<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, 1999
OR
[_] TRANSITION REPORT UNDER TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the transition period from ______________ to _______________
Commission File No. 0-25180
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CKF BANCORP, INC.
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(Name of Small Business Issuer in Its Charter)
Delaware 61-1267810
- ---------------------------------- ---------------------
(State or Other Jurisdiction (I.R.S.Employer
of Incorporation or Organization) Identification No.)
340 West Main Street, Danville, Kentucky 40422
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(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (606) 236-4181
--------------
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $0.01 per share
---------------------------------------
(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No ____
----
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B in this form, and no disclosure will be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
The issuer's revenues for the fiscal year ended December 31, 1999 were $4.9
million.
As of March 3, 2000, the aggregate market value of voting stock held by non-
affiliates was approximately $11.6 million based on the closing sales price of
$14.50 per share of the registrant's Common Stock on March 3, 2000, 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 3, 2000: 800,560
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, 1999. (Part II)
2. Portions of Proxy Statement for the 2000 Annual Meeting of
Stockholders. (Part III)
<PAGE>
PART I
Item 1. Business
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General
The Company. CKF Bancorp, Inc., a Delaware corporation (the "Company"), is
the holding company for Central Kentucky Federal Savings Bank ("Central Kentucky
Federal" or the "Bank"). 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 formation and
acquisition of the Bank in 1994, the Company had no assets and no liabilities
and engaged in no business activities. 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 $694,000 in bank deposits held by the Bank,
which are invested with the Federal Home Loan Bank ("FHLB") of Cincinnati, and a
note receivable from the Company's Employee Stock Ownership Plan. 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, 1999, the Company had total assets of $71.2
million, deposits of $53.3 million, net loans receivable of $63.2 million and
stockholders' equity of $12.6 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, and has one office under construction there.
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.
Central Kentucky Federal has sought to build an interest rate-sensitive
loan portfolio by originating adjustable rate mortgage loans ("ARMs"). As of
December 31, 1999, 80.9% 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
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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 $6.2 million in fixed-rate mortgage loans during the year
ended December 31, 1999. 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 statutory 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, 1999, the maximum amount that the Bank
could have loaned to any one borrower without prior OTS approval was $1.9
million. At such date, the largest aggregate amount of loans that the Bank had
outstanding to any one borrower was $1.5 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, 1999, the Bank had no concentrations of loans
exceeding 10% of total loans that are not otherwise disclosed below.
At December 31,
-----------------------------------
1999 1998
----------------- ----------------
Amount % Amount %
-------- ------- -------- -------
(Dollars in thousands)
Real estate loans:
One- to four-family residential (1).. $51,365 79.92% $45,375 77.63%
Multi-family residential............. 878 1.37 1,008 1.72
Non-residential...................... 9,410 14.64 9,007 15.41
Consumer loans:
Savings account...................... 348 .54 533 .91
Other (2)............................ 2,269 3.53 2,527 4.33
------- ------ ------- ------
64,270 100.00% 58,450 100.00%
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Less:
Loans in process..................... 871 322
Deferred loan fees................... 84 68
Allowance for loan losses............ 155 148
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Total............................... $63,160 $57,912
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(1) Includes home equity loans. Also includes construction loans that will be
converted to permanent loans and which comprised $1,992,500 and $627,500 at
December 31, 1999 and 1998, respectively.
(2) Consists primarily of unsecured loans made to qualified existing depositors
of the Bank.
Loan Maturity Schedule. The following table sets forth certain information
at December 31, 1999 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, 1999.
<TABLE>
<CAPTION>
Due After
Due Within 1 Through Due After
One Year After 5 Years After 5 Years After
December 31, 1999 December 31, 1999 December 31, 1999 Total
----------------- ----------------- ----------------- -------
(In thousands)
<S> <C> <C> <C> <C>
Real estate mortgage (1).. $ 931 $ 1,200 $ 57,530 $ 59,661
Real estate construction.. 1,121 -- -- 1,121
Consumer.................. 1,348 997 -- 2,345
Commercial................ 25 247 -- 272
--------- --------- ----------------- ----------
Total................. $ 3,425 $ 2,444 $ 57,530 $ 63,399
========= ========= ================= ==========
</TABLE>
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(1) Includes home equity loans.
4
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The following table sets forth at December 31, 1999, the dollar amount of
all loans due one year or more after December 31, 1999 which have predetermined
interest rates or have floating or adjustable interest rates.
Predetermined Floating or
Rate Adjustable Rates Total
------------- ---------------- -------
(In thousands)
Real estate mortgage....... $ 9,869 $ 48,861 $ 58,730
Consumer................... 256 741 997
Commercial................. -- 247 247
---------- ----------- ---------
Total................... $ 10,125 $ 49,849 $ 59,974
========== =========== =========
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,
1999, $51.3 million, or 79.92%, 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, 1999, $10.7 million, or 16.7%, 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.
5
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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 $6.2
million in fixed rate single-family mortgage loans with a maximum term of 20
years during 1999 and such loans amounted to $10.7 million, or 16.7%, of the
Bank's loan portfolio at December 31, 1999. 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,
1999, the Bank's loan portfolio included $1.1 million 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 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, 1999, loans on commercial real estate
properties constituted approximately $9.4 million, or 14.64%, 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
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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, 1999, consumer loans amounted to $2.6 million, or
4.07%, 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 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.
7
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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,
-----------------------
1999 1998
---- ----
(In thousands)
Loans originated
Real estate:
Construction............... $ 2,823 $ 1,317
One- to four-family........ 10,849 12,186
Multi-family...............
Non-residential and other.. 4,173 1,033
Consumer loans............... 2,588 3,401
------- -------
Total loans originated... $20,433 $17,937
======= =======
Loans purchased:
Real estate loans:
Conventional loans......... $ 362 $ --
Other loans.................. -- --
------- -------
Total loans purchased.... $ 362 $ --
======= =======
Central Kentucky Federal does not sell 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, 1999, the Bank
had received $84,000 of loan fees, net of loan origination costs, that had been
deferred and were being recognized as income over the estimated lives of the
related loans.
Asset Classification and Allowance for Loan Losses. Federal regulations
require savings associations to review their assets on a regular basis and to
classify them as "substandard," "doubtful" or "loss," if warranted. Assets
classified as substandard or doubtful require the institution to establish
general allowances for loan losses. If an asset or portion thereof is classified
loss, the insured institution must either establish specified allowances for
loan losses in the amount of 100% of the portion of the asset classified loss,
or charge off such amount. An asset which does not currently warrant
classification but which possesses weaknesses or deficiencies deserving close
attention is required to
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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, 1999,
management had no assets classified as special mention, $307,000 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.
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, 1999,
the Bank had identified impaired loans, as defined by SFAS No. 114, totaling
$160,000 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.
9
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The following table sets forth an analysis of the Bank's allowance for loan
losses for the periods indicated.
Year Ended December 31,
------------------------
1999 1998
------- ------
(Dollars in thousands)
Balance at beginning of period........ $ 148 $ 125
------ ------
Loans charged-off..................... 29 1
Recoveries............................ --
------ ------
Net loans charged-off................. 29 1
------ ------
Provision for loan losses............. 36 24
------ ------
Balance at end of period.............. $ 155 $ 148
====== ======
Ratio of net charge-offs to average
loans outstanding during the period.. .05% --%
====== ======
Ratio of allowance for loan losses
to non-performing loans.............. 50.65% 35.20%
====== ======
The following table sets forth the breakdown of the allowance for loan
losses by loan category at the dates indicated. Management believes that the
allowance can be allocated by category only on an approximate basis. The
allocation of the allowance to each category is not necessarily indicative of
future losses and does not restrict the use of the allowance to absorb losses in
any category.
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------
1999 1998
--------------------- ----------------------
Percent of Percent of
Loans in Loans in
Category to Category to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real estate - mortgage:
Residential (1)..................... $ 155 79.55% $ 148 78.28%
Commercial.......................... -- 14.64 -- 15.41
Real estate - construction............ -- 1.74 -- 1.07
Commercial business................... -- -- -- --
Consumer (2).......................... -- 4.07 -- 5.24
----- ------ ----- ------
Total allowance for loan losses.. $ 155 100.00% $ 148 100.00%
===== ====== ===== ======
</TABLE>
____________
(1) Includes home equity loans.
(2) 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.
10
<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,
-----------------------
1999 1998
-----------------------
(Dollars in thousands)
Loans accounted for on a non-accrual basis: (1)
Real Estate:
Residential.................................... $ 132 $ 27
Consumer....................................... 28 38
------ ------
Total......................................... $ 160 $ 65
====== ======
Accruing loans which are contractually past due
90 days or more:
Real Estate:
Residential.................................... $ 140 $ 356
Commercial..................................... -- --
Consumer....................................... 6 --
------ ------
Total......................................... $ 146 $ 356
====== ======
Total of non-accrual and 90 days past due loans $ 306 421
====== ======
Percentage of total loans......................... .48 .73%
====== ======
Other non-performing assets (2)................... $ 33 $ --
====== ======
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, 1999, additional interest income of
$6,792 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, 1999 was $3,675.
11
<PAGE>
At December 31, 1999, 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, 1999, the
unrealized holding gains of $369,000, less the applicable deferred tax of
$126,000, 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.
At December 31,
----------------------
1999 1998
---------- -----------
(Dollars in thousands)
Investment securities available for sale:
FHLMC capital stock................................. $ 376 $ 635
------ ------
Total investment securities available for sale.. $ 376 $ 635
====== ======
Investment securities held to maturity:
U.S. government and agency securities............... $1,250 $1,254
Mortgage-backed securities.......................... 145 219
FHLB stock.......................................... 595 555
Common stock of subsidiary.......................... 15 15
------ ------
Total investment securities held to maturity.... $2,005 $2,043
====== ======
12
<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, 1999.
<TABLE>
<CAPTION>
One Year or Less One to Five Years Five to Ten Years More than Ten Years Total Investment Portfolio
------------------ ------------------ ------------------ ------------------ --------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Market Average
Value Yield Value Yield Value Yield Value Yield Value Value Yield
-------- -------- -------- -------- -------- -------- -------- -------- -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities
available for sale:
FHLMC securities...... $ 376 1.19% $ -- -- % $ -- $ -- % $ -- -- % $ 376 $ 376 1.19%
Investment securities
held-to-maturity:
U.S. Government and
agency securities.... 250 6.01 1,000 5.37 -- -- -- -- 1,250 1,226 5.49
Mortgage-backed
securities........... -- -- 145 6.11 -- -- -- -- 145 142 6.11
FHLB stock............ -- -- -- -- -- -- 595 6.99 595 595 6.99
Common stock of
subsidiary........... -- -- -- -- -- -- 15 -- 15 15 --
-------- ------- -------- ------- -------- ------- -------- ------- ------ ------ ----
Total............... 250 6.01 1,145 5.46 -- -- 610 6.81 2,005 1,978 5.94
-------- ------- -------- ------- -------- ------- -------- ------- ------ ------ ----
Total Investment
securities....... $ 626 3.11% $ 1,145 5.46% $ -- $ --% $ 610 6.81% $2,381 $2,354 5.19%
======== ======= ======== ======= ======== ======= ======== ======= ====== ====== ====
</TABLE>
13
<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, 1999 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>
3.02% None NOW Accounts $ 50 $ 3,444 6.46%
3.05 None Passbook Statement Accounts 1 3,480 6.53
4.06 None Money Market Deposits Accounts 2,500 3,876 7.27
3.25 None Super NOW Accounts 2,500 553 1.04
Certificates of Deposit
-----------------------
5.09 91 days 3-month Money Market 500 2,526 4.74
4.98 182 days 6-month Money Market 500 6,227 11.68
4.96 12-month Fixed-Term, Fixed-Rate 500 6,163 11.56
5.07 14-month Fixed-Term, Fixed Rate 500 3,711 6.94
5.31 18 month Fixed-Term, Fixed-Rate 500 1,174 2.20
5.44 18 month 18 month IRA Accounts 500 4,847 9.09
5.31 24 month Fixed-Term, Fixed-Rate 500 3,655 6.85
5.50 30 month Fixed-Term, Fixed-Rate 500 1,658 3.12
5.53 36 month Fixed-Term, Fixed-Rate 500 3,034 5.69
5.69 42 month Fixed-Term, Fixed-Rate 500 398 .75
5.68 48 month Fixed-Term, Fixed-Rate 500 1,133 2.12
6.00 60 month Fixed-Term, Fixed-Rate 500 7,446 13.96
------- ------
$53,325 100.00%
======= ======
</TABLE>
___________
* Represents weighted average interest rate.
14
<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.
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------
1999 1998
----------------------- ---------------------
Interest- Interest-
Bearing Bearing
Demand Time Demand Time
Deposits Deposits Deposits Deposits
-------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Average balance.............. $11,044 $40,556 $9,656 $36,920
Average rate................. 2.98% 5.32% 2.72% 5.64%
</TABLE>
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
1999 Deposit (Decrease) 1998 Deposits (Decrease)
------------ ------- ---------- ------------ -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
NOW accounts................... $ 3,444 6.46% $ 560 $ 2,884 5.89% $ 623
Passbook and regular savings... 3,480 6.53 (253) 3,733 7.63 302
Money market deposit accounts.. 3,876 7.27 688 3,188 6.51 331
Super NOW accounts............. 553 1.04 333 220 .45 76
6-month Money Market........... 2,526 4.74 (2,706) 5,232 10.69 433
1 year certificates............ 6,163 11.56 244 5,919 12.09 (1,094)
18 month IRA accounts.......... 4,847 9.09 (32) 4,879 9.97 (88)
2 year certificate............. 3,655 6.85 869 2,786 5.69 220
30 month certificates.......... 1,658 3.12 24 1,634 3.35 19
3 year certificates............ 3,034 5.69 (327) 3,361 6.87 846
5 year certificates............ 7,446 13.96 (189) 7,635 15.60 664
Other.......................... 12,643 23.69 5,176 7,467 15.26 3,353
------- ------ ------- ------- ------ -------
Total..................... $53,325 100.00% $ 4,387 $48,938 100.00% $ 5,685
======= ====== ======= ======= ====== =======
</TABLE>
15
<PAGE>
The following table sets forth the time deposits in the Bank classified by
nominal rates at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
----------------
1999 1998
---- ----
(In thousands)
<S> <C> <C>
2.01 - 4.00%................ $ -- $ --
4.01 - 6.00%................ 38,193 34,021
6.01 - 8.00%................ 3,779 4,892
8.01 - 10.00%............... -- --
------- -------
$41,972 $38,913
======= =======
</TABLE>
The following table sets forth the amount and maturities of time deposits
at December 31, 1999.
<TABLE>
<CAPTION>
Amount Due
------------------------------------------------
Less Than After
Rate One Year 1-2 Years 2-3 Years 3 Years Total
- ---- -------- --------- --------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C>
4.01 - 6.00%........ $ 24,993 $ 7,483 $ 1,599 $ 4,118 $38,193
6.01 - 8.00%........ 1,237 292 1,770 480 3,779
-------- --------- --------- ------- -------
$ 26,230 $ 7,775 $ 3,369 $ 4,598 $41,972
======== ========= ========= ======= =======
</TABLE>
The following table indicates the amount of the Bank's certificates of
deposit of $100,000 or more by time remaining until maturity as of December 31,
1999.
<TABLE>
<CAPTION>
Certificates
Maturity Period of Deposits
--------------- -----------
(In thousands)
<S> <C>
Three months or less............ $ 4,348
Over three through six months... 1,162
Over six through twelve months.. 2,466
Over twelve months.............. 5,260
-----------
Total......................... $ 13,236
===========
</TABLE>
The following table sets forth the savings deposit activities of the Bank
for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1999 1998
---- ----
(In thousands)
<S> <C> <C>
Deposits.......................................................... $67,010 $55,392
Withdrawals....................................................... 64,323 51,296
------- -------
Net increase (decrease) before interest credited.............. 2,687 4,096
Interest credited................................................. 1,700 1,589
------- -------
Net increase (decrease) in savings deposits................... $ 4,387 $ 5,685
======= =======
</TABLE>
16
<PAGE>
The Bank does not offer premiums for deposits, does not generally offer
interest rates on deposits which exceed the average rates offered by other
financial institutions in its market area, and usually does not institute
promotional programs which result in increased rates being paid on deposits.
The Bank does, however, offer above-average rates on certificates of deposit if
management believes that the deposit will entail administrative savings by the
Bank as well as contribute to the stability of the Bank's core deposit base.
These strategies are consistent with management's goals of keeping the Bank's
cost of funds at reduced levels and maintaining slow and measurable growth for
the Bank.
Borrowings. Savings deposits historically have been the primary source of
funds for the Bank's lending and investment activities and for its general
business activities. The Bank is authorized, however, to use advances from the
FHLB of Cincinnati to supplement its supply of lendable funds and to meet
deposit withdrawal requirements. Advances from the FHLB are secured by the
Bank's stock in the FHLB and a portion of the Bank's mortgage loans.
The FHLB of Cincinnati functions as a central reserve bank providing credit
for savings institutions and certain other member financial institutions. As a
member, Central Kentucky Federal is required to own capital stock in the FHLB
and is authorized to apply for advances on the security of such stock and
certain of its home mortgages and other assets (principally, securities which
are obligations of, or guaranteed by, the United States) provided certain
standards related to creditworthiness have been met. See "Regulation of the
Bank -- Federal Home Loan Bank System."
The following table sets forth certain information regarding borrowings by
the Bank at the dates and for the periods indicated.
<TABLE>
<CAPTION>
At or For the
Year Ended December 31,
-----------------------
1999 1998
---- ----
(Dollars in thousands)
<S> <C> <C>
Amounts outstanding at end of period:
FHLB advances (1)............................. $4,589 $2,120
====== ======
Weighted average rate paid.................... 4.79 5.83%
</TABLE>
<TABLE>
<CAPTION>
At or For the
Year Ended December 31,
-----------------------
1999 1998
---- ----
(Dollars in thousands)
<S> <C> <C>
Maximum amount of borrowings outstanding
at any month end:
FHLB advances.................................. $4,589 $3,210
====== ======
</TABLE>
<TABLE>
<CAPTION>
At or For the
Year Ended December 31,
-----------------------
1999 1998
---- ----
(Dollars in thousands)
<S> <C> <C>
Approximate average borrowings outstanding
with respect to:
FHLB advances................................. $1,564 $1,915
====== ======
Approximate weighted average rate paid........ 5.24% 5.90%
</TABLE>
______________
(1) The Bank makes monthly principal and interest payments of $4,540 with the
principal being amortized through the year 2001 on one note, which had a
balance of $89,000 at December 31, 1999. The other notes for $4,500,000
mature in 2000.
17
<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, 1999 Central Kentucky Federal was authorized to
invest up to approximately $2.1 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, 1999.
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, 1999, Central Kentucky Federal had 11 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 three credit unions, and six
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.
18
<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. 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, 1999 was 8.10%.
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; and (iii) 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 a savings association.
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, 1999, the Bank was in compliance with
the QTL Test.
Dividend Limitations. Under OTS regulations, the Bank is not permitted to
pay dividends on its capital stock if its regulatory capital would thereby be
reduced below the amount then required for the liquidation account established
for the benefit of certain of the Bank's depositors at the time of its
conversion to stock form.
Savings institutions must submit notice to the OTS prior to making a
capital distribution (including cash dividends, stock repurchases and amounts
paid to stockholders of another institution in a cash merger) if (a) they would
not be well capitalized after the distribution, (b) the distribution would
result in the retirement of any of the institution's common or preferred stock
or debt counted as its regulatory capital, or (c) the institution is a
subsidiary of a holding company. A savings institution must make application to
the OTS to pay a capital distribution if (x) the institution would not be
adequately capitalized following the distribution, (y) the institution's total
distributions for the calendar year exceeds the institution's net income for the
calendar year to date plus its net income (less distributions) for the preceding
two years, or (z) the distribution would otherwise violate applicable law or
regulation or an agreement with or condition imposed by the OTS.
19
<PAGE>
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, "Tier 1" or "core" capital equal to 4% of adjusted total assets
(or 3% if the institution is rated CAMELS 1 under the OTS examination rating
system) 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 CAMELS 1 under the OTS examination rating
system). See "-- Prompt Corrective Regulatory Action." For purposes of this
regulation, Tier 1 capital and core capital are 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." Tier 1 capital and core capital are
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
the savings institution's debt and equity investments in "nonincludable"
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 their
holding companies. At December 31, 1999, 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 unconsolidated
includable subsidiaries in which the savings institution holds a minority
interest.
20
<PAGE>
Adjusted total assets are reduced by the amount of assets that have been
deducted from capital, the investments in any unconsolidated includable
subsidiary in which the savings institution has a minority interest and, for
purposes of the core capital requirement, qualifying supervisory goodwill. At
December 31, 1999, the Bank's adjusted total assets for purposes of core capital
requirement were $71 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, a portion of the
savings institution's general loss allowances and up to 45% of unrealized gains
of equity securities.
Total core and supplementary capital are reduced by the amount of capital
instruments held by other depository institutions pursuant to reciprocal
arrangements and by the amount of the savings 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,
1999, 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 on-balance sheet 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, single and one-to-four family first
mortgages not more than 90 days past due with loan-to-value ratios under 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, 1999, see Note 8 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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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, 1999.
The table below presents the Bank's capital position at December 31, 1999,
relative to its various minimum regulatory capital requirements.
<TABLE>
<CAPTION>
At December 31, 1999
--------------------
Percent of
Amount Assets (1)
------ ----------
(Dollars in thousands)
<S> <C> <C>
Core Capital................................. $11,057 15.60%
Core Capital Requirement..................... 2,834 4.00
------- -----
Excess..................................... $ 8,223 11.60%
======= =====
Risk-Based Capital........................... $11,212 27.10%
Risk-Based Capital Requirement............... 3,305 8.00
------- -----
Excess..................................... $ 7,907 19.10%
======= =====
</TABLE>
____________
(1) Based upon adjusted total assets of $71 million for purposes of the
tangible and core capital requirements, and risk-weighted assets of $41
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
controlling the institution. Any company controlling the institution could also
be required to divest the institution or
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<PAGE>
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 specific time periods.
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 CAMELS 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
CAMELS 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 CAMELS rating
category. The Bank is classified as "well-capitalized" under the new
regulations.
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
23
<PAGE>
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 are zero and institutions in the highest risk assessment
classification are assessed at the rate of .027% of insured deposits. In
addition, all SAIF-insured institutions are required to pay assessments to the
FDIC 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. Prior to December 31, 1999, SAIF-insured
institutions were required to pay FICO assessments at five times the rate at
which Bank Insurance Fund ("BIF") members were assessed. After December 31,
1999, both BIF and SAIF members will be assessed at the same rate for FICO
payments.
Federal Reserve System. Pursuant to the regulations of the Federal Reserve
Board, a thrift institution must maintain average daily reserves equal to 3% on
the first $44.3 million of transaction accounts, plus 10% on the remainder.
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.
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
24
<PAGE>
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.
Recently Enacted Legislative and Regulatory Changes. On November 12, 1999,
President Clinton signed legislation which could have a far-reaching impact on
the financial services industry. The Gramm-Leach-Bliley ("G-L-B") Act authorizes
affiliations between banking, securities and insurance firms and authorizes bank
holding companies and national banks to engage in a variety of new financial
activities. Among the new activities that will be permitted to bank holding
companies are securities and insurance brokerage, securities underwriting,
insurance underwriting and merchant banking. The Federal Reserve Board, in
consultation with the Department of Treasury, may approve additional financial
activities. National bank subsidiaries will be permitted to engage in similar
financial activities but only on an agency basis unless they are one of the 50
largest banks in the country. National bank subsidiaries will be prohibited from
insurance underwriting, real estate development and merchant banking. The G-L-B
Act, however, prohibits future acquisitions of existing unitary savings and loan
holding companies, like the Company, by firms that are engaged in commercial
activities and prohibits the formation of new unitary holding companies.
The G-L-B Act imposes new requirements on financial institutions with
respect to customer privacy. The G-L-B Act generally prohibits disclosure of
customer information to non-affiliated third parties unless the customer has
been given the opportunity to object and has not objected to such disclosure.
Financial institutions are further required to disclose their privacy policies
to customers annually. Financial institutions, however, will be required to
comply with state law if it is more protective of customer privacy than the G-L-
B Act. The G-L-B Act directs the federal banking agencies, the National Credit
Union Administration, the Secretary of the Treasury, the Securities and Exchange
Commission and the Federal Trade Commission, after consultation with the
National Association of Insurance Commissioners, to promulgate implementing
regulations within six months of enactment. The privacy provisions will become
effective six months thereafter.
The G-L-B Act contains significant revisions to the Federal Home Loan Bank
System. The G-L-B Act imposes new capital requirements on the Federal Home Loan
Banks and authorizes them to issue two classes of stock with differing dividend
rates and redemption requirements. The G-L-B Act expands the permissible uses of
Federal Home Loan Bank advances by community financial institutions (under $500
million in assets) to include funding loans to small businesses, small farms and
small agri-businesses. The G-L-B Act makes membership in the Federal Home Loan
Bank System voluntary for federal savings associations.
The G-L-B Act contains a variety of other provisions including a
prohibition against ATM surcharges unless the customer has first been provided
notice of the imposition and amount of the fee. The G-L-B Act reduces the
frequency of Community Reinvestment Act examinations for smaller institutions
and imposes certain reporting requirements on depository institutions that make
payments to non-governmental entities in connection with the Community
Reinvestment Act. The G-L-B Act eliminates the SAIF special reserve and
authorizes a federal savings association that converts to a national or state
bank charter to continue to use the term "federal" in its name and to retain any
interstate branches.
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<PAGE>
The Company is unable to predict the impact of the G-L-B Act on its
operations at this time. Although the G-L-B Act reduces the range of companies
with which the Company may affiliate, it may facilitate affiliations with
companies in the financial services industry.
Regulation of the Company
General. The Company is a unitary savings and loan holding company within
the meaning of the Home Owners' Loan Act. As such, the Company is registered
with the OTS and subject to OTS regulations, examinations, supervision and
reporting requirements.
Activities Restrictions. The Board of Directors of the Company presently
intends to operate the Company as a unitary savings and loan holding company.
There are generally no restrictions on the activities of a unitary savings and
loan holding company. However, if the director of OTS determines that there is
reasonable cause to believe that the continuation by a savings and loan holding
company of an activity constitutes a serious risk to the financial safety,
soundness, or stability of its subsidiary savings association, the Director of
OTS may impose such restrictions as deemed necessary to address such risk and
limiting (i) payment of dividends by the savings association, (ii) transactions
between the savings association and its affiliates, and (iii) any activities of
the savings association that might create a serious risk that the liabilities of
the holding company and its affiliates may be imposed on the savings
association. Notwithstanding the above rules as to permissible business
activities of unitary savings and loan holding companies, if the savings
association subsidiary of such a holding company fails to meet the QTL Test,
then such unitary holding company shall also presently become subject to the
activities restrictions applicable to multiple holding companies and unless the
savings association requalifies as a Qualified Thrift Lender within one year
thereafter, register as, and become subject to, the restrictions applicable to a
bank holding company.
If the Company were to acquire control of another savings association,
other than through merger or other business combination with the Bank, the
Company would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the authority to approve emergency
thrift acquisitions and where each subsidiary savings association meets the QTL
Test, the activities of the Company and any of its subsidiaries (other than the
Bank or other subsidiary savings institutions) would thereafter be subject to
further restrictions. The Home Owners' Loan Act, as amended by FIRREA, provides
that, among other things, no multiple savings and loan holding company or
subsidiary thereof which is not a savings association shall commence or continue
for a limited period of time after becoming a multiple savings and loan holding
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
26
<PAGE>
than one common director or officer between the savings and loan holding company
and the issuing savings association and transactions between the savings
association and the savings and loan holding company and any of its affiliates
must conform to Sections 23A and 23B of the Federal Reserve Act. Except with the
prior approval of the Director of OTS, no director or officer of a savings and
loan holding company or person owning or controlling by proxy or otherwise more
than 25% of such company's stock, may also acquire control of any savings
association, other than a subsidiary savings association, or of any other
savings and loan holding company.
The Director of OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
associations in more than one state if: (i) the multiple savings and loan
holding company involved controls a savings institution which operated a home or
branch office in the state of the association to be acquired as of March 5,
1987; (ii) the acquiror is authorized to acquire control of the savings
association pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act; or (iii) the statutes of the state in which the
association to be acquired is located specifically permit institutions to be
acquired by state-chartered associations or savings and loan holding companies
located in the state where the acquiring entity is located (or by a holding
company that controls such state-chartered savings institutions).
OTS regulations permit federal associations to branch in any state or
states of the United States and its territories. Except in supervisory cases or
when interstate branching is otherwise permitted by state law or other statutory
provision, a federal association may not establish an out-of-state branch unless
(i) the federal association qualifies as a "domestic building and loan
association" under (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.
27
<PAGE>
Federal Income Taxation. Thrift institutions are subject to the provisions
of the Code in the same general manner as other corporations. However, for tax
years prior to December 31, 1996, institutions such as Central Kentucky Federal
which meet certain definitional tests and other conditions prescribed by the
Code may benefit from certain favorable provisions regarding their deductions
from taxable income for annual additions to their bad debt reserve. For purposes
of the bad debt reserve deduction, loans were separated into "qualifying real
property loans," which generally are loans secured by interests in certain real
property, and nonqualifying loans, which are all other loans. The bad debt
reserve deduction with respect to nonqualifying loans must be based on actual
loss experience. The amount of the bad debt reserve deduction with respect to
qualifying real property loans may be based upon actual loss experience (the
"experience method") or a percentage of taxable income determined without regard
to such deduction (the "percentage of taxable income method").
Earnings appropriated to an institution's bad debt reserve and claimed as a
tax deduction are not available for the payment of cash dividends or for
distribution to shareholders (including distributions made on dissolution or
liquidation), unless such amount is included in taxable income, along with the
amount deemed necessary to pay the resulting federal income tax.
On August 20, 1996, the President signed into law the Small Business Jobs
Protection Act. Included within this act were provisions repealing the
percentage of taxable income method of calculating a thrift's bad debt reserve
for tax purposes. This method had permitted thrift institutions, such as the
Bank, who satisfied certain definitional tests and other conditions prescribed
by the Internal Revenue Code, to deduct an annual addition to their bad debt
reserve calculated as a percentage of taxable income. Other financial
institutions generally were required to calculate their bad debt deduction based
upon actual loss experience (the "experience method"). As a result of the
elimination of the percentage of taxable income method, institutions that have
utilized such method 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 9 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, 1999, the amount of such expense for the Bank was $60,000.
28
<PAGE>
Item 2. Properties
- -------------------
The following table sets forth the location and certain additional
information regarding the Bank's sole office at December 31, 1999.
Year Owned or Square
Opened Leased Footage Net Book Value
------ ------ ------- --------------
340 West Main Street
Danville, Kentucky 1968 Owned 5,832 $589,468
The Bank also owns a lot in the Ridgefield Shopping Center in Danville,
Kentucky where a new branch office is being constructed. Construction commenced
on December 1, 1999. At December 31, 1999, the book value of this property was
$264,686.
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, 1999.
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, 1999 (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" in the Annual Report is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
- -------------
The information contained in the section captioned "Management's Discussion
and Analysis of Financial Condition and Results of Operations" on pages 4
through 14 in the Annual Report is incorporated herein by reference.
29
<PAGE>
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
The consolidated financial statements contained on pages 15 through 45 in
the Annual Report, which are listed under Item 14 herein, are incorporated
herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure
- --------------------
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
For information concerning the Board of Directors and executive officers
who are not directors of the Company, the information contained under the
section captioned "Proposal I -- Election of Directors" in the Company's
definitive proxy statement for the Company's 2000 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.
30
<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, 1999 and 1998
Consolidated Statements of Income for Each of the Years in the Three-Year
Period Ended December 31, 1999
Consolidated Statements of Changes in Stockholders' Equity for Each of the
Years in the Three-Year Period Ended December 31, 1999
Consolidated Statements of Cash Flows for Each of the Years in the Three-
Year Period Ended December 31, 1999
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.
No. Exhibits
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 1999 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).
31
<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.
32
<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 16, 2000 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 16, 2000
- -----------------------------------------------
John H. Stigall
President, Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Ann L. Hooks March 16, 2000
- -----------------------------------------------
Ann L. Hooks
Vice President and Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
/s/ Jack L. Bosley, Jr. March 16, 2000
- -----------------------------------------------
Jack L. Bosley, Jr.
(Director)
/s/ W. Irvine Fox, Jr. March 16, 2000
- -----------------------------------------------
W. Irvine Fox, Jr.
(Director)
/s/ J. T. Goggans March 16, 2000
- -----------------------------------------------
J. T. Goggans
(Director)
/s/ W. Banks Hudson, III March 16, 2000
- -----------------------------------------------
W. Banks Hudson, III
(Director)
/s/ Yvonne Y. Morley March 16, 2000
- -----------------------------------------------
Yvonne Y. Morley
(Director)
/s/ Warren O. Nash March 16, 2000
- -----------------------------------------------
Warren O. Nash
(Director)
<PAGE>
- --------------------------------------------------------------------------------
1999 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 3, 2000, there were
800,560 shares of the Common Stock issued and outstanding, held by approximately
229 stockholders of record and approximately 131 beneficial owners. For further
information regarding stock prices and dividends paid, see stock prices and
dividends on page 3.
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
CKF Bancorp, Inc. ........................................ Inside Front Cover
Market and Dividend Information........................... Inside Front Cover
Letter to Stockholders..................................................... 1
Selected Financial and Other Data.......................................... 2
Management's Discussion and Analysis of
Financial Condition and Results of Operations............................ 4
Financial Statements....................................................... 15
Corporate Information..................................... Inside Back Cover
</TABLE>
<PAGE>
LETTER TO STOCKHOLDERS
- --------------------------------------------------------------------------------
To Our Stockholders,
We are pleased to report the results of the CKF Bancorp, Inc.'s operations for
1999, our fifth full year as a public company.
The consolidated net income for 1999 was $811,145 or $1.08 for both the weighted
average common share and the per weighted average common share - assuming
dilution. This compares to $773,613 of consolidated net income or $.98 cents per
weighted average common share and $.96 cents per weighted average common share -
assuming dilution, for the year ended December 31, 1998.
Total assets at December 31, 1999 were $71.2 million as compared to $65.6
million at December 31, 1998. Deposits were $53.3 million at December 31, 1999
as compared to $48.9 million at December 31, 1998. Stockholders' equity was
$12.6 million at December 31, 1999, compared to $13.9 million at December 31,
1998. During 1999, $1.6 million of Stockholders' equity was used for stock
repurchases and $443,433 was paid in dividends to stockholders. On December 31,
1999, Stockholders' equity was $18.00 per common share - assuming no dilution,
as compared to $17.47 per common share - assuming no dilution, on December 31,
1998, based on the common shares outstanding on those respective dates of
700,613 and 793,890.
Our new full service branch bank is now under construction in the Ridgefield
Shopping Center. We expect the new branch to be open in May or June.
Visit our home page on the Internet at www.centralkyfsc.com.
--------------------
We appreciate your interest in CKF Bancorp, Inc. and your continued support.
Sincerely,
/s/ John H. Stigall
John H. Stigall
President and Chief Executive Officer
<PAGE>
SELECTED FINANCIAL AND OTHER DATA
- --------------------------------------------------------------------------------
Financial Condition Data:
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------
1999 1998 1997 1996 1995
---------- --------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Total amount of:
Assets........................... $71,214 $65,580 $62,865 $60,002 $56,549
Loans receivable, net............ 63,160 57,912 55,895 53,182 49,638
Cash and investment securities... 6,705 6,681 5,977 5,663 5,898
Deposits......................... 53,325 48,938 43,253 42,832 39,356
FHLB advances.................... 4,589 2,120 5,214 1,252 288
Stockholders' equity............. 12,610 13,867 13,763 15,099 16,129
---------- --------- --------- --------- ---------
Number of:
Real estate loans outstanding/1/. 1,163 1,160 1,267 1,229 1,196
Savings accounts................. 3,710 3,644 3,922 3,933 3,696
Offices open..................... 1 1 1 1 1
</TABLE>
____________________
/1/ Includes home equity loans.
Operating Data:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------
1999 1998 1997 1996 1995
--------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest income.................. $4,725 $4,608 $4,586 $4,328 $4,088
Interest expense................. 2,596 2,506 2,335 2,153 1,930
--------- -------- -------- -------- --------
Net interest income before
provision for loan losses...... 2,129 2,102 2,251 2,175 2,158
Provision for loan losses........ 36 24 18 7 24
Non-interest income.............. 180 218 484 334 43
Non-interest expense............. 1,045 1,124 1,025 1,334 1,033
--------- -------- -------- -------- --------
Income before federal income tax
expense 1,228 1,172 1,692 1,168 1,144
Federal income tax expense....... 417 398 575 408 398
--------- -------- -------- -------- --------
Net income....................... $ 811 $ 774 $1,117 $ 760 $ 746
========= ======== ======== ======== ========
</TABLE>
2
<PAGE>
Key Operating Ratios:
<TABLE>
<CAPTION>
At or for the
Years Ended December 31,
----------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Performance Ratios:
Return on assets (net income divided
by average total assets)....................... 1.20% 1.23% 1.84% 1.29% 1.34%
Return on average equity (net income
divided by average stockholders' equity)....... 5.86 5.72 7.90 4.90 4.76
Interest rate spread (combined weighted average
interest rate earned less combined weighted
weighted average interest rate cost)........... 2.26 2.32 2.56 2.44 2.57
Net yield on interest-earning assets (net
interest income as a percentage of average
balance of interest-earning assets)............ 3.23 3.42 3.78 3.77 3.95
Ratio of non-interest expense to average
total assets................................... 1.55 1.79 1.69 2.26 1.85
Dividend payout................................. 54.67 53.22 112.87 49.41 24.69
Asset Quality Ratios:............................
Nonperforming assets to total assets at
end of period(1)............................... .43 .64 .46 1.12 .97
Allowance for loan losses to nonperforming
loans at end of period......................... 50.65 35.20 42.80 23.99 18.28
Allowance for loan losses to total loans
receivable, net................................ .25 .26 .22 .20 .20
Capital Ratios:
Equity to total assets at end of period......... 17.71 21.14 21.89 25.16 28.52
Average equity to average assets................ 20.45 21.51 23.33 26.30 28.07
Ratio of average interest-earning assets to
average interest-bearing liabilities........... 124.74 126.89 131.02 135.72 139.12
</TABLE>
- ------------------------
(1) 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 1999 and 1998.
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>
1999 1998
------------------------------ ----------------------------
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 $15.13 $18.88 $.27 $18.50 $21.25 $ .25
2nd 16.50 17.75 19.00 19.87
3rd 14.75 17.25 .30 15.00 19.37 .27
4th 11.63 14.50 15.12 17.25
- --------------------------------------------------------------------
Total $.57 $ .52
==== ========
</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 expense, 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 area 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 materially from historical
earnings and those presently anticipated and
4
<PAGE>
projected. The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made.
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, 1999, the Bank originated approximately $13.7 million of
one- to four-family residential loans, of which $8.5 million were adjustable
rate loans. The Bank's origination of multi-family and commercial loans amounted
to approximately $4.2 million or 23.4% of total loan originations during the
same period. 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, 1999, the Bank had
approximately $5.9 million of funds so invested, including $376,000 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 4.99%.
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, 1999, the Bank's interest-bearing deposit base was comprised of $11.4
million in interest-bearing demand deposits with an average rate of 3.3% and
$42.0 million in time deposits with an average rate of 5.35%. Time deposits with
maturities of one year or less at December 31, 1999 totaled $26.2 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 $4.6 million at December 31, 1999, with
monthly principal and interest payments due through the year 2001.
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
5
<PAGE>
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, 1999 in the event of 1%, 2%, and 3%
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>
+ 300 bp 8,637 -724 -8% 12.96% -62 bp
+ 200 bp 8,990 -371 -4% 13.32% -26 bp
+ 100 bp 9,226 -135 -1% 13.52% -6 bp
0 9,361 13.59%
- 100 bp 9,387 26 0% 13.51% -8 bp
- 200 bp 9,423 61 +1% 13.44% -14 bp
- 300 bp 9,632 270 +3% 13.58% 0 bp
</TABLE>
The following table sets forth the interest rate risk capital component for the
Bank at December 31, 1999 (the most recent date for which such information is
available to the Bank from the OTS) given a hypothetical 200 basis point rate
change in market interest rates.
December 31, 1999
-----------------
Pre-shock NPV Ratio: NPV as % of Portfolio
Value of Assets................................. 13.59%
Exposure Measure:
Post-Shock NPV Ratio............................ 13.32%
Sensitivity Measure:
Change in NPV Ratio............................. 26 bp
Change in NPV as % of
Portfolio Value of Assets....................... 1% to (-4)%
Interest Rate Risk
Capital Component ($000)........................ 0
Computations of prospective effects of hypothetical interest rate changes are
based on numerous assumptions, including relative levels of market interest
rates, loan prepayments, and deposit run-offs, and should not be relied upon as
indicative of actual results. Further, the computations do not contemplate any
actions the Bank may undertake in response to changes in interest rates.
6
<PAGE>
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 decrease below current
levels and refinance activity continues. 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,
-----------------------------------------------------------------
1999 1998
------------------------------ --------------------------------
Average Average Average
Balance Yield/ Average Yeild/
Interest Cost Balance Interest Cost
----------- --------- ---------- --------- ---------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable......................... $60,809 $4,499 7.40% $56,673 $4,372 7.71%
Investment securities.................... 2,372 117 4.93% 2,312 107 4.63
Mortgage-backed securities............... 172 11 6.41% 280 19 6.79
Other interest-earning assets............ 2,550 98 3.84% 2,229 110 4.93
----------- -------- ------- ------
Total interest-earning assets.......... 65,903 4,725 7.17% 61,494 4,608 7.49
-------- ------
Non-interest-earning assets................ 1,718 1,380
----------- -------
Total assets........................... $67,621 $62,874
=========== =======
Interest-bearing liabilities:
Deposits................................. $51,269 $2,514 4.90% $46,546 $2,393 5.14%
Borrowings............................... 1,564 82 5.24% 1,915 113 5.90
----------- -------- ------- ------
Total interest-bearing liabilities..... 52,833 2,596 4.91% 48,461 2,506 5.17
-------- ------
Non-interest-bearing liabilities........... 957 888
----------- -------
Total liabilities...................... 53,790 49,349
Stockholders' equity....................... 13,831 13,525
----------- -------
Total liabilities and
stockholders' equity.................. $67,621 $62,874
=========== =======
Net interest income........................ $2,129 $2,102
======== ======
Interest rate spread (1)................... 2.26% 2.32%
====== =========
Net yield on interest-earning assets (2)... 3.23% 3.42%
====== =========
Ratio of average interest-earning assets to
average interest-bearing liabilities..... 124.74% 126.89%
====== =========
<CAPTION>
-------------------------------
1997
-------------------------------
Average Average
Balance Yield/
Interest Cost
-------- ----------- -------
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable................................ $55,128 $4,368 7.92%
Investment securities........................... 2,564 128 4.99
Mortgage-backed securities...................... 421 27 6.41
Other interest-earning assets................... 1,480 62 4.19
------- ----------
Total interest-earning assets................. 59,593 4,585 7.69
Non-interest-earning assets....................... 1,015 ----------
-------
Total assets.................................. $60,608
=======
Interest-bearing liabilities:
Deposits........................................ $42,587 $2,181 5.12%
Borrowings...................................... 2,898 153 5.28
------- ----------
Total interest-bearing liabilities............ 45,485 2,334 5.13
Non-interest-bearing liabilities.................. 982 ----------
-------
Total liabilities............................. 46,467
Stockholders' equity.............................. 14,141
-------
Total liabilities and stockholders' equity.... $60,608
=======
Net interest income............................... $2,251
==========
Interest rate spread (1).......................... 2.56%
=======
Net yield on interest-earning assets (2).......... 3.78%
=======
Ratio of average interest-earning assets to
average interest-bearing liabilities............ 131.02%
=======
</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 3.23% for the year ended
December 31, 1999 compared to 3.42% and 3.78% for the years ended December 31,
1998 and 1997, respectively. The net interest income increased by $27,000 during
the year ended December 31, 1999 compared to the same period in 1998, and
decreased by $149,000 in 1998 compared to 1997.
The increase in net interest income of $27,000 between 1999 and 1998 was due to
the increase in the volume of average net interest-earning assets of
approximately $4.4 million at 7.17% in 1999 compared to 1998 offset by the
increase of approximately $4.4 million in average interest bearing liabilities
at 4.91% in 1999 compared to 1998.
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.
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,
----------------------------------------------------------------------
1999 vs. 1998 1998 vs. 1997
---------------------------------- ----------------------------------
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................................. $318 $(179) $(12) $127 $122 $(115) $(3) $ 4
Investment securities................. 3 7 10 (13) (9) 1 (21)
Mortgage-backed securities............ (7) (1) (8) (9) 2 (1) (8)
Other interest-earning assets......... 16 (24) (4) (12) 31 11 6 48
-------- ------ ------- ------ ------ ------ ------- ------
Total interest-earning assets....... 330 (197) (16) 117 131 (111) 3 23
-------- ------ ------- ------ ------ ------ ------- ------
Interest expense:
Deposits.............................. 243 (110) (11) 122 203 8 1 212
Borrowings............................ (21) (13) 2 (32) (52) 18 (6) (40)
-------- ------ ------- ------ ------ ------ ------- ------
Total interest-bearing liabilities.. 222 (123) (9) 90 151 26 (5) 172
-------- ------ ------- ------ ------ ------ ------- ------
Change in net interest income........... $108 $ (74) $ (7) $ 27 $(20) $(137) $ 8 $(149)
======== ====== ======= ====== ====== ====== ======= ======
</TABLE>
9
<PAGE>
COMPARISON OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AS OF AND FOR THE
YEARS ENDED DECEMBER 31, 1999 AND 1998
Financial Condition.
The Company's consolidated assets increased $5.6 million or 8.6% to $71.2
million at December 31, 1999 compared to $65.6 million at December 31, 1998. The
net increase of $5.6 million primarily consists of an increase of $5.2 million
in loans receivable.
The Company's investment portfolio decreased $296,000. Securities classified as
available-for-sale per SFAS No. 115 decreased $100,000 due to the sale of 2,000
shares of Federal Home Loan Mortgage Corporation stock, compounded by a decrease
of $158,000 in the market value of the remaining securities. Securities held-to-
maturity decreased $38,000 due primarily to principle repayment on a mortgage
back security.
Loans receivable increased $5.2 million or 9.1% to $63.1 million at December 31,
1999 from $57.9 million at December 31, 1998. The increase in loans during the
year ended December 31, 1999 is the result of management's pricing to make
adjustable rate loans more attractive.
The allowance for loan losses totaled $155,000 and $148,000, respectively at
December 31, 1999 and 1998. The allowance for loan losses as a percentage of
non-performing loans was 50.6% and 35.2% as of December 31, 1999 and 1998,
respectively. During these periods there were two loans 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 $4.4 million or 9.0% from $48.9 million at December 31 1998
to $53.3 million at December 31, 1999. The increase in deposits reflects
management's continued success in attracting depositors within the local market
area.
Stockholders' equity decreased by $1.3 million to $12.6 million at December 31,
1999 as compared to $13.9 million at December 31, 1998. During 1999, the Company
repurchased 101,420 shares of its common stock at a cost of $1.6 million. Other
changes to stockholders' equity from 1998 to 1999 resulted from an increase of
$811,000 in net income, an increase of $86,000 due to the release of ESOP stock
from collateral, a decrease of $167,000 in the net unrealized gain on securities
available-for-sale, an increase of $32,000 from the issuance of stock, offset by
a decrease of $443,000 from the payments of dividends.
Results of Operations
Net Income. Net income increased $37,000 or 4.9% to $811,000 for the year ended
December 31, 1999 as compared to $774,000 for the same period in 1998. The net
increase was due to a $27,000 increase in net interest income, a $12,000
increase in the provision for loan losses, a $38,000 decrease in non-interest
10
<PAGE>
income, a $79,000 decrease in non-interest expense, and an increase of $19,000
in income taxes for 1999 compared to 1998.
Interest Income. Interest income was $4.7 million, or 7.17% of average interest-
earning assets for the year ended December 31, 1999 as compared to $4.6 million,
or 7.49% of average interest-earning assets for the year ended December 31,
1998. Interest income increased by $117,000 or 2.55% from 1998 to 1999. The
change was due to a $4.4 million increase in the average balance of interest-
earning assets offset by a 32 basis point decrease in the average rate earned on
the average interest-earning assets during the year ended December 31, 1999
compared to the year ended December 31, 1998.
Interest Expense. Interest expense was $2.6 million, or 4.91% of average
interest-bearing liabilities for the year ended December 31, 1999 as compared to
$2.5 million, or 5.17% of average interest-bearing liabilities for the
corresponding period in 1998. The increase in interest expense of $90,000 was
due primarily to a $4.4 million increase in the average balance of interest-
bearing liabilities offset by a 26 basis point decrease in the average rate paid
on the average bearing liabilities during the year ended December 31, 1999 as
compared to the year ended December 31, 1998.
Provision for Loan Losses. The provision for loan losses was $36,000 and $24,000
for the years ended December 31, 1999 and 1998, 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, 1999 and 1998,
the allowance for loan losses represented .25% and .26% of total loans,
respectively.
Non-Interest Income. Non-interest income amounted to $180,000 and $218,000 for
the years ended December 31, 1999 and 1998, respectively. The decrease of
$38,000 was due primarily to a $93,000 gain resulting from the sale of
investments classified as available-for-sale in 1999 as compared to a $137,000
gain in 1998.
Non-Interest Expense. Non-interest expense decreased approximately $79,000 or
7.03% to $1,045,000 for the year ended December 31, 1999 compared to $1,124,000
for the year ended December 31, 1998. Non-interest expense was 1.54% of average
assets for the year ended December 31, 1999 as compared to 1.79% of average
assets for the same period in 1998. The decrease of $79,000 was due primarily to
a decrease of $104,000 in legal and professional fees. The net increase in other
non-interest categories for 1999 compared to 1998 was $25,000. The decrease of
$104,000 in legal and professional fees was due to services provided in
connection with the Bank's exploration of strategic capital employment in 1998.
Income Taxes. The provision for income tax expense amounted to approximately
$417,000 and $398,000 for the years ended December 31, 1999 and 1998,
respectively. The provision for income tax expense as a percentage of income
before tax expense amounted to 34% for both 1999 and 1998 (see Note 9 of Notes
to Consolidated Financial Statements).
11
<PAGE>
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998 AND
1997
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
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 expense 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
12
<PAGE>
percentage of income before tax expense amounted to 34% for both 1998 and 1997
(see Note 9 of Notes to Consolidated Financial Statements).
Year 2000
Like many financial institutions, the Bank relies on computers to conduct its
business and information systems processing. Industry experts were concerned
that on January 1, 2000, some computers might not be able to interpret the new
year properly, causing computer malfunctions. Some banking industry experts
remain concerned that some computers may not be able to interpret additional
data in the year 2000 properly. The Bank has operated and evaluated its computer
operating systems following January 1, 2000 and has not identified any errors or
experienced any computer system malfunctions. The Bank will continue to monitor
information systems to assess whether its systems are at risk of misinterpreting
any future dates and will develop appropriate contingency plans to prevent any
potential system malfunction or correct any system failures. The Bank has not
been informed of any such problem experienced by its vendors or its customers,
nor by any of the municipal agencies that provide services to the Bank.
Nevertheless, it is too soon to conclude that there will not be any problems
arising from Year 2000 problem, particularly at some of the Bank's vendors. The
Bank will continue to monitor its significant vendors of goods and services with
respect to Year 2000 problems they may encounter as those issues may effect the
Bank's ability to continue operations, or might adversely affect the Bank's
financial position, results of operations, and cash flows. The Bank does not
believe at this time that these potential problems will materially impact the
ability of the Company to continue its operations; however, no assurance can be
given that this will be the case.
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 8
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, 1999, was
approximately 8.10%. 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, 1999 and 1998,
cash and cash equivalents totaled approximately $4.3 million and $4.0 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,
13
<PAGE>
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 1999 and 1998. The
primary investing activities of the Bank are origination of loans and purchase
of investment securities. For the year ended December 31, 1999 and 1998,
respectively, the Bank's origination of loans exceeded repayments by $5.3
million and $2.0 million. The excess of originations over repayments during 1999
and 1998 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, 1999, the Bank had a net increase in other
deposit accounts of approximately $1.3 million and a net increase in
certificates of deposit of $3.1 million. In addition, the Company repurchased
101,420 shares of its stock at a cost of $1.6 million.
The Bank's capital ratios are substantially in excess of current regulatory
capital requirements. At December 31, 1999, the Bank's core capital amounted to
15.6% of adjusted total assets, or 11.6%, in excess of the Bank's current 4%
core capital requirement. Additionally, the Bank's risk-weighted assets ratio
was 27.1% at December 31, 1999, or 19.1% in excess of the Bank's 8.0% risk-based
capital requirement (See Note 8 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.
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires entities to recognize all
derivatives in their financial statements as either assets or liabilities
measured at fair value. SFAS No. 133 also specifies new methods of accounting
for hedging transactions, prescribes the items and transactions that may be
hedged, and specifies detailed criteria to be met to qualify for hedge
accounting.
The definition of a derivative financial instrument is complex, but in general,
it is an instrument with one or more underlyings, such as an interest rate or
foreign exchange rate, that is applied to a notional amount, such as an amount
of currency, to determine the settlement amounts. It generally requires no
significant initial investment and can be settled net or by delivery of an asset
that is readily convertible to cash. SFAS No. 133 applies to derivatives
embedded in other contracts, unless the underlying of the embedded derivative is
clearly and closely related to the host contract.
SFAS No. 133, as amended by SFAS No. 137, is effective for fiscal years
beginning after June 15, 2000. On adoption, entities are permitted to transfer
held-to-maturity debt securities to the available-for-sale or trading category
without calling into question their intent to hold other debt securities to
maturity in the future. SFAS No. 133 is not expected to have a material impact
on the Company's financial statements.
14
<PAGE>
[LETTERHEAD OF MILLER, MAYER, SULLIVAN & STEVENS LLP]
CERTIFIED PUBLIC ACCOUNTANTS
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, 1999 and 1998, 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, 1999.
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, 1999 and 1998, and the consolidated results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999 in conformity with generally accepted accounting
principles.
/s/ Miller, Mayer, Sullivan, & Stevens, LLP
Lexington, Kentucky
January 21, 2000
15
<PAGE>
CKF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
______________________
<TABLE>
<CAPTION>
As of December 31,
---------------------------------
1999 1998
------------------- ------------
<S> <C> <C>
Assets
Cash and due from banks $ 835,547 $ 545,711
Interest bearing deposits 3,488,269 3,458,161
Investment securities:
Securities available-for-sale 376,500 634,585
Securities held-to-maturity (market values of $1,978,310
and $2,047,776 for 1999 and 1998, respectively) 2,004,600 2,042,705
Loans receivable, net 63,160,359 57,911,846
Real estate owned 32,923
Accrued interest receivable 453,587 431,153
Office property and equipment, net 854,154 546,203
Other assets 7,826 9,551
----------- -----------
Total assets $71,213,765 $65,579,915
=========== ===========
Liabilities and Stockholders' Equity
Deposits $53,324,839 $48,938,374
Advance from Federal Home Loan Bank 4,589,359 2,119,932
Advance payment by borrowers for taxes and insurance 25,966 39,737
Other liabilities 663,215 615,167
----------- -----------
Total liabilities 58,603,379 51,713,210
----------- -----------
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 9,585,429 9,555,017
Retained earnings, substantially restricted 7,733,718 7,366,006
Accumulated other comprehensive income 243,322 410,294
Treasury stock, 187,365 and 85,945 shares, respectively, at cost (3,265,804) (1,683,489)
Incentive Plan Trust, 59,600 and 62,500 shares, respectively, at cost (1,172,073) (1,221,853)
Unearned Employee Stock Ownership Plan (ESOP) stock (524,206) (569,270)
----------- -----------
Total stockholders' equity 12,610,386 13,866,705
----------- -----------
Total liabilities and stockholders' equity $71,213,765 $65,579,915
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
16
<PAGE>
CKF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
______________________
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Interest income:
Interest on loans $4,498,884 $4,372,430 $4,368,261
Interest and dividends on investments 128,281 125,697 154,938
Other interest income 98,244 110,002 62,497
---------- ---------- ----------
Total interest income 4,725,409 4,608,129 4,585,696
---------- ---------- ----------
Interest expense:
Interest on deposits 2,514,203 2,393,349 2,180,927
Other interest 81,587 112,968 153,599
---------- ---------- ----------
Total interest expense 2,595,790 2,506,317 2,334,526
---------- ---------- ----------
Net interest income 2,129,619 2,101,812 2,251,170
Provision for loan losses 36,000 24,000 18,000
---------- ---------- ----------
Net interest income after provision for loan losses 2,093,619 2,077,812 2,233,170
---------- ---------- ----------
Non-interest income:
Loan and other service fees 83,505 77,503 61,614
Gain on sale of investments 92,544 137,067 420,575
Other, net 4,357 3,514 2,234
---------- ---------- ----------
Total non-interest income 180,406 218,084 484,423
---------- ---------- ----------
Non-interest expense:
Compensation and benefits 555,697 554,619 571,771
Federal insurance premium 29,757 27,474 22,369
Legal and professional fees 31,311 135,058 15,857
State franchise tax 59,689 52,597 52,922
Occupancy expense, net 51,942 62,225 45,387
Data processing 60,456 54,978 46,506
Loss on foreclosed real estate -- 5,004 41,813
Other operating expenses 256,205 232,074 228,726
---------- ---------- ----------
Total non-interest expense 1,045,057 1,124,029 1,025,351
---------- ---------- ----------
Income before income tax expense 1,228,968 1,171,867 1,692,242
Provision for income taxes 417,823 398,254 575,361
---------- ---------- ----------
Net income $ 811,145 $ 773,613 $1,116,881
========== ========== ==========
Earnings per common share $1.08 $.98 $1.33
========== ========== ==========
Earnings per common share - assuming dilution $1.08 $.96 $1.29
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
17
<PAGE>
CKF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
for the years ended December 31, 1999, 1998, and 1997
----------------
<TABLE>
<CAPTION>
Accumulated
Additional Other Incentive Unearned
Common Paid-in Retained Comprehensive Treasury Plan ESOP
Stock Capital Earnings Income Stock Trust Stock
----------- ----------- ------------ ------------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $ 10,000 $ 9,612,331 $ 7,147,931 $ 463,732 $ (986,388) $ (455,344) $(693,333)
Comprehensive income:
Net income 1,116,881
Other comprehensive
income, net of tax,
decrease in unrealized
gains on securities (108,015)
Total comprehensive income
Dividend declared (1,260,675)
ESOP stock released in 1997 49,944 53,321
Purchase of common stock,
63,975 shares (1,236,244)
Stock issued upon
exercise of options (23,593) 72,155
----------- ----------- ------------ ------------- ------------ ------------ ----------
Balance, December 31, 1997 10,000 9,638,682 7,004,137 355,717 (986,388) (1,619,433) (640,012)
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 released in 1998 43,635 70,742
Purchase of common stock,
21,970 shares (697,101)
Stock issued upon
exercise of options (127,300) 389,800
Stock issued as compensation 7,780
----------- ----------- ------------ ------------- ------------ ------------ ----------
Balance, December 31, 1998 10,000 9,555,017 7,366,006 410,294 (1,683,489) (1,221,853) (569,270)
Comprehensive income:
Net income 811,145
Other comprehensive
income, net of tax,
decrease in unrealized
gains on securities,
net of reclassification
adjustment (see disclosure) (166,972)
Total comprehensive income
Dividend declared (443,433)
ESOP stock released in 1999 40,912 45,064
Purchase of common stock,
101,420 shares (1,582,315)
Stock issued upon
exercise of options (10,500) 42,000
Stock issued as compensation 7,780
----------- ----------- ------------ ------------- ------------ ------------ ----------
Balance, December 31, 1999 $ 10,000 $ 9,585,429 $ 7,733,718 $ 243,322 $ (3,265,804) $ (1,172,073) $(524,206)
=========== =========== ============ ============= ============ ============ ==========
Disclosure of reclassification
amount: 1998 1999
------------- ------------
Unrealized holding gains(loss)
arising during the period $ 153,841 $ (102,264)
Less: reclassification
adjustment for gains included
in net income, net of tax (99,264) (64,708)
------------- ------------
Net change in unrealized
gains on securities $ 54,577 $ (166,972)
============= ============
<CAPTION>
Total
Stockholders'
Equity
-----------
<S> <C>
Balance, December 31, 1996 $15,098,929
-----------
Comprehensive income:
Net income 1,116,881
Other comprehensive
income, net of tax,
decrease in unrealized
gains on securities (108,015)
-----------
Total comprehensive income 1,008,866
Dividend declared (1,260,675)
ESOP stock released in 1997 103,265
Purchase of common stock,
63,975 shares (1,236,244)
Stock issued upon
exercise of options 48,562
-----------
Balance, December 31, 1997 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 released in 1998 114,377
Purchase of common stock,
21,970 shares (697,101)
Stock issued upon
exercise of options 262,500
Stock issued as compensation 7,780
-----------
Balance, December 31, 1998 13,866,705
-----------
Comprehensive income:
Net income 811,145
Other comprehensive
income, net of tax,
decrease in unrealized
gains on securities,
net of reclassification
adjustment (see disclosure) (166,972)
-----------
Total comprehensive income 644,173
Dividend declared (443,433)
ESOP stock released in 1999 85,976
Purchase of common stock,
101,420 shares (1,582,315)
Stock issued upon
exercise of options 31,500
Stock issued as compensation 7,780
-----------
Balance, December 31, 1999 $12,610,386
===========
Disclosure of reclassification
amount:
Unrealized holding gains(loss)
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.
18
<PAGE>
CKF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 811,145 $ 773,613 $ 1,116,881
Adjustments to reconcile net income to net
cash provided by operating activities:
ESOP benefit expense 77,085 95,165 103,265
Provision for loan losses 36,000 24,000 18,000
Provisions for losses on foreclosed real estate 5,004 41,813
Amortization of loan fees (19,866) (14,231) (10,273)
Realized gain on sale of investment (92,544) (137,067) (420,575)
Provision for depreciation 38,814 31,452 27,480
FHLB stock dividend (40,000) (38,000) (35,400)
Amortization of investment premium and (discount) 2,227 3,301 3,014
Stock issued for compensation 7,780 7,780
Changes in:
Interest receivable (22,434) (863) (51,885)
Other liabilities 108,999 (47,298) (141,992)
Prepaid expense 1,725 4,301 (2,074)
Interest payable 28,203 (13,022) 3,186
----------- ----------- -----------
Net cash provided by operating activities 937,134 694,135 651,440
----------- ----------- -----------
Cash flows from investing activities:
Loan originations and principal payment on loans, net (5,264,647) (2,026,802) (1,833,321)
Purchase of loans (887,710)
Purchase of real estate owned (32,923)
Proceeds from sale of real estate owned 33,627 185,527
Proceeds from maturities of securities held-to-maturity 500,000 500,000 500,000
Purchase of securities held-to-maturity (500,000) (500,000)
Purchase of certificates of deposit (500,000)
Proceeds from maturities of certificates of deposit 500,000
Proceeds from sale of securities available-for-sale 94,502 140,203 433,500
Principle repayment on mortgage back securities 75,878 144,014 95,089
Purchase of fixed assets (346,765) (28,732) (35,765)
----------- ----------- -----------
Net cash provided (used) for investing activities (5,473,955) (1,737,690) (1,542,680)
----------- ----------- -----------
</TABLE>
(Continued)
The accompanying notes are an integral part of the consolidated financial
statements.
19
<PAGE>
CKF BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
------------------
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------------
1999 1998 1997
------------ ------------- ------------
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in demand deposits,
NOW accounts and savings accounts 1,327,430 1,332,908 (243,214)
Net increase (decrease) in certificate of deposits 3,059,034 4,352,398 663,927
Proceeds from FHLB advance 6,500,000 8,000,000 12,000,000
Payments on FHLB advances (4,030,572) (11,093,851) (8,038,396)
Net increase (decrease) in custodial accounts (13,771) 9,549 11,245
Purchase of common stock (1,582,315) (697,101) (1,236,244)
Payment of dividends (443,433) (411,744) (1,260,675)
Additional principal payment on ESOP loan 8,892 19,211
Proceeds from exercise of stock options 31,500 262,500 48,562
----------- ------------ -----------
Net cash provided (used) by financing activities 4,856,765 1,773,870 1,945,205
----------- ------------ -----------
Increase (decrease) in cash and cash equivalents 319,944 730,315 1,053,965
Cash and cash equivalents, beginning of period 4,003,872 3,273,557 2,219,592
----------- ------------ -----------
Cash and cash equivalents, end of period $ 4,323,816 $ 4,003,872 $ 3,273,557
=========== ============ ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid for income taxes $ 317,000 $ 568,480 $ 794,708
Cash paid for interest $ 2,567,581 $ 2,519,339 $ 2,322,838
Supplemental Disclosures of Noncash Activities:
ESOP stock released $ 77,085 $ 95,165 $ 103,265
Mortgage loans originated to finance sale of
foreclosed real estate $ 97,625 $ 15,000
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
20
<PAGE>
CKF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
1. Summary of Significant Accounting Policies
On December 29, 1994, Central Kentucky Federal Savings and Loan Association
completed a conversion from a federal mutual savings and loan association
to a federal stock savings bank, Central Kentucky Federal Savings Bank
(Bank). All stock of the Bank was issued to CKF Bancorp, Inc. (Company), a
holding company formed in connection with the conversion. Simultaneously,
the Company completed an offering and sale of its common stock.
CKF Bancorp, Inc. is a corporation organized under the laws of Delaware.
The Company is a unitary savings and loan holding company which, under
existing laws, generally is not restricted in the types of business
activities in which it may engage provided that the Bank retains a
specified amount of its assets in housing-related investments. The
Company's operations consist primarily of those of the Bank.
The Bank is a federally chartered stock savings bank located in Danville,
Kentucky. The Bank is a member of the Federal Home Loan Bank System. As a
member of this system, the Bank is required to maintain an investment in
capital stock of the Federal Home Loan Bank of Cincinnati (FHLB) in an
amount equal to at least the greater of 1% of its outstanding loan and
mortgage-backed securities or .3% of total assets as of December 31 of each
year. The Bank's operations consist of attracting deposits from the general
public and using such deposits to originate loans primarily in the Bank's
market area. The Bank's profitability is significantly dependent on net
interest income which is the difference between income generated from
interest-earning assets (i.e., loans and investments) and the interest
expense paid on interest-bearing liabilities (i.e., customer deposits and
borrowed funds). Net interest income is affected by the relative amount of
interest-earning assets and interest-bearing liabilities and the interest
received or paid by the Bank can be significantly influenced by a number of
environmental factors, such as governmental monetary policy, that are
outside of management's control.
The consolidated financial information presented herein has been prepared
in accordance with generally accepted accounting principles (GAAP) and
general accounting practices within the financial services industry. In
preparing the consolidated financial statements in accordance with GAAP,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and revenues
and expenses during the reporting period. Actual results could differ from
such estimates.
The following is a summary of the Company's significant accounting policies
which have been consistently applied in the preparation of the accompanying
consolidated financial statements.
Principles of Consolidation. The consolidated financial statements include
the accounts of CKF Bancorp, Inc. and its subsidiary, Central Kentucky
Federal Savings Bank. All significant intercompany balances and
transactions have been eliminated.
(Continued)
21
<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 $67,000 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, 1999 and 1998) of deposit accounts (net of loans on
deposits) plus short-term borrowings. At December 31, 1999 and 1998, 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.
Real Estate Owned. 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)
22
<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.
The Bank accounts for the impairment of a loan in accordance with SFAS No.
114, Accounting by Creditors for Impairment of a Loan, as amended by SFAS
No. 118 as to certain income recognition and disclosure provisions. 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.
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").
(Continued)
23
<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. 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.
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)
24
<PAGE>
CKF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
2. Investment Securities
Investment securities held by the Company at December 31, 1999 and 1998 are
summarized as follows:
<TABLE>
<CAPTION>
December 31, 1999
----------------------------------------------
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 - 8,000 shares $ 7,831 $ 368,669 $ $ 376,500
========== ========== ========== ==========
Securities held-to-maturity:
U. S. Treasury securities and
obligations of U. S. Government
corporations and agencies $1,249,505 $ $ 23,257 $1,226,248
Mortgage backed securities 145,195 3,033 142,162
Federal Home Loan Bank of
Cincinnati capital stock - 5,949
shares 594,900 594,900
Intrieve Incorporated capital
stock - 10 shares 15,000 15,000
---------- ---------- ---------- ----------
$2,004,600 $ $ 26,290 $1,978,310
========== ========== ========== ==========
<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)
25
<PAGE>
CKF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
The amortized cost and estimated market value of debt securities at
December 31, 1999, 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, 1999:
Due in one year or less $ 250,100 $ 249,218
Due after one year through five years 999,405 977,030
---------- ----------
$1,249,505 $1,226,248
========== ==========
</TABLE>
Investment securities with a carrying value of approximately $1,000,000 at
December 31, 1999 and 1998 were pledged as collateral for certain municipal
deposits.
For the years ended December 31, 1999, 1998, and 1997, the Bank received
$94,502, $140,203, and $433,500, respectively, from the sale of equity
securities classified as available-for-sale investments, and $500,000 in
each of those years from the maturity of U.S. Government and Agency
obligations classified as held-to-maturity investments.
At December 31, 1999 and 1998 the unrealized appreciation on investment
securities available-for-sale in the amount of $368,669 and $624,796 net of
the deferred tax liability of $125,347 and $214,502, respectively, is
included in Accumulated Other Comprehensive Income as a separate component
of stockholders' equity.
Accrued interest receivable includes $9,881 and $9,689 as of December 31,
1999 and 1998, respectively, related to investment securities and term
deposits.
(Continued)
26
<PAGE>
CKF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
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, 1999 and 1998 consist of the
following:
<TABLE>
<CAPTION>
December 31,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Real estate mortgage secured by one-to-four family
residential property $51,365,227 $45,375,024
Real estate mortgage secured by multi-family
residential property 877,679 1,008,127
Real estate mortgage secured by other properties 9,410,542 9,006,876
Consumer loans:
Loans to depositors, secured by savings 347,590 533,052
Other, principally unsecured 2,269,164 2,527,140
----------- -----------
64,270,202 58,450,219
Less:
Undisbursed portion of mortgage loans 871,199 322,468
Allowance for loan losses 154,914 148,200
Net deferred loan origination fees 83,730 67,705
----------- -----------
$63,160,359 $57,911,846
=========== ===========
</TABLE>
Accrued interest receivable includes $443,706 and $421,464 at December 31,
1999 and 1998, respectively, related to loans receivable.
The following is a reconciliation of the allowance for loan losses:
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------
1999 1998 1997
----------- ---------- ---------
<S> <C> <C> <C>
Balance, beginning of period $148,200 $125,000 $107,000
Additions charged to operations 36,000 24,000 18,000
Charge-offs (29,286) (800)
Recoveries
-------- -------- --------
Balance, end of period $154,914 $148,200 $125,000
======== ======== ========
</TABLE>
(Continued)
27
<PAGE>
CKF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
The following is a summary of non-performing loans:
<TABLE>
<CAPTION>
Amount (in thousands)
-----------------------------------
For the Years Ended December 31,
-----------------------------------
1999 1998 1997
----------- ----------- ---------
<S> <C> <C> <C>
Loans past due 90 days or more $ 146 $ 356 $ 227
Non-accrual loans 160 65 65
---------- ---------- --------
Total nonperforming loan balances $ 306 $ 421 $ 292
========== ========== ========
Nonperforming loans as a percentage of loans .48% .73% .52%
========== ========== ========
</TABLE>
The Bank identified impaired loans as defined by SFAS No. 114 in the amount
of $159,720, $65,457, and $65,432 at December 31, 1999, 1998, and 1997 for
which no allowance for loan losses has been provided. The average recorded
investment in impaired loans was $162,100, $57,070 and $96,612 during the
years ended December 31, 1999, 1998, and 1997, respectively. Interest
income on impaired loans of $3,675, $4,158, and $7,905, respectively, was
recognized for cash payments received in 1999, 1998, and 1997,
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, 1999 and 1998, were as follows:
<TABLE>
<CAPTION>
December 31,
---------------------
1999 1998
--------- ----------
<S> <C> <C>
Balance at beginning of period $464,799 $ 246,338
New loans 125,000 636,889
Repayments (90,437) (418,428)
-------- ---------
Balance at end of period $499,362 $ 464,799
======== =========
</TABLE>
These loans were incurred in the ordinary course of business on
substantially the same terms as those prevailing at the time for comparable
transactions with other persons and do not involve more than normal risk of
collectibility or present other unfavorable features.
4. 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 loan commitments outstanding
which amounted to approximately $75,000 and $329,000 as of December 31,
1999 and 1998, respectively. Also, as of December 31, 1999, the Bank had
made a $315,000 commitment for a promissory note, and 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 $2,036,478 and $1,000,658 of unused home equity lines and
(Continued)
28
<PAGE>
CKF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
other open lines of credit outstanding to customers at December 31, 1999
and 1998, respectively. There were no fixed rate mortgage loan commitments
at December 31, 1999, and the mortgage loan commitments at December 31,
1998 included fixed rate loan commitments of $89,000. 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 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.
5. Office Property and Equipment
Office property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Land, at cost $ 405,157 $ 165,157
Building, at cost 592,084 567,398
Furniture, fixtures and equipment 368,327 286,285
---------- ----------
1,365,568 1,018,840
Less accumulated depreciation 511,414 472,637
---------- ----------
$ 854,154 $ 546,203
========== ==========
</TABLE>
(Continued)
29
<PAGE>
CKF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
6. Deposits
Deposit accounts are summarized as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1999 1998
------------- -------------
<S> <C> <C>
Demand deposit accounts $ 339,472 $ 224,650
Passbook accounts with a weighted average rate of 3.05%
at December 31, 1999 and 1998 3,479,611 3,733,222
NOW and MMDA deposits with a weighted average rate of
3.62% at December 31, 1999 and 1998 7,533,531 6,067,312
------------- -------------
11,352,614 10,025,184
Certificate of deposits with a weighted average interest rate of
5.35% and 5.60% at December 31, 1999 and 1998, respectively 41,972,225 38,913,190
------------- -------------
Total deposits $ 53,324,839 $ 48,938,374
============= =============
Jumbo certificates of deposit (minimum denomination of $100,000) $ 13,236,761 $ 12,377,746
============= =============
</TABLE>
Certificates of deposit by maturity at December 31, 1999 and 1998 are as
follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1999 1998
------------- -------------
<S> <C> <C>
(In Thousands)
Within 1 year $ 26,230 $ 24,270
1-2 years 7,775 7,114
2-3 years 3,369 2,980
Maturing in years thereafter 4,598 4,549
------------- -------------
$ 41,972 $ 38,913
============= =============
</TABLE>
(Continued)
30
<PAGE>
CKF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
Certificates of deposit by maturity and interest rate category at December
31, 1999 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% $ 24,993 $ 7,483 $ 1,599 $ 4,118 $ 38,193
6.01 - 8.00% 1,237 292 1,770 480 3,779
---------- --------- ---------- ----------- -----------
$ 26,230 $ 7,775 $ 3,369 $ 4,598 $ 41,972
========== ========= ========== =========== ===========
</TABLE>
Interest expense on deposits for the periods indicated are as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31,
-------------------------------------
1999 1998 1997
---------- ----------- -----------
<S> <C> <C> <C>
Money market and NOW accounts $ 244,085 $ 197,385 $ 189,195
Savings accounts 112,318 113,386 104,402
Certificates 2,157,800 2,082,578 1,887,330
---------- ----------- -----------
$2,514,203 $ 2,393,349 $ 2,180,927
========== =========== ===========
</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,
1999 and 1998.
7. Advances from Federal Home Loan Bank
The advances from the Federal Home Loan Bank consist of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------------
Maturity Date Interest Rate 1999 1998
------------- ------------- ----------- ------------
<S> <C> <C> <C>
3/22/99 5.77% $ $ 2,000,000
1/28/00 4.75% 1,000,000
2/17/00 4.75% 500,000
3/13/00 4.75% 1,000,000
3/31/00 4.75% 2,000,000
7/01/01 6.85% 89,359 119,932
----------- ------------
$ 4,589,359 $ 2,119,932
=========== ============
</TABLE>
(Continued)
31
<PAGE>
CKF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
A schedule of the principal payments due over the remaining term of the
notes as of December 31, 1999 follows:
<TABLE>
<CAPTION>
Year Amount
---- -----------
<S> <C>
2000 $ 4,550,460
2001 38,899
-----------
Total $ 4,589,359
===========
</TABLE>
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 $7,478,939 and $3,734,797 at December 31, 1999 and 1998,
respectively. At December 31, 1999 FHLB advances totaling $4,500,000 have a
variable or floating interest rate.
8. Stockholders' Equity
Regulatory Capital. The Bank's actual capital and its statutory required
capital levels based on the consolidated financial statements accompanying
these notes are as follows (in thousands):
<TABLE>
<CAPTION>
December 31, 1999
----------------------------------------------------------------------------------------------
To be Well
Capitalized Under
For Capital Prompt Corrective
Adequacy Purposes Action Provisions
---------------------------- ---------------------------- ----------------------------
Actual Required Required
---------------------------- ---------------------------- ----------------------------
Amount % Amount % Amount %
---------------------------- ---------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
Core capital $11,057 15.6% $2,834 4.0% $4,251 6.0%
Tangible capital $11,057 15.6% $1,063 1.5% N/A N/A
Total Risk based capital $11,212 27.1% $3,305 8.0% $4,131 10.0%
Leverage $11,057 15.6% N/A N/A $3,542 5.0%
<CAPTION>
December 31, 1998
----------------------------------------------------------------------------------------------
To be Well
Capitalized Under
For Capital Prompt Corrective
Adequacy Purposes Action Provisions
---------------------------- ---------------------------- ----------------------------
Actual Required Required
---------------------------- ---------------------------- ----------------------------
Amount % Amount % Amount %
---------------------------- ---------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
Core capital $11,162 17.2% $2,600 4.0% $3,900 6.0%
Tangible capital $11,162 17.2% $ 975 1.5% N/A N/A
Total Risk based capital $11,310 29.4% $3,070 8.0% $3,838 10.0%
Leverage $11,162 17.2% N/A N/A $3,250 5.0%
</TABLE>
(Continued)
32
<PAGE>
CKF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") required each federal banking agency to implement prompt
corrective actions for institutions that it regulates. In response to this
requirement, OTS adopted final rules based upon FDICIA's five capital
tiers. The rules provide that a savings bank is "well capitalized" if its
total risk-based capital ratio is 10% or greater, its Tier 1 risk-based
capital ratio is 6% or greater, its leverage is 5% or greater and the
institution is not subject to a capital directive. Under this regulation,
the Bank was deemed to be "well capitalized" as of December 31, 1999 and
1998 based upon the most recent notifications from its regulators. There
are no conditions or events since those notifications that management
believes would change its classifications.
Retained Earnings Restriction. Retained earnings at December 31, 1999
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.
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.
9. Income Taxes
The provision for income taxes for the periods indicated consist of the
following:
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
Federal income tax expense:
Current $441,629 $420,801 $575,390
Deferred (23,806) (22,547) (29)
-------- -------- --------
$417,823 $398,254 $575,361
======== ======== ========
</TABLE>
(Continued)
33
<PAGE>
CKF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
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,
-----------------------------------
1999 1998 1997
----------- ----------- ---------
<S> <C> <C> <C>
FHLB stock $ 13,600 $ 12,920 $ (4,705)
Directors retirement plan (7,923) (14,861) (19,839)
ESOP loan (28,489)
Allowance for loan losses (2,283) (7,976) 6,282
Net accrued income (5,240) (5,164) 14,959
Other, net 6,529 (7,466) 3,274
-------- -------- --------
$(23,806) $(22,547) $ (29)
======== ======== ========
</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,
-----------------------------------
1999 1998 1997
---------- ---------- -----------
<S> <C> <C> <C>
Expected income tax expense at federal tax rate $417,849 $398,435 $ 575,361
Other, net (26) (181)
-------- -------- ---------
Total income tax expense $417,823 $398,254 $ 575,361
======== ======== ==========
Effective income tax rate 34.0% 34.0% 34.0%
======== ======== ==========
</TABLE>
Deferred tax assets and liabilities as of December 31, 1999 and 1998
consisted of the following:
<TABLE>
<CAPTION>
1999 1998
-------- ----------
<S> <C> <C>
Deferred tax assets:
Deferred loan fee income $ 28,468 $ 23,020
Directors retirement plan 88,086 80,163
Allowance for loan losses 52,331 50,048
Other, net 6,293
-------- ----------
175,178 153,231
-------- ----------
Deferred tax liabilities:
Net accrued interest income 132,535 137,775
FHLB stock 126,854 113,254
Other, net 10,217
-------- ----------
259,389 261,246
-------- ----------
Net deferred tax asset (liability) $(84,211) $(108,015)
======== ==========
</TABLE>
(Continued)
34
<PAGE>
CKF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------
In addition to the net deferred tax liability of $84,211 as of December 31,
1999 included in the preceding table, the financial statements include a
deferred tax liability of $125,347 that was charged against the unrealized
gain on securities available-for-sale of $368,669. The net amount of
$243,322 is recorded in Accumulated Other Comprehensive Income, a separate
component of stockholders' equity at December 31, 1999.
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.
10. Employee Benefits
Retirement Savings Plan. Effective January 1, 1994, the Bank became a
participant in the Financial Institutions Thrift Plan. The Plan allows
participating employees to make contributions by salary reduction pursuant
to Section 401(K) of the Internal Revenue Code for all employees who meet
certain requirements as to age and length of service. The Bank makes 25%
matching contributions to each participant's account up to 6% of the
participant's compensation. The Bank contributions to the Plan amounted to
$2,409, $4,492, and $2,297 for the years ended December 31, 1999, 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 $28,252, $43,709, and
$58,351, in connection with this plan for the years ended December 31,
1999, 1998, and 1997, respectively.
(Continued)
35
<PAGE>
CKF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------
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.
A summary of option transactions for the years indicated are as follows:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------
1999 1998
----------------------- -----------------------
Option Number Option Number
Price of Units Price of Units
------------ --------- ------------ ---------
<S> <C> <C> <C> <C>
Balance outstanding at beginning of year $13.13-$17.19 61,500 $13.13-20.00 83,900
Granted 17.19 4,000
Exercised 13.13 (2,400) 13.13 (20,000)
Cancelled 13.13 (1,600) 13.13 (6,400)
------ -------
Balance outstanding at end of year $13.13-$17.19 57,500 $13.13-17.19 61,500
====== =======
Shares exercisable 39,300 36,700
====== =======
Shares available for grant 13,000 11,400
====== =======
</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
(Continued)
36
<PAGE>
CKF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------
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, 1999, 1998,
and 1997, respectively.
<TABLE>
<CAPTION>
Reported Per Consolidated
Financial Statements Pro Forma Amount
---------------------------------------- ----------------------------------------
1999 1998 1997 1999 1998 1997
---------- ---------- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net income $ 811,145 $ 773,613 $ 1,116,881 $ 770,667 $ 733,135 $ 1,078,687
========== ========== ============ ========== ========== ============
Earnings per share $ 1.08 $ .98 $ 1.33 $ 1.03 $ .93 $ 1.28
========== ========== ============ ========== ========== ============
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ------------
<S> <C> <C> <C>
Dividend yield 3.0% 3.0% 3.0%
Expected volatility .06% .06% .06%
Expected life 10 10 10
Free interest rate 5.3% 5.3% 5.3%
</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 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, 1999, 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
(Continued)
37
<PAGE>
CKF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------
being repaid in annual installments over a 15-year period with interest,
which is based on the published prime rate (currently 8.5%) 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 $43,187
and $41,600 were used in fiscal year 1999 and 1998, 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 $77,085, $95,165, and $103,265 for the years ended
December 31, 1999, 1998, and 1997, respectively. During 1999, 1998, and
1997, 5,240, 5,237, and 6,428 shares of stock were released from
collateral, respectively. At December 31, 1999, there were 52,422
unallocated ESOP shares of stock having a fair value of $760,119.
11. 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, 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.
(Continued)
38
<PAGE>
CKF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------
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.
The estimated fair values of the Company's financial instruments at
December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
------------------------ ------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Assets
Cash and interest bearing deposits $ 4,323,816 $ 4,323,816 $ 4,003,872 $ 4,003,872
Securities available-for-sale 376,500 376,500 634,585 634,585
Securities held-to-maturity 2,004,600 1,978,310 2,042,705 2,047,776
Loans receivable, net 63,160,359 63,248,457 57,911,846 57,649,549
Liabilities
Deposits 53,324,839 53,056,540 48,938,374 49,377,089
FHLB advances 4,589,359 4,595,629 2,119,932 2,123,238
Unrecognized Financial Instruments
Loan commitments 390,000 1,329,000
Unused home equity lines of credit 2,036,478 1,000,658
</TABLE>
12. 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 $17,154, $35,772 and $26,064 for the years ended December 31,
1999, 1998 and 1997, respectively. Appraisal fees paid by the Bank amounted
to $37,825, $36,395 and $26,825 for these same periods. In addition, the
Bank leases office space to a Director. Rent income received by the
(Continued)
39
<PAGE>
CKF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------
Bank amounted to $8,400 for each of the years ended December 31, 1999, 1998
and 1997. 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.
13. 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, 1999, 1998 and 1997, respectively.
Summary balance sheets for the Bank's wholly-owned subsidiary, Central
Kentucky Savings and Loan Service Corporation, follow:
Central Kentucky Savings and Loan Service Corporation
Balance Sheets
--------------
<TABLE>
<CAPTION>
As of December 31,
------------------
1999 1998
-------- --------
<S> <C> <C>
Assets
Investment, at cost $15,000 $15,000
======= =======
Stockholder's Equity
Common stock $15,000 $15,000
======= =======
</TABLE>
14. Stock Transactions
The Board of Directors authorized the repurchase of the Company's common
stock outstanding as follows:
<TABLE>
<CAPTION>
Percentage
Number of
of Outstanding
Date of Authorization Shares Shares
--------------------- ------- -----------
<S> <C> <C>
December 16, 1995 50,000 5%
September 10, 1996 47,500 5%
October 4, 1997 36,127 4%
February 10, 1998 43,350 5%
February 9, 1999 45,000 5%
September 14, 1999 43,000 5%
</TABLE>
(Continued)
40
<PAGE>
CKF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------
For the years ended December 31, 1999, 1998, and 1997, the Company
repurchased 101,420, 21,970, and 63,975 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, 1999, 2,400 common shares were issued from
the Incentive Plan Trust at an average cost of $17.50 per share for the
exercise of stock options. Also, during 1999, 500 shares of common stock
were issued from the Incentive Plan, which was recorded as compensation at
the fair value on the date of the award.
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, 3,700 shares of common stock were
issued from the Incentive Plan Trust at an average cost of $19.50 per share
for the exercise of stock options.
(Continued)
41
<PAGE>
CKF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------
15. 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, 1999, 1998, and 1997, respectively.
<TABLE>
<CAPTION>
For the years ended December 31,
----------------------------------------------
1999 1998 1997
----------- ----------- -------------
<S> <C> <C> <C>
Earnings Per Common Share
Numerator:
Income available to common shareholders $ 811,145 $ 773,613 $ 1,116,881
=========== =========== =============
Denominator:
Weighted average of common
shares outstanding 748,546 789,800 841,662
=========== =========== =============
Per Share Amount $ 1.08 $ .98 $ 1.33
=========== =========== =============
Earning Per Common Share - Assuming Dilution
Numerator:
Income available to common shareholders $ 811,145 $ 773,613 $ 1,116,881
=========== =========== =============
Denominator:
Weighted average of common
shares outstanding 748,546 789,800 841,662
Effect of outstanding stock options 997 15,751 26,643
----------- ----------- -------------
Weighted average of common shares
outstanding - assuming dilution 749,543 805,551 868,305
=========== =========== =============
Per share amount $ 1.08 $ .96 $ 1.29
=========== =========== =============
</TABLE>
Unallocated shares held by the Company's ESOP are considered outstanding
when they are committed to be released.
16. Commitments
During December 1999, the Company entered into a construction contract to
build a new branch in Danville, Kentucky. The contract price is based on
cost plus 15%, but is not to exceed $420,000. As of December 31, 1999, this
contract was approximately 5% complete.
(Continued)
42
<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,
1999 1998
----------- -----------
<S> <C> <C>
Assets:
Cash and due from banks $ 693,911 $ 1,586,476
Investment in subsidiary 11,824,853 12,140,857
Other assets 91,622 139,372
----------- -----------
Total assets $12,610,386 $13,866,705
=========== ===========
Liabilities and Stockholders' Equity:
Liabilities $ $
----------- -----------
Stockholders' equity:
Common stock 10,000 10,000
Additional paid-in capital 9,585,429 9,555,017
Retained earnings, restricted 7,733,718 7,366,006
Treasury stock, 187,365 and 85,945 shares, respectively, at cost (3,265,804) (1,683,489)
Stock Option Trust, 59,600 and 62,500 shares, respectively, at cost (1,172,073) (1,221,853)
Accumulated other comprehensive income 243,322 410,294
Unearned ESOP stock (524,206) (569,270)
----------- -----------
Total stockholders' equity 12,610,386 13,866,705
----------- -----------
Total liabilities and stockholders' equity $12,610,386 $13,866,705
=========== ===========
</TABLE>
(Continued)
43
<PAGE>
CKF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------
Condensed Statement of Income
<TABLE>
<CAPTION>
For the years ended December 31,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Income:
Dividends from Subsidiary $ 821,512 $ 847,250 $ 1,000,000
----------- ----------- -----------
Expense:
Legal and professional fees 7,050 104,000 3,490
Franchise and license tax 11,420 10,621 15,281
Other operating expenses 21,708 24,011 22,341
----------- ----------- -----------
40,178 138,632 41,112
----------- ----------- -----------
Net income before tax expense (benefit) 781,334 708,618 958,888
Income tax (expense) benefit 29,811 64,995 13,980
----------- ----------- -----------
Net income before equity in undistributed net
income of Subsidiary 811,145 773,613 972,868
Equity in undistributed net income of Subsidiary 144,013
----------- ----------- -----------
Net income $ 811,145 $ 773,613 $ 1,116,881
=========== =========== ===========
</TABLE>
(Continued)
44
<PAGE>
CKF BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------
Condensed Statement of Cash Flows
<TABLE>
<CAPTION>
For the years ended December 31,
1999 1998 1997
----------- ---------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 811,145 $ 773,613 $ 1,116,881
Adjustments to reconcile net income to cash
provided by operating activities:
Equity in undistributed net income of Subsidiary (144,013)
Excess distributions from consolidated Subsidiary 178,488 1,152,750
Change in other receivables 104,270 145,111 (87,203)
Change in other liabilities (1,175)
----------- ---------- -----------
Net cash provided by operating activities 1,093,903 2,071,474 884,490
----------- ---------- -----------
Cash flows from investing activity:
Net cash provided by investing activities
----------- ---------- -----------
Cash flows from financing activities:
Dividends paid (443,433) (411,744) (1,260,675)
Purchase of common stock (1,582,315) (697,101) (1,236,244)
Proceeds from exercise of stock options 31,500 262,500 48,562
Stock issued as compensation 7,780 7,780
----------- ---------- -----------
Net cash used by financing activities (1,986,468) (838,565) (2,448,357)
----------- ---------- -----------
Net increase (decrease) in cash and cash equivalents (892,565) 1,232,909 (1,563,867)
Cash and cash equivalents at beginning of period 1,586,476 353,567 1,917,434
----------- ---------- -----------
Cash and cash equivalents at end of period $ 693,911 $1,586,476 $ 353,567
=========== ========== ===========
</TABLE>
45
<PAGE>
CORPORATE INFORMATION
================================================================================
<TABLE>
BOARD OF DIRECTORS
<S> <C> <C>
W. Irvine Fox, Jr. Jack L. Bosley, Jr. Warren O. Nash
Chairman of the Board Farm Partner Veterinarian
Real Estate Developer/Partner Viewpoint Farm
Charleston Green Townhouses
W. Banks Hudson, III
Attorney-at-Law
John H. Stigall William H. Johnson
President and Chief Executive Yvonne York Morley Senior Vice President
Officer of the Bank and the Executive Assistant to the and Secretary of the Bank
Company President and Assistant and the Company
Secretary to the Board of
Trustees of Centre College
. ------------------------------------------------------------------------------------------------------- .
EXECUTIVE OFFICERS
John H. Stigall William H. Johnson Ann L. Hooks
President and Chief Senior Vice President Vice President and Treasurer
Executive Officer of the Bank and Secretary of the Bank of the Bank and the Company
and the Company and the Company
. ------------------------------------------------------------------------------------------------------- .
OFFICE LOCATION
340 West Main Street
Danville, Kentucky 40422
. ------------------------------------------------------------------------------------------------------- .
GENERAL INFORMATION
Independent Accountants Annual Meeting Annual Report on Form 10-K
Miller, Mayer, Sullivan & Stevens, LLP The 1999 Annual Meeting of
2365 Harrodsburg Road Stockholders will be held on A copy of the Company's 1999
Lexington, Kentucky 40504-3399 April 18, 2000 at 4:00 p.m. at Annual Report on Form 10-k
Central Kentucky Federal will be furnished without charge
Savings Bank, 340 West Main to stockholders as of the record
General Counsel Street, Danville, Kentucky date for the 1999 Annual
W. Banks Hudson, III Meeting upon written request
Attorney at Law to:
102 S. Fourth Street
Danville, Kentucky 40422
John H. Stigall
Transfer Agent CKF Bancorp, Inc.
Special Counsel Illinois Stock Transfer Company POB 400
Housley Kantarian & Bronstein, P.C. 223 West Jackson Boulevard 340 West Main Street Danville,
1220 19th Street, N.W., Suite 700 Suite 1210 KY 40423
Washington, DC 20036 Chicago, Illinois 60606
</TABLE>
<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]
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
CKF Bancorp, Inc.
We consent to incorporation by reference in the registration statement (No. 33-
83972) on Form S-8 of CKF Bancorp, Inc. of our report dated January 21, 2000,
relating to the consolidated balance sheets of CKF Bancorp, Inc. and subsidiary
as of December 31, 1999 and 1998, 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, 1999, which report is incorporated by reference
in the December 31, 1999 annual report on Form 10-KSB of CKF Bancorp, Inc.
/s/ Miller, Mayer, Sullivan, & Stevens, LLP
Lexington, Kentucky
January 24, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 835
<INT-BEARING-DEPOSITS> 3,488
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 376
<INVESTMENTS-CARRYING> 2,005
<INVESTMENTS-MARKET> 1,978
<LOANS> 63,315
<ALLOWANCE> 155
<TOTAL-ASSETS> 71,214
<DEPOSITS> 53,325
<SHORT-TERM> 4,500
<LIABILITIES-OTHER> 690
<LONG-TERM> 89
0
0
<COMMON> 10
<OTHER-SE> 12,600
<TOTAL-LIABILITIES-AND-EQUITY> 71,214
<INTEREST-LOAN> 4,499
<INTEREST-INVEST> 128
<INTEREST-OTHER> 98
<INTEREST-TOTAL> 4,725
<INTEREST-DEPOSIT> 2,514
<INTEREST-EXPENSE> 81
<INTEREST-INCOME-NET> 2,130
<LOAN-LOSSES> 36
<SECURITIES-GAINS> 92
<EXPENSE-OTHER> 1,045
<INCOME-PRETAX> 1,229
<INCOME-PRE-EXTRAORDINARY> 1,229
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 811
<EPS-BASIC> 1.08
<EPS-DILUTED> 1.08
<YIELD-ACTUAL> 3.23
<LOANS-NON> 160
<LOANS-PAST> 146
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 148
<CHARGE-OFFS> 29
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 155
<ALLOWANCE-DOMESTIC> 155
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
