loans, net (2,026,802) (1,833,321) (3,473,994)
Purchase of loans (887,710) (332,000)
Proceeds from sale of foreclosed real estate 33,627 185,527
Proceeds from maturities of securities held-to-maturity 500,000 500,000 250,000
Purchase of securities held-to-maturity (500,000) (1,017,807)
Purchase of certificates of deposit 500,000
Proceeds from maturities of certificates of deposit (500,000) 1,000,000
Proceeds from sale of securities available-for-sale 140,203 433,500 294,167
Principle repayment on mortgage back securities 144,014 95,089 51,969
Purchase of fixed assets (28,732) (35,765) (7,127)
------------- ------------- -------------
Net cash provided (used) for investing activities (1,737,690) (1,542,680) (3,234,792)
------------- ------------- -------------
</TABLE>
(Continued)
The accompanying notes are an integral part of the consolidated financial
statements.
21
<PAGE>
CKF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
---------------
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in demand deposits,
NOW accounts and savings accounts 1,332,908 (243,214) 366,519
Net increase (decrease) in certificate of deposits 4,352,398 663,927 3,109,995
Proceeds from FHLB advance 8,000,000 12,000,000 1,000,000
Payments on FHLB advances (11,093,851) (8,038,396) (35,862)
Net increase (decrease) in custodial accounts 9,549 11,245 14,761
Purchase of common stock (697,101) (1,236,244) (1,508,882)
Payment of dividends (411,744) (1,260,675) (379,542)
Additional principal payment on ESOP loan 19,211
Stock issued as compensation 7,780
Proceeds from exercise of stock options 262,500 48,562 44,625
------------- ------------- -------------
Net cash provided (used) by financing activities 1,781,650 1,945,205 2,611,614
------------- ------------- -------------
Increase (decrease) in cash and cash equivalents 730,315 1,053,965 115,835
Cash and cash equivalents, beginning of period 3,273,557 2,219,592 2,103,757
------------- ------------- -------------
Cash and cash equivalents, end of period $ 4,003,872 $ 3,273,557 $ 2,219,592
============= ============= =============
Supplemental Disclosures of Cash Flow Information:
Cash paid for income taxes $ 568,480 $ 794,708 $ 421,445
Cash paid for interest $ 2,519,339 $ 2,322,838 $ 2,151,623
Supplemental Disclosures of Noncash Activities:
ESOP stock earned $ 95,165 $ 103,265 $ 104,783
Mortgage loans originated to finance sale of
foreclosed real estate $ 15,000
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
22
<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.
(Continued)
23
<PAGE>
CKF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------------------
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 maturities of three months or less to be cash equivalents.
Cash and cash equivalents include approximately $228,000 on deposit
with other banks which is not covered by FDIC insurance.
Investment Securities. 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 stockholders' 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 (4% at December 31, 1998 and 1997) of deposit accounts (net
of loans on deposits) plus short-term borrowings. At December 31, 1998
and 1997, 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. This statement
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 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' 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
(Continued)
24
<PAGE>
CKF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------------------
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. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the allowance for loan losses and may require
additions to the allowance based on their judgement about information
available to them at the time of their examination.
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, 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, decreased from .23% on customer deposit balances under $100,000
to approximately .6% on customer deposit balances under $100,000.
(Continued)
25
<PAGE>
CKF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------------------
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 stock in stockholders' equity at
the fair value of the stock at the date of issuance to the plan. As
shares of stock are committed to be released as compensation to
employees, the Company reduces the carrying value of the unearned
stock and records compensation expense equal to the current value of
the stock.
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 stock at the date of the award. The
total compensation cost is recognized over the vesting period.
Earnings Per Share. In accordance with SFAS No. 128, which was
effective for financial statement periods ending after December 15,
1997, earnings per common share is computed by dividing income
available to common shareholders by the weighted average number of
common shares outstanding during the period. Earnings per common share
- assuming dilution reflects the potential dilution that could occur
if securities or other contracts to issue common stock were exercised
or converted into common stock or resulted in the issuance of common
stock, that then shared in the earnings of the company. Earnings per
share disclosures for the prior periods presented have been restated
in accordance with SFAS No. 128.
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.
(Continued)
26
<PAGE>
CKF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------------------
2. Investment Securities
Investment securities held by the Company at December 31, 1998 and 1997 are
summarized as follows:
<TABLE>
<CAPTION>
December 31, 1998
--------------------------------------------------------------------
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-10,000 shares $ 9,789 $ 624,796 $ $ 634,585
============= ============== ============= =============
Securities held-to-maturity:
U. S. Treasury securities and
obligations of U. S. Government
corporations and agencies $ 1,253,877 $ 4,205 $ $ 1,258,082
Mortgage backed securities 218,928 866 219,794
Federal Home Loan Bank of
Cincinnati capital stock - 5,549
shares 554,900 554,900
Intrieve Incorporated capital
stock - 10 shares 15,000 15,000
------------- -------------- ------------- -------------
$ 2,042,705 $ 5,071 $ $ 2,047,776
============= ============== ============= =============
</TABLE>
(Continued)
27
<PAGE>
CKF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------------------
<TABLE>
<CAPTION>
December 31, 1997
--------------------------------------------------------------------
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-13,200 shares $ 12,925 $ 538,967 $ $ 551,892
============= ============== ============= =============
Securities held-to-maturity:
U. S. Treasury securities and
obligations of U. S. Government
corporations and agencies $ 1,251,734 $ 6,343 $ 574 $ 1,257,503
Mortgage backed securities 368,386 3,752 364,634
Federal Home Loan Bank of
Cincinnati capital stock - 5,169
shares 516,900 516,900
Intrieve Incorporated capital
stock - 10 shares 15,000 15,000
------------- -------------- ------------- -------------
$ 2,152,020 $ 6,343 $ 4,326 $ 2,154,037
============= ============== ============= =============
</TABLE>
The amortized cost and estimated market value of debt securities at
December 31, 1998, 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, 1998:
Due in one year or less $ 500,351 $ 504,060
Due after one year through five years 753,526 754,022
------------- -------------
$ 1,253,877 $ 1,258,082
============= =============
</TABLE>
Investment securities with a carrying value of approximately
$1,000,000 and $500,000 at December 31, 1998 and 1997, respectively,
were pledged as collateral for certain municipal deposits.
For the year ended December 31, 1998, the Bank received $140,203 from
the sale of an equity security, which was classified as available-for-
sale and $500,000 from the maturity of an obligation of a U.S.
Government Agency, which was classified as held-to-maturity.
(Continued)
28
<PAGE>
CKF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------------------
For the year ended December 31, 1997, the Bank received $433,500 from
the sale of an equity security, which was classified as available-for-
sale and $500,000 from the maturity of an obligation of a U.S.
Government agency, which was classified as held-to-maturity. For the
year ended December 31, 1996, the Bank received $294,167 from the sale
of an equity security, which was classified as available-for-sale and
$250,000 from the maturity of an obligation of the U.S. Government,
which was classified as held-to-maturity.
At December 31, 1998 and 1997 the unrealized appreciation on
investment securities available-for-sale in the amount of $624,796 and
$538,967 net of the deferred tax liability of $214,502 and $183,250,
respectively, is included in Accumulated Other Comprehensive Income as
a separate component of stockholders' equity.
Accrued interest receivable includes $9,689 and $5,205 as of December
31, 1998 and 1997, 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, 1998 and 1997 consist of the
following:
<TABLE>
<CAPTION>
December 31,
---------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Real estate mortgage secured by one-to-four family
residential property $ 45,375,024 $ 44,394,107
Real estate mortgage secured by multi-family
residential property 1,008,127 1,113,742
Real estate mortgage secured by other properties 9,006,876 7,803,782
Consumer loans:
Loans to depositors, secured by savings 533,052 458,916
Other, principally unsecured 2,527,140 2,610,249
-------------- ---------------
58,450,219 56,380,796
Less:
Undisbursed portion of mortgage loans 322,468 299,088
Allowance for loan losses 148,200 125,000
Net deferred loan origination fees 67,705 61,895
-------------- ---------------
$ 57,911,846 $ 55,894,813
============== ===============
</TABLE>
Accrued interest receivable includes $421,464 and $425,085 at
December 31, 1998 and 1997, respectively, related to loans receivable.
(Continued)
29
<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,
-------------------------------------------------
1998 1997 1996
-------------- ------------- -------------
<S> <C> <C> <C>
Balance, beginning of period $ 125,000 $ 107,000 $ 100,000
Additions charged to operations 24,000 18,000 7,000
Charge-offs (800)
Recoveries
-------------- ------------- -------------
Balance, end of period $ 148,200 $ 125,000 $ 107,000
============== ============= =============
</TABLE>
The following is a summary of non-performing loans:
<TABLE>
<CAPTION>
Amount (in thousands)
-------------------------------------------------
For the Years Ended December 31,
-------------------------------------------------
1998 1997 1996
-------------- ------------- -------------
<S> <C> <C> <C>
Loans past due 90 days or more $ 356 $ 227 $ 359
Non-accrual loans 65 65 87
-------------- ------------- -------------
Total nonperforming loan balances $ 421 $ 292 $ 446
============== ============= =============
Nonperforming loans as a percentage of loans .73% .52% .82%
=============== ============== ==============
</TABLE>
The Bank identified impaired loans as defined by SFAS No. 114 in the
amount of $65,457, $65,432, and $270,465 at December 31, 1998, 1997, and
1996 for which no allowance for loan losses has been provided. The
average recorded investment in impaired loans was $57,070, $96,612 and
$285,056 during the years ended December 31, 1998, 1997, and 1996,
respectively. Interest income on impaired loans of $4,158 and $7,905 and
$5,480, respectively, was recognized for cash payments received in 1998,
1997, and 1996, respectively.
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, 1998 and 1997, were as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1998 1997
------------- --------------
<S> <C> <C>
Balance at beginning of period $ 246,338 $ 254,701
New loans 636,889 33,098
Repayments (418,428) (41,461)
------------- --------------
Balance at end of period $ 464,799 $ 246,338
============= ==============
</TABLE>
(Continued)
30
<PAGE>
CKF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------
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
years ended December 31, 1998 and 1997 is as follows:
December 31,
--------------------------------
1998 1997
-------------- ---------------
Balance at beginning of period $ -0- $ 36,000
Provision charged to income 41,813
Charge-offs, net of recoveries (77,813)
-------------- ---------------
Balance at end of period $ -0- $ -0-
============== ===============
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 $329,000 and $844,000 as of December 31, 1998 and
1997, respectively. Also, as of December 31, 1998, the Bank had made a
$1,000,000 commitment to participate in a mortgage loan with a local
financial institution. In addition, the Bank had approximately $1,000,658
and $905,583 of unused home equity lines and other open lines of credit
outstanding to customers at December 31, 1998 and 1997, respectively. The
mortgage loan commitments at December 31, 1998 included fixed rate loan
commitments of $89,000. The mortgage loan commitments at December 31, 1997
included fixed rate loan commitments of $196,000. 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 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
(Continued)
31
<PAGE>
CKF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------
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 consist of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1998 1997
------------- --------------
<S> <C> <C>
Land, at cost $ 165,157 $ 165,157
Building, at cost 567,398 553,286
Furniture, fixtures and equipment 286,285 271,665
------------- --------------
1,018,840 990,108
Less accumulated depreciation 472,637 441,185
------------- --------------
$ 546,203 $ 548,923
============= ==============
</TABLE>
7. Deposits
Deposit accounts are summarized as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------
1998 1997
-------------- ---------------
<S> <C> <C>
Demand deposit accounts $ 224,650 $ 266,941
Passbook accounts with a weighted average rate of 3.05%
at December 31, 1998 and 1997 3,733,222 3,431,241
NOW and MMDA deposits with a weighted average rate of
3.62% and 3.65% at December 31, 1998 and 1997,
respectively 6,067,312 4,994,093
-------------- ---------------
10,025,184 8,692,275
Certificate of deposits with a weighted average interest rate of 5.60%
and 5.59% at December 31, 1998 and 1997,
respectively 38,913,190 34,560,793
-------------- ---------------
Total deposits $ 48,938,374 $ 43,253,068
============== ===============
Jumbo certificates of deposit (minimum denomination
of $100,000) $ 12,377,746 $ 9,435,274
============== ===============
</TABLE>
(Continued)
32
<PAGE>
CKF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------
Certificates of deposit by maturity at December 31, 1998 and 1997 are as
follows:
<TABLE>
<CAPTION>
December 31,
------------------------------
1998 1997
------------- -------------
(In Thousands)
<S> <C> <C>
Within 1 year $ 24,270 $ 22,067
1-2 years 7,114 6,454
2-3 years 2,980 3,152
Maturing in years thereafter 4,549 2,888
------------- -------------
$ 38,913 $ 34,561
============= =============
</TABLE>
Certificates of deposit by maturity and interest rate category at December
31, 1998 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% $ 22,491 $ 5,880 $ 2,893 $ 2,757 $ 34,021
6.01 - 8.00% 1,779 1,234 87 1,792 4,892
-------------- ------------- -------------- ------------- -------------
$ 24,270 $ 7,114 $ 2,980 $ 4,549 $ 38,913
============== ============= ============== ============= =============
</TABLE>
Interest expense on deposits for the periods indicated are as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31,
-------------------------------------------------
1998 1997 1996
-------------- ------------- -------------
<S> <C> <C> <C>
Money market and NOW accounts $ 197,385 $ 189,195 $ 198,329
Savings accounts 113,386 104,402 111,743
Certificates 2,082,578 1,887,330 1,824,652
-------------- ------------- -------------
$ 2,393,349 $ 2,180,927 $ 2,134,724
============== ============= =============
</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,
1998 and 1997.
(Continued)
33
<PAGE>
CKF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------
8. Advances from Federal Home Loan Bank
The advances from the Federal Home Loan Bank consist of the following:
December 31,
-------------------------------
Maturity Date Interest Rate 1998 1997
------------- ------------- -------------- -------------
1/23/98 6.90% $ $ 1,000,000
2/03/98 6.90% 1,000,000
2/24/98 6.90% 1,000,000
3/30/98 6.98% 2,000,000
3/22/99 5.77% 2,000,000
7/01/01 6.85% 119,932 213,782
------------- --------------
$ 2,119,932 $ 5,213,782
============= ==============
A schedule of the principal payments due over the remaining term of the
notes as of December 31, 1998 follows:
Year Amount
---- -------------
1999 $ 2,047,128
2000 50,460
2001 22,344
-------------
Total $ 2,119,932
=============
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 $3,734,797 and $8,337,574 at December 31, 1998 and 1997,
respectively. At December 31, 1998 FHLB advances totaling $2,000,000 have a
variable or floating interest rate.
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 two tests, hereinafter described as the
core capital requirement and the risk-based capital requirement. The core
capital requirement provides for minimum core capital (stockholders' equity
less all intangible assets plus certain forms of supervisory goodwill and
other qualifying intangible assets such as capitalized mortgage servicing
rights) equal to 4.0% of adjusted total assets. The risk-based capital
requirement provides for the maintenance of core capital plus any 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)
34
<PAGE>
CKF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------
As of December 31, 1998, the Bank's regulatory capital exceeded all minimum
regulatory capital requirements as shown in the following table:
<TABLE>
<CAPTION>
Regulatory Capital
--------------------------------------------------------
Core Risk-based
Capital Percent Capital Percent
--------- --------- ------------ ---------
in thousands
--------------------------------------------------------
<S> <C> <C> <C> <C>
Capital under generally accepted
accounting principles $ 11,572 17.8 $ 11,572 30.2
Adjustments:
Net unrealized appreciation on
securities available-for-sale (410) (.6) (410) (1.1)
General valuation allowances 148 .3
-------- -------- -------- ------
Regulatory capital computed 11,162 17.2 11,310 29.4
Minimum capital requirement 2,600 4.0 3,070 8.0
-------- -------- -------- ------
Regulatory capital-excess $ 8,562 13.2 $ 8,240 21.4
======== ======== ======== ======
</TABLE>
Retained Earnings Restriction. Retained earnings at December 31, 1998
include approximately $1,471,000 of tax bad debt reserves accumulated prior
to December 31, 1987 for which no Federal income tax has been provided.
These tax bad debt reserves are only taxable in certain circumstances, such
as if the Bank converted to an institution that did not qualify as a bank
for tax purposes (see Note 10).
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 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.
(Continued)
35
<PAGE>
CKF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------
10. Income Taxes
The provision for income taxes for the periods indicated consist of the
following:
<TABLE>
<CAPTION>
For the Years Ended December 31,
-------------------------------------------------
1998 1997 1996
-------------- ------------- -------------
<S> <C> <C> <C>
Federal income tax expense:
Current $ 420,801 $ 575,390 $ 612,292
Deferred (22,547) (29) (203,706)
-------------- ------------- -------------
$ 398,254 $ 575,361 $ 408,586
============== ============= =============
</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,
-------------------------------------------------
1998 1997 1996
-------------- ------------- -------------
<S> <C> <C> <C>
FHLB stock $ 12,920 $ (4,705) $ 10,914
Directors retirement plan (14,861) (19,839) (18,448)
Allowance for loan losses (7,976) 6,282 (171,523)
Net accrued income (5,164) 14,959 (23,499)
Other, net (7,466) 3,274 (1,150)
-------------- ------------- -------------
$ (22,547) $ (29) $ (203,706)
============== ============= =============
</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,
-------------------------------------------------
1998 1997 1996
-------------- ------------- -------------
<S> <C> <C> <C>
Expected income tax expense at federal tax rate $ 398,435 $ 575,361 $ 397,407
Other, net (181) 11,179
-------------- ------------- -------------
Total income tax expense $ 398,254 $ 575,361 $ 408,586
============== ============= =============
Effective income tax rate 34.0% 34.0% 34.9%
============== ============= =============
</TABLE>
(Continued)
36
<PAGE>
CKF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------
Deferred tax assets and liabilities as of December 31, 1998 and 1997
consisted of the following:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Deferred tax assets:
Deferred loan fee income $ 23,020 $ 21,044
Directors retirement plan 80,163 65,302
Allowance for loan losses 50,048 42,072
------------- -------------
153,231 128,418
------------- -------------
Deferred tax liabilities:
Net accrued interest income 137,775 142,940
FHLB stock 113,254 100,334
Other, net 10,217 15,708
------------- -------------
261,246 258,982
------------- -------------
Net deferred tax asset (liability) $ 108,015 $ (130,564)
============= =============
</TABLE>
In addition to the net deferred tax liability of $108,015 as of December
31, 1998 included in the preceding table, the financial statements include
a deferred tax liability of $214,502 that was charged against the
unrealized gain on securities available-for-sale of $624,796. The net
amount of $410,294 is recorded in Accumulated Other Comprehensive Income, a
separate component of stockholders' equity at December 31, 1998.
In 1996, the Internal Revenue Service repealed a 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 are 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, 1997. 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)
37
<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
$4,492 and $2,297 for the years ended December 31, 1998 and 1997,
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 expense of $43,709, $58,351, and
$54,260, in connection with this plan for the years ended December 31,
1998, 1997, and 1996, 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, 1998, the Company awarded options to
purchase 4,000 shares of common stock at an exercise price of $17.19 per
share. For the year ended December 31, 1996, the Company awarded options to
purchase 2,000 shares of common stock at an exercise price of $20.00 per
share. In 1998, the Company lowered the exercise price on the 2,000 stock
options awarded in 1996 to $17.19 per share.
(Continued)
38
<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,
---------------------------------------------------------------
1998 1997
-------------------------- -----------------------------
Option Number Option Number
Price of Units Price of Units
------------ --------- ------------- -----------
<S> <C> <C> <C> <C>
Balance outstanding at beginning of year $13.13-20.00 83,900 $ 13.13 87,600
Granted 17.19 4,000 20.00
Exercised 13.13 (20,000) 13.13 (3,700)
Cancelled 13.13 (6,400)
--------- ----------
Balance outstanding at end of year $13.13-17.19 61,500 $13.13-$20.00 83,900
========= ==========
Shares exercisable 36,700 28,900
========= ==========
Shares available for grant 11,400 9,000
========= ==========
</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, 1998, 1997, and 1996, respectively.
<TABLE>
<CAPTION>
Reported Per Consolidated
Financial Statements Pro Forma Amount
----------------------------------------------- -------------------------------------------
1998 1997 1996 1998 1997 1996
------------- -------------- -------------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Net income $ 773,613 $ 1,116,881 $ 760,258 $ 671,875 $ 1,019,323 $ 664,336
============ ============== ============== ============= ============ ===========
Earnings per share $ .98 $ 1.29 $ 0.83 $ .85 $ 1.17 $ 0.72
============ ============== ============== ============= =========== ===========
</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 a committee appointed by the Company's Board of
Directors. The ERP is a non-qualified plan that
(Continued)
39
<PAGE>
CKF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------
is managed through a separate trust. The Bank is authorized to contribute
sufficient funds to the Incentive Plan 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, 1998, 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 being repaid in annual installments over a 15-year period with interest,
which is based on the published prime rate (currently 7.75%) 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 $41,600
and $117,600 were used in fiscal year 1998 and 1997, respectively, 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 $95,165, $103,265, and $104,783 for the years ended
December 31, 1998, 1997, and 1996, respectively. During 1998, 1997, and
1996, 5,237, 6,428, and 5,333 shares of stock were released from
collateral, respectively. At December 31, 1998, there were 57,664
unallocated ESOP shares of stock having a fair value of $987,496.
12. Disclosures about Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of the fair value of financial instruments, both assets
and liabilities whether or not recognized in the consolidated statement of
financial condition, for which it is practicable to estimate that value.
For financial instruments where quoted market prices are not available,
fair values are based on estimates using present value and other valuation
methods.
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,
(Continued)
40
<PAGE>
CKF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------
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)
41
<PAGE>
CKF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------
The estimated fair values of the Company's financial instruments at
December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
--------------------------- -----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------------------------- -----------------------------
<S> <C> <C> <C> <C>
Assets
Cash and interest bearing deposits $ 4,003,872 $ 4,003,872 $ 3,273,557 $ 3,293,557
Securities available-for-sale 634,585 634,585 551,892 551,892
Securities held-to-maturity 2,042,705 2,047,776 2,152,020 2,154,037
Loans receivable, net 57,911,846 57,649,549 55,894,813 55,746,430
Liabilities
Deposits 48,938,374 49,377,089 43,253,068 43,341,388
FHLB advances 2,119,932 2,123,238 5,213,782 5,216,583
Unrecognized Financial Instruments
Loan commitments 1,329,000 844,000
Unused home equity lines of credit 1,000,658 905,583
</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 $35,772, $26,064 and $30,025 for the years ended December 31,
1998, 1997 and 1996, respectively. Appraisal fees paid by the Bank amounted
to $36,395, $26,825 and $37,095 for these same periods. In addition, the
Bank leases office space to a Director. Rent income received by the Bank
amounted to $8,400, $8,400 and $7,800 for the years ended December 31,
1998, 1997 and 1996, respectively. Also in 1998 and 1997, general
contracting services totaling $14,112 and $26,186, respectively, were
provided by a company affiliated with one of the Bank's directors, in
connection with improvements made to the Bank's main office.
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, 1998, 1997 and 1996, respectively.
(Continued)
42
<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
----------------------------
As of December 31,
------------------------------
1998 1997
------------- -------------
Assets
Investment, at cost $ 15,000 $ 15,000
============= =============
Stockholder's Equity
Common stock $ 15,000 $ 15,000
============= =============
15. Stock Transactions
The Board of Directors authorized the repurchase of the Company's
common stock outstanding as follows:
Percentage
Number of
of Outstanding
Date of Authorization Shares Shares
--------------------- -------- -----------
December 16, 1995 50,000 5%
September 10, 1996 47,500 5%
October 4, 1997 36,127 4%
February 10, 1998 43,350 5%
For the years ended December 31, 1998, 1997, and 1996, the Company
repurchased 21,970, 63,975, and 76,125 common shares, respectively. The
63,975 shares of stock acquired in 1997 were transferred to the Incentive
Plan Trust.
For the year ended December 31, 1998, 20,000 common shares were issued from
the Incentive Plan Trust at an average cost of $19.49 per share for the
exercise of stock options. Also during 1998, 500 shares of common stock
were issued from the Incentive Plan Trust, which was recorded as
compensation at the fair value on the date of the award.
For the years ended December 31, 1997 and 1996, 3,700 and 200 shares of
common stock were issued from the Incentive Plan Trust at an average cost
of $19.50 and $19.75 per share for the exercise of stock options. In 1996
an additional 3,200 shares of common stock were issued from Treasury Stock
at an average cost of $19.75 per share for the exercise of stock options.
(Continued)
43
<PAGE>
CKF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------
16. Earnings Per Share
The table below summarizes the computation of earnings per common share and
earnings per common share, assuming dilution for the years ended
December 31, 1998, 1997, and 1996, respectively.
<TABLE>
<CAPTION>
For the years ended December 31,
-------------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Earnings Per Common Share
Numerator:
Income available to common shareholders $ 773,613 $ 1,116,881 $ 760,258
=========== =========== ===========
Denominator:
Weighted average of common
shares outstanding 789,800 841,662 888,580
=========== =========== ===========
Per Share Amount $ .98 $ 1.33 $ .85
=========== =========== ===========
Earning Per Common Share - Assuming Dilution
Numerator:
Income available to common shareholders $ 773,613 $ 1,116,881 $ 760,258
=========== =========== ===========
Denominator:
Weighted average of common
shares outstanding 789,800 841,662 888,580
Effect of outstanding stock options 15,751 26,643 29,227
----------- ----------- -----------
Weighted average of common shares
outstanding - assuming dilution 805,551 868,305 917,807
=========== =========== ===========
Per share amount $ .96 $ 1.29 $ .83
=========== =========== ===========
</TABLE>
Unallocated shares held by the Company's ESOP are considered outstanding
when they are committed to be released.
(Continued)
44
<PAGE>
CKF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------
17. 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,
1998 1997
------------- -------------
<S> <C> <C>
Assets:
Cash and due from banks $ 1,586,476 $ 353,567
Investment in subsidiary 12,140,857 13,240,671
Other assets 139,372 168,465
------------- -------------
$ 13,866,705 $ 13,762,703
============= =============
Liabilities and Stockholders' Equity:
Liabilities $ $
------------- -------------
Stockholders' equity:
Common stock 10,000 10,000
Additional paid-in capital 9,555,017 9,638,682
Retained earnings, restricted 7,366,006 7,004,137
Treasury stock, 85,945 and 50,000 shares, respectively, at cost (1,683,489) (986,388)
Stock Option Trust, 62,500 and 83,000 shares, respectively, at cost (1,221,853) (1,619,433)
Accumulated other comprehensive income 410,294 355,717
Unearned ESOP stock (569,270) (640,012)
------------- -------------
Total stockholders' equity 13,866,705 13,762,703
------------- -------------
$ 13,866,705 $ 13,762,703
============= =============
</TABLE>
(Continued)
45
<PAGE>
CKF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------
Condensed Statement of Income
<TABLE>
<CAPTION>
For the years ended December 31,
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Income: $ $ $
----------- ----------- -----------
Expense:
Legal and professional fees 104,000
Franchise and license tax 10,621 15,281 32,604
Other operating expenses 24,011 25,831 23,512
----------- ----------- -----------
138,632 41,112 56,116
----------- ----------- -----------
Net loss before tax expense (benefit) (138,632) (41,112) (56,116)
Income tax (expense) benefit 64,995 13,980 (11,374)
----------- ----------- -----------
Net loss before equity in undistributed net
income of subsidiary (73,637) (27,132) (67,490)
Equity in net income of subsidiary 847,250 1,144,013 827,748
----------- ----------- -----------
Net income $ 773,613 $ 1,116,881 $ 760,258
=========== =========== ===========
</TABLE>
(Continued)
46
<PAGE>
CKF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------
Condensed Statement of Cash Flows
<TABLE>
<CAPTION>
For the years ended December 31,
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 773,613 $ 1,116,881 $ 760,258
Adjustments to reconcile net income to cash
provided by operating activities:
Equity in undistributed net income of subsidiary (847,250) (1,144,013) (827,748)
Change in other receivables 145,111 (87,203) 56,986
Change in other liabilities (1,175) 1,175
------------- ------------- -------------
Net cash used by operating activities 71,474 (115,510) (9,329)
------------- ------------- -------------
Cash flows from investing activity:
Dividend payment from Bank 2,000,000 1,000,000
------------- ------------- -------------
Net cash provided by investing activities 2,000,000 1,000,000
------------- ------------- -------------
Cash flows from financing activities:
Dividends paid (411,744) (1,260,675) (379,542)
Purchase of common stock (697,101) (1,236,244) (1,508,882)
Proceeds from exercise of stock options 262,500 48,562 44,625
Stock issued as compensation 7,780
------------- ------------- -------------
Net cash used by financing activities (838,565) (2,448,357) (1,843,799)
------------- ------------- -------------
Net decrease in cash and cash equivalents 1,232,909 (1,563,867) (1,853,128)
Cash and cash equivalents at beginning of period 353,567 1,917,434 3,770,562
------------- ------------- -------------
Cash and cash equivalents at end of period $ 1,586,476 $ 353,567 $ 1,917,434
============= ============= =============
</TABLE>
47
<PAGE>
CORPORATE INFORMATION
================================================================================
BOARD OF DIRECTORS
W. Irvine Fox, Jr.
Chairman of the Board
Real Estate Developer/Partner
Charleston Green Townhouses
John H. Stigall
President and Chief Executive
Officer of the Bank and the Company
Jack L. Bosley, Jr.
Farm Partner
Viewpoint Farm
J.T. Goggans
General Contractor
W. Banks Hudson, III
Attorney-at-Law
Yvonne York Morley
Executive Assistant to the President and Assistant Secretary to the Board of
Trustees of Centre College
Warren O. Nash
Veterinarian
- --------------------------------------------------------------------------------
EXECUTIVE OFFICERS
John H. Stigall
President and Chief Executive Officer of the Bank and the Company
Ann L. Hooks
Vice President, Treasurer and Secretary of the Bank and the Company
- --------------------------------------------------------------------------------
OFFICE LOCATION
340 West Main Street
Danville, Kentucky 40422
- --------------------------------------------------------------------------------
GENERAL INFORMATION
Independent Accountants
Miller, Mayer, Sullivan & Stevens, LLP
2365 Harrodsburg Road
Lexington, Kentucky 40504-3399
General Counsel
W. Banks Hudson, III
Attorney at Law
102 S. Fourth Street
Danville, Kentucky 40422
Special Counsel
Housley Kantarian & Bronstein, P.C.
1220 19th Street, N.W., Suite 700
Washington, DC 20036
Annual Meeting
The 1998 Annual Meeting of Stockholders will be held on April 20, 1999 at 4:00
p.m. at Central Kentucky Federal Savings Bank, 340 West Main Street, Danville,
Kentucky
Transfer Agent
Illinois Stock Transfer Company
223 West Jackson Boulevard
Suite 1210
Chicago, Illinois 60606
Annual Report on Form 10-K
A COPY OF THE COMPANY'S 1998 ANNUAL REPORT ON FORM 10-K WILL BE FURNISHED
WITHOUT CHARGE TO STOCKHOLDERS AS OF THE RECORD DATE FOR THE 1999 ANNUAL MEETING
UPON WRITTEN REQUEST TO JOHN H. STIGALL, CKF BANCORP, INC., P.O. BOX 400, 340
WEST MAIN STREET, DANVILLE, KENTUCKY 40423
<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>
Exhibit 23
[LETTERHEAD OF MILLER, MAYER, SULLIVAN & STEVENS LLP APPEARS HERE]
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
CKF Bankcorp, 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 21, 1999,
relating to the consolidated balance sheets of CKF Bancorp, Inc. and subsidiary
as of December 31, 1998 and 1997, 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, 1998, which report is incorporated by
reference in the December 31, 198 annual report on Form 10-KSB of CKF Bancorp,
Inc.
/s/ Miller, Mayer, Sullivan, & Stevens, LLP
Lexington, Kentucky
March, 17, 1999
(606)223-3095
2365 Harrodsburg Road Lexington, Kentucky 40504-3399 FAX: (606)223-2143
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 546
<INT-BEARING-DEPOSITS> 3,458
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 635
<INVESTMENTS-CARRYING> 2,043
<INVESTMENTS-MARKET> 2,048
<LOANS> 58,060
<ALLOWANCE> 148
<TOTAL-ASSETS> 65,580
<DEPOSITS> 48,938
<SHORT-TERM> 2,000
<LIABILITIES-OTHER> 655
<LONG-TERM> 120
10
0
<COMMON> 0
<OTHER-SE> 13,857
<TOTAL-LIABILITIES-AND-EQUITY> 65,580
<INTEREST-LOAN> 4,372
<INTEREST-INVEST> 126
<INTEREST-OTHER> 110
<INTEREST-TOTAL> 4,608
<INTEREST-DEPOSIT> 2,393
<INTEREST-EXPENSE> 2,506
<INTEREST-INCOME-NET> 2,102
<LOAN-LOSSES> 24
<SECURITIES-GAINS> 137
<EXPENSE-OTHER> 1,124
<INCOME-PRETAX> 1,172
<INCOME-PRE-EXTRAORDINARY> 1,172
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 774
<EPS-PRIMARY> .98
<EPS-DILUTED> .96
<YIELD-ACTUAL> 3.42
<LOANS-NON> 65
<LOANS-PAST> 356
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 125
<CHARGE-OFFS> 1
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 148
<ALLOWANCE-DOMESTIC> 148
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
