<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
X Annual report under Section 13 or 15(d) of the Securities Exchange Act
- ----- of 1934
For the fiscal year ended December 31, 1996
OR
Transition report under Section 13 or 15(d) of the Securities Exchange
- ----- Act of 1934
Commission File No.: 0-25204
GATEWAY BANCORP, INC.
- --------------------------------------------------------------------------------
(Name of Small Business Issuer in Its Charter)
Kentucky 61-1269067
- ------------------------------------- ---------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
2717 Louisa Street, Catlettsburg, Kentucky 41129
- ------------------------------------------- ---------------------------------
(Address of Principal (Zip Code)
Executive Offices)
Issuer's Telephone Number, Including Area Code: (606) 739-4126
Securities registered under Section 12(b) of the Exchange Act:
Not Applicable
Securities registered under Section 12(g) of the Exchange Act:
Common Stock (par value $.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 disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained 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
----
Issuer's revenues for its most recent fiscal year: $4.7 million.
As of March 20, 1997, the aggregate value of the 954,193 shares of Common Stock
of the Registrant issued and outstanding on such date, which excludes 121,561
shares held by all directors and executive officers of the Registrant and the
Registrant's Employee Stock Ownership Plan ("ESOP") as a group, was
approximately $13.8 million. This figure is based on the closing sales price of
$14.50 per share of the Registrant's Common Stock on March 20, 1997. Although
directors and executive officers and the ESOP were assumed to be "affiliates" of
the Registrant for purposes of this calculation, the classification is not to be
interpreted as an admission of such status.
Number of shares of Common Stock outstanding as of March 20, 1997: 1,075,754
Transitional Small Business Disclosure Format: Yes No X
---- ----
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Briefly describe the following documents incorporated by reference and
identify 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, 1996 are incorporated into Parts II and IV.
(2) Portions of the definitive proxy statement for the Annual Meeting of
Stockholders are incorporated into Part III.
<PAGE>
PART I.
Item 1. Description of Business
General
Gateway Bancorp, Inc. (the "Company") is a Kentucky corporation and sole
stockholder of Catlettsburg Federal Savings Bank (the "Bank") which converted to
the stock form of organization in January 1995. The only significant assets of
the Company are the capital stock of the Bank and the net conversion proceeds
retained by the Company. The business of the Company initially consists of the
business of the Bank.
The Bank is headquartered in Catlettsburg, Kentucky. At December 31,
1996, the Company had $66.4 million of total consolidated assets, $49.4 million
of total consolidated liabilities and $17.0 million of total consolidated
stockholders' equity.
Operating characteristics of the Bank in recent years include the
following:
o Lending and Investment Activities. The Bank's primary lending
emphasis has been, and will continue to be, the origination of
single-family residential mortgage loans secured by properties
located in Boyd, Carter and Greenup Counties, Kentucky. At
December 31, 1996, such loans amounted to $16.8 million, or
87.9%, of the Bank's gross loan portfolio. The remainder of the
Bank's loan portfolio is comprised of $903,000, or 4.7%, of loans
secured by multi-family residential properties, $792,000, or
4.1%, of loans secured by commercial real estate, and $621,000,
or 3.3%, of loans secured by savings accounts. Loan originations
totaled $5.0 million during the year ended December 31, 1996, of
which $4.5 million were single-family residential loans. The Bank
has also focused its investing activities in recent years on
investment securities of the U.S. Government and Government
agencies and mortgage- backed securities issued by
quasi-governmental agencies, which involve less risk and less
overhead expenditures. At December 31, 1996, investment
securities amounted to $17.5 million or 26.4% of total assets,
while mortgage-backed securities amounted to $27.7 million or
41.7% of total assets.
o Profitability. Since its founding in 1935, the Bank has always
been profitable. The Company had net income of $530,000 and
$821,000 for the years ended December 31, 1996 and 1995,
respectively, as compared to the Bank's net income of $694,000
(unaudited) for the year ended December 31, 1994, and $319,000
and $712,000 for the six months ended December 31, 1994 and the
year ended June 30, 1994, respectively. The primary reason for
the magnitude of the decline in 1996 net income was a $335,937
pretax charge in 1996 reflecting the consequences of the one-time
assessment by the Federal Deposit Insurance Corporation ("FDIC")
to restore the Savings Association Insurance Fund ("SAIF") to the
statutorily prescribed level of 1.25% of insured deposits. If not
for this one-time assessment, 1996 net income would have been
$751,000,
<PAGE>
a decrease of $70,000 primarily attributable to a $98,000
reduction in net interest income due to a lower volume of
interest-earning assets, and increased compensation costs due to
a full year of funding the Company's Recognition and Retention
Plan as compared to only a partial year for 1995.
The Company's net income is primarily dependent on its net
interest income, the difference between interest income on
interest-earning assets and interest expense on interest-bearing
liabilities. Net interest income totalled $2.1 million, $2.2
million and $1.8 million for the years ended December 31, 1996,
1995 and 1994 (unaudited), respectively, and $909,000 and $1.7
million for the six months ended December 31, 1994 and the year
ended June 30, 1994, respectively, reflecting interest rate
spreads of 1.70%, 1.55%, 2.13%, 2.18% (on an annualized basis)
and 2.00%, respectively.
The Bank's interest rate spread has recently been adversely
affected by, among other things, the high rates of prepayments of
loans and mortgage-backed securities, reflecting the declining
interest rate environment in such periods. The Bank's results of
operations are also affected by, among other things, changes in
interest rates and the relative amounts of interest-earning
assets and interest-bearing liabilities maturing or repricing in
any period. At December 31, 1996, the Bank's interest-bearing
liabilities estimated to mature or reprice within one year
exceeded the Bank's interest-earning assets with the same
characteristics by $17.5 million or 26.4% of total assets. At
December 31, 1996, the carrying value of the Bank's investment
securities exceeded the market value of such securities by
$100,000, while the market value of the mortgage-backed
securities held by the Bank exceeded the carrying value of such
securities by $40,000. The Bank has ample liquidity and borrowing
authority to cover any funding needs which may arise and,
accordingly, is not concerned with the differential in the values
of such securities. The Bank has the ability and the intention to
hold such securities to maturity.
o Noninterest Expense. The Company's profitability has been
enhanced by management's emphasis on operating efficiency. The
Company's efficiency ratio (noninterest expense divided by the
sum of net interest income plus noninterest income) was 62.9%,
41.3% and 42.7% for the years ended December 31, 1996, 1995 and
1994 (unaudited), respectively, and was 48.6% (on an annualized
basis) and 38.3%, respectively, for the six months ended December
31, 1994 and the year ended June 30, 1994. The increase for 1996
as compared to 1995 was primarily due to the SAIF special
assessment referred to above, without which the 1996 operating
efficiency ratio would have been 46.8%. Non-interest income has
not been a historical source of profitability.
o Strong Capital Position. At December 31, 1996, the Bank had total
regulatory capital of $16.8 million and exceeded all of its
regulatory capital requirements, with tangible, core and
risk-based capital ratios of 25.4%, 25.4% and 86.2%,
- 2 -
<PAGE>
respectively, as compared to the minimum requirements of 1.5%,
3.0% and 8.0%, respectively.
The Bank has historically operated its business and filed its tax
returns on a calendar year basis although its financial accounting records were
maintained on a June 30 fiscal year basis. In order to report its financial
results as a public company in a manner which is consistent with the way the
Bank has traditionally conducted its business, the Company established December
31 as its fiscal year end, effective as of December 31, 1994.
The Bank is subject to examination and comprehensive regulation by the
Office of Thrift Supervision ("OTS"), which is the Bank's chartering authority
and primary regulator. The Bank's deposits are insured by the SAIF, which is
administered by the FDIC, to the maximum extent permitted by law. The Bank is
also regulated by the FDIC, the administrator of the SAIF. The Bank is also
subject to certain reserve requirements established by the Board of Governors of
the Federal Reserve System and is a member of the Federal Home Loan Bank
("FHLB") of Cincinnati, which is one of the 12 regional banks comprising the
FHLB System.
Lending Activities
General. At December 31, 1996, the Bank's net loans receivable totalled
$19.1 million, or 28.8% of the Company's total assets at such date, as compared
to $16.9 million, or 23.0% of total assets at December 31, 1995. The Bank's
primary lending emphasis has been, and continues to be, the origination of
conventional loans secured by first liens on single-family residences located
primarily in Boyd, Carter and Greenup Counties, Kentucky. Conventional
residential real estate loans are loans which are neither insured by the Federal
Housing Administration ("FHA") nor partially guaranteed by the Veterans
Administration ("VA"). At December 31, 1996, the Bank had $16.8 million, or
87.9% of the total loan portfolio invested in single-family residential loans.
To a significantly lesser extent, the Bank's loan portfolio also includes home
equity loans, loans secured by multi-family residential properties and
commercial real estate and loans secured by savings deposits. Virtually all of
the Bank's mortgage loans are secured by properties located in Kentucky.
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<PAGE>
Loan Portfolio Composition. The following table sets forth the
composition of the Bank's loan portfolio by type of loan at the dates indicated.
<TABLE>
<CAPTION>
December 31, June 30,
------------------------------------------------------------------------ ----------------------
1996 1995 1994 1994
---------------------- ---------------------- ---------------------- ----------------------
Amount Percentage Amount Percentage Amount Percentage Amount Percentage
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
Single-family residential $ 16,785 87.9% $ 15,206 89.6% $ 10,338 89.8% $ 8,999 88.5%
Multi-family residential 903 4.7 585 3.4 105 0.9 186 1.8
Commercial real estate 792 4.1 362 2.2 331 2.9 379 3.7
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total real estate loans 18,480 96.7 16,153 95.2 10,774 93.6 9,564 94.0
Other loans:
Loans secured by savings
accounts 621 3.3 810 4.8 738 6.4 607 6.0
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total loans 19,101 100.0% 16,963 100.0% 11,512 100.0% 10,171 100.0%
========== ========== ========== ==========
Less:
Allowance for loan losses (81) (81) (61) (61)
Net deferred cost reserve 56 38 -- --
---------- ---------- ---------- ----------
Net loans $ 19,076 $ 16,920 $ 11,451 $ 10,110
========== ========== ========== ==========
</TABLE>
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<PAGE>
Contractual Principal Repayments and Interest Rates. The following table
sets forth certain information at December 31, 1996 regarding the dollar amount
of loans maturing in the Bank's gross loan portfolio, based on the contractual
terms to maturity. Demand loans and loans having no stated schedule of
repayments and no stated maturity are reported as due in one year or less.
<TABLE>
<CAPTION>
Due 1-3 years Due 3-5 years Due 5-10 years Due 10-15 years Due 15 years
Due 1 year after after after after and more after
or less 12/31/96 12/31/96 12/31/96 12/31/96 12/31/96 Total
---------- ------------- ------------- -------------- --------------- -------------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Single-family residential $ 151 $ 165 $ 555 $ 2,963 $ 5,409 $ 7,542 $16,785
Multi-family residential -- 502 -- 345 56 -- 903
Commercial real estate -- 29 123 321 212 107 792
Other 621 -- -- -- -- -- 621
---------- ------------- ------------- -------------- --------------- -------------- -------
Total $ 772 $ 696 $ 678 $ 3,629 $ 5,677 $ 7,649 $19,101
========== ============= ============= ============== =============== ============== =======
</TABLE>
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<PAGE>
The following table sets forth the dollar amount of gross loans due
after one year from December 31, 1996 which have fixed interest rates or which
have floating or adjustable interest rates.
<TABLE>
<CAPTION>
Fixed Floating or
Rates Adjustable-Rates Total
---------------- ---------------- ----------------
(In Thousands)
<S> <C> <C> <C>
Single-family residential $ 6,766 $ 9,868 $ 16,634
Multi-family residential 847 56 903
Commercial real estate 260 532 792
---------------- ---------------- ----------------
Total $ 7,873 $ 10,456 $ 18,329
================ ================ ================
</TABLE>
Scheduled contractual amortization of loans does not reflect the
expected term of the Bank's loan portfolio. The average life of loans is
substantially less than their contractual terms because of prepayments and
due-on-sale clauses, which give the Bank the right to declare a conventional
loan immediately due and payable in the event, among other things, that the
borrower sells the real property subject to the mortgage and the loan is not
repaid. The average life of mortgage loans tends to increase when current
mortgage loan rates are higher than rates on existing mortgage loans and,
conversely, decrease when rates on existing mortgage loans are lower than
current mortgage loan rates (due to refinancings of adjustable-rate and
fixed-rate loans at lower rates). Under the latter circumstances, the weighted
average yield on loans decreases as higher-yielding loans are repaid or
refinanced at lower rates.
Loan Activity. The following table shows total loans originated,
purchased and repaid during the periods indicated. There were no loans sold
during the periods.
<TABLE>
<CAPTION>
Six Months
Year Ended Ended Year Ended
December 31, December 31, June 30,
---------------------------------------- ------------ ------------
1996 1995 1994 1994 1994
------------ ------------ ------------ ------------ ------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Loan originations:
Single-family residential $ 4,543 $ 7,651 $ 3,899 $ 2,315 $ 2,943
Multi-family residential -- -- 145 80 65
Commercial real estate 470 -- -- -- --
Other 20 324 474 131 539
------------ ------------ ------------ ------------ ------------
Total loans originated 5,033 7,975 4,518 2,526 3,547
------------ ------------ ------------ ------------ ------------
Loans purchased:
Multi-family residential 350 500 -- -- --
Commercial real estate -- 29 -- -- --
------------ ------------ ------------ ------------ ------------
Total loans purchased 350 529 -- -- --
------------ ------------ ------------ ------------ ------------
Loan principal reductions 3,307 3,091 3,157 1,247 4,300
------------ ------------ ------------ ------------ ------------
Net increase (decrease)
before other items 2,076 5,413 1,361 1,279 (753)
Increase due to other
items, net 80 56 129 62 301
------------ ------------ ------------ ------------ ------------
Net increase (decrease)
in loan portfolio $ 2,156 $ 5,469 $ 1,490 $ 1,341 $ (452)
============ ============ ============ ============ ============
</TABLE>
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<PAGE>
The lending activities of the Bank are subject to underwriting standards
and loan origination procedures established by the Bank's Board of Directors.
Applications for mortgage loans are taken at each of the Bank's offices. Loan
applications are forwarded to the main office, which supervises the process of
obtaining credit reports, appraisals and other documentation involved with a
loan. Effective in February 1995, the Bank requires that a property appraisal be
obtained in connection with all new mortgage loans which are performed by an
outside, certified appraiser. Prior thereto, appraisals generally were performed
by the Bank's loan officer. The Bank requires that hazard insurance be
maintained on all security properties and that flood insurance be maintained if
the property is within a designated flood plain. The Bank receives a title
opinion from an attorney in connection with closing the loan.
Residential mortgage loan applications are primarily developed from
referrals, existing customers and walk-in customers. All other loan applications
are obtained in the same manner, as well as by advertising.
Applications for residential mortgage loans are required to be approved
by three members of the Board of Directors, regardless of size. The Bank's Chief
Executive Officer has authority to approve home equity loans in amounts of not
more than $10,000 provided that the Bank's underwriting requirements are
otherwise satisfied. All of such loans are subsequently ratified by the Board.
Loan originations totaled $5.0 million during the year ended December
31, 1996, as compared to $8.0 million during the year ended December 31, 1995.
Single-family residential loan originations constituted $4.5 million, as
compared to $7.7 million in 1995. During 1996, the Bank originated $470,000 in
commercial real estate loans and no multi-family residential loans, while in
1995, the Bank did not originate any multi-family residential or commercial real
estate loans. In 1995, the Bank adopted a competitive mortgage loan pricing
policy to regain market share in single-family lending which has resulted in the
$13.0 million of originations over the past two years, following a relatively
inactive period of mortgage lending during the preceding three years.
The Bank will from time to time purchase whole residential loans and
participation interests in loans that meet its underwriting criteria. During
1995, the Bank purchased participation interests in multi-family residential and
commercial real estate loans of $500,000 (constituting 20.5% of the whole loan)
and $29,000 (constituting 5.4% of the whole loan), respectively. The properties
securing the multi-family residential loan are located in North Canton, Ohio
while the property securing the commercial real estate loan is located in the
Bank's market area. During 1996, the Bank purchased participation interests in a
multi-family residential real estate loan of $350,000 (constituting 40.0% of the
whole loan). The property securing the loan is located in Canton, Ohio. At
December 31, 1996, the Bank had no purchased single-family residential loans in
its portfolio and four participation interests in multi-family and commercial
real estate loans totalling $881,000.
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<PAGE>
Single-Family Residential Loans. The Bank's single-family residential
mortgage loans consist almost exclusively of conventional loans. While the vast
majority of conventional residential mortgage loans originated by the Bank are
originated under terms and documentation of the Federal Home Loan Mortgage
Corporation ("FHLMC") or the Federal National Mortgage Association ("FNMA"),
prior to February 1995, such loans are non-conforming because of the lack of a
certified appraiser. Effective in February 1995, all residential mortgage loans
are appraised by an outside, certified appraiser. Thus, all new originations
from that date forward conform to FHLMC or FNMA guidelines. However, the Bank
has traditionally sought quality loan originations for portfolio and has not had
a desire to sell loans. The Bank does not believe that holding non-conforming
loans has materially increased its risks.
The single-family residential mortgage loans offered by the Bank
currently consist of fixed-rate and adjustable-rate loans. Fixed-rate loans
generally have maturities ranging from 15 to 25 years and are fully amortizing
with monthly loan payments sufficient to repay the total amount of the loan with
interest by the end of the loan term. At December 31, 1996, $6.8 million, or
40.7% of the Bank's single-family residential mortgage loans were fixed-rate
loans.
The adjustable-rate loans currently offered by the Bank have interest
rates which adjust every year in accordance with the Federal Housing Finance
Board's National Average Contract Mortgage Rate for the Purchase of Previously
Occupied Homes by Combined Lenders. The Bank's adjustable-rate single-family
residential real estate loans generally have a cap of 1% on any increase or
decrease in the interest rate at any adjustment date, and a limit of a 2%
decrease and a 5% increase over the life of the loan. The Bank's adjustable-rate
loans require that any payment adjustment resulting from a change in the
interest rate of an adjustable-rate loan be sufficient to result in full
amortization of the loan by the end of the loan term and, thus, do not permit
any of the increased payment to be added to the principal amount of the loan, or
so-called negative amortization. At December 31, 1996, $9.9 million or 59.3% of
the Bank's single-family residential mortgage loans were adjustable-rate loans.
Adjustable-rate loans decrease the risks associated with changes in
interest rates but involve other risks, primarily because as interest rates
increase the loan payment by the borrower increases to the extent permitted by
the terms of the loan, thereby increasing the potential for default. Moreover,
as interest rates increase, the marketability of the underlying collateral
property may be adversely affected by higher interest rates. The Bank believes
that these risks, which have not had a material adverse effect on the Bank to
date because of the generally declining interest rate environment in recent
years, generally are less than the risks associated with holding fixed-rate
loans in an increasing interest rate environment.
The Bank currently will lend up to 85% of the appraised value of the
property securing a single-family residential loan (referred to as the
loan-to-value ratio). The Bank does not require private mortgage insurance. The
Bank's current policy is to limit the principal balance of such loans to
$175,000, although exceptions can be permitted by the Board.
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<PAGE>
The Bank offers home equity loans to those borrowers with whom it has a
first mortgage loan, in amounts up to $10,000, which are secured by the
underlying equity in the borrower's home. Home equity loans are amortizing loans
and generally have maximum terms of five years. The Bank's home equity loans
generally require combined loan-to-value ratios of 85% or less.
Federal law imposes limitations on the aggregate amount of loans that a
savings institution may make to any one borrower, including related entities.
The permissible amount of loans-to-one borrower generally may not exceed 15% of
unimpaired capital and surplus. Loans in an amount equal to an additional 10% of
unimpaired capital and surplus also may be made to a borrower if the loans are
fully secured by readily marketable securities. At December 31, 1996, the Bank's
five largest loans or groups of loans-to-one borrower, including related
entities, ranged from an aggregate of $186,576 to $488,563 and the Bank's
loans-to-one borrower limit was $2.5 million at such date. All of such loans
were performing as of December 31, 1996.
Multi-Family Residential and Commercial Real Estate Lending. At December
31, 1996, the Bank's multi-family residential loan portfolio was comprised of
three apartment dwellings which contain between four and 15 units and two loan
participations, one secured by 42 duplexes and the other by a 48 unit apartment
complex. The Bank will originate loans up to 80% of the value of the security
property for terms of up to 25 years in the case of 2-4 family loans and for
terms of 20 years for larger loans. Multi-family residential loans are generally
originated with principal balances of up to $125,000 for 2-4 family loans and
$250,000 for greater sizes, although the Board will consider exceptions. During
1995, the Bank purchased a $500,000, or 20.5%, participation interest in a $2.4
million loan secured by 42 duplexes located in North Canton, Ohio. During 1996,
the Bank purchased a $350,000, or 40.0%, participation interest in a $875,000
loan secured by a 48 unit apartment complex located in Canton, Ohio. At December
31, 1996, the Bank had $903,000 or 4.7% of the total loan portfolio invested in
multi-family residential loans.
At December 31, 1996, the Bank's commercial real estate portfolio was
comprised of ten loans, with principal balances ranging from $19,000 to
$140,000. The properties which secure such loans are local facilities and
include a pharmacy, video store, bakery, dentist and lawyer's office, garage,
office building, funeral home, nursing home, church and sports complex. The
Bank's underwriting standard is the same as for larger multi-family residential
loans set forth above. During 1995, the Bank purchased a $29,000, or 5.4%,
participation interest in a $535,000 loan. The Bank, along with several other
area financial institutions located in Boyd and Greenup Counties, Kentucky,
participated on a pro rata basis based on asset size in making a loan for the
construction of a building through the economic development committee of Boyd
and Greenup Counties, Kentucky. At December 31, 1996, the Bank's commercial real
estate loan portfolio amounted to $792,000 or 4.1% of the total loan portfolio.
The Bank conducted its normal due diligence investigation, including
inspection of the specific properties, in connection with participation
interests purchased during 1996 and 1995.
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<PAGE>
The Bank evaluates various aspects of commercial and multi-family
residential real estate loan transactions in an effort to mitigate risk to the
extent possible. In underwriting these loans, consideration is given to the
stability of the property's cash flow history, future operating projections,
current and projected occupancy, position in the market, location and physical
condition. The Bank also generally imposes a debt coverage ratio (the ratio of
net cash from operations before payment of debt service to debt service) of not
less than 125% for multi-family loans and for commercial real estate loans. The
underwriting analysis also includes credit checks and a review of the financial
condition of the borrower and guarantor, if applicable. An appraisal report is
prepared by the Bank's appraiser to substantiate property values for every
commercial real estate and multi-family loan transaction.
Multi-family and commercial real estate lending entails different and
significant risks when compared to single-family residential lending because
such loans typically involve large loan balances to single borrowers and because
the payment experience on such loans is typically dependent on the successful
operation of the project or the borrower's business. These risks can also be
significantly affected by supply and demand conditions in the local market for
apartments, offices, or other commercial space. The Bank attempts to minimize
its risk exposure by limiting such lending to proven owners, only considering
properties with existing operating performance which can be analyzed, requiring
conservative debt coverage ratios, and periodically monitoring the operation and
physical condition of the collateral.
Other Loans. At December 31, 1996, the Bank had $621,000 or 3.3% of the
total loan portfolio invested in loans secured by savings accounts. The Bank
will originate such loans in an amount up to the account balance at 2% points
over the rate paid on the account.
Asset Quality
General. When a borrower fails to make a required payment on a loan, the
Bank attempts to cure the deficiency by contacting the borrower and seeking
payment. Contacts are generally made 30 days after a payment is due. In most
cases, deficiencies are cured promptly. If a delinquency continues, additional
efforts are made to collect the loan. While the Bank generally prefers to work
with borrowers to resolve such problems, when the account becomes 90 days
delinquent, the Bank institutes foreclosure proceedings or takes such other
action as may be necessary to minimize any potential loss.
Loans are placed on non-accrual status when, in the judgment of
management, the probability of collection of interest is deemed to be
insufficient to warrant further accrual. When a loan is placed on non-accrual
status, previously accrued but unpaid interest is deducted from interest income.
As a matter of policy, the Bank does not accrue interest on loans past due 90
days or more. For purposes of the table below, loans greater than 90 days
delinquent which are still accruing are current with respect to the payment of
interest and do not otherwise constitute "slow loans" as defined by federal
regulation.
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<PAGE>
Non-Performing Assets. The following table sets forth the amounts and
categories of the Bank's non-performing assets at the dates indicated. The Bank
had no troubled debt restructurings during the periods.
December 31, June 30,
------------------ --------
1996 1995 1994 1994
---- ---- ---- --------
(Dollars in Thousands)
Non-accruing loans:
Single-family residential $ 82 $265 $108 $ 82
---- ---- ---- ----
Accruing loans greater than
90 days delinquent:
Single-family residential 79 85 133 18
Commercial real estate 48 64 81 89
Total accruing loans
greater than 90 days
delinquent
---- ---- ---- ----
127 149 214 107
---- ---- ---- ----
Total non-performing assets $209 $414 $322 $189
==== ==== ==== ====
Total non-performing loans
as a percentage of total
loans 1.09% 2.45% 2.81% 1.86%
==== ==== ==== ====
Total non-performing assets
as a percentage of total
assets 0.31% 0.56% 0.46% 0.28%
==== ==== ==== ====
The Bank's total non-performing assets to total assets were relatively
insignificant at December 31, 1996, amounting to $209,000 or 0.31% of total
assets. Of this amount, $127,000 or 60.8% of total non-performing assets were
currently paying but are considered delinquent solely because the obligers at
some time in the past did not make one or more required payments of principal
and interest. As long as such missed payments in excess of 90 days remain
outstanding, the Bank will treat such loans as delinquent, even though regular
and required payments are being made. At December 31, 1996, the Bank had one
accruing commercial real estate loan which was reported as greater than 90 days
outstanding. This loan has been outstanding for in excess of seven years and has
paid down to less than 52% of the loan's original principal balance.
The Bank's total non-performing assets have decreased from $414,000 or
0.56% of total assets at December 31, 1995 to $209,000 or 0.31% of total assets
at December 31, 1996. Of the $205,000 or 49.5% decrease, $183,000 is
attributable to a reduction in non-accruing loans and $22,000 is attributable to
a reduction in loans which are currently paying but considered delinquent
because the borrowers missed one or more prior payments, as explained above.
$189,000 of the decrease is attributable to single-family residential loans and
$16,000 is attributable to commercial real estate loans.
- 11 -
<PAGE>
At December 31, 1996 and 1995, approximately $1,394 and $3,050,
respectively, in gross interest income would have been recorded in the period
then ended on loans accounted for on a non-accrual basis if such loans had been
current in accordance with their original terms and had been outstanding
throughout the period or since origination if held for part of the period. For
the years ended December 31, 1996, 1995 and 1994 and the six months ended
December 31, 1994, no amount was included in net income for these same loans
prior to the time they were placed on non-accrual status, and $6,200 was
included in net income for the year ended June 30, 1994.
Allowance for Loan Losses. The Bank's policy is to establish reserves
for estimated losses on loans when it determines that a significant and probable
decline in value occurs. The allowance for losses on loans is maintained at a
level believed adequate by management to absorb potential losses in the
portfolio. Management's determination of the adequacy of the allowance is based
on an evaluation of the portfolio, past loss experience, current economic
conditions, volume, growth and composition of the portfolio, and other relevant
factors. The allowance is increased by provisions for loan losses which are
charged against income. The Bank's allowance for loan losses has historically
been predicated on its low loss experience.
The following table sets forth an analysis of the Bank's allowance for
loan losses during the periods indicated.
<TABLE>
<CAPTION>
Six Months
Year Ended Ended Year Ended
December 31, December June 30,
---------------------------------- 31, ----------
----------
1996 1995 1994 1994 1994
---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Total loans outstanding $ 19,101 $ 16,963 $ 11,512 $ 11,512 $ 10,171
========== ========== ========== ========== ==========
Average loans outstanding $ 17,789 $ 14,675 $ 10,313 $ 10,747 $ 10,154
========== ========== ========== ========== ==========
Balance at beginning of
period $ 81 $ 61 $ 61 $ 61 $ 157
Charge-offs -- -- -- -- (96)(1)
Recoveries -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Net charge-offs -- -- -- -- (96)
---------- ---------- ---------- ---------- ----------
Provision for loan losses -- 20 -- -- --
---------- ---------- ---------- ---------- ----------
Balance at end of period $ 81 $ 81 $ 61 $ 61 $ 61
========== ========== ========== ========== ==========
Allowance for loan losses
as a percent of total
loans outstanding 0.42% 0.48% 0.53% 0.53% 0.60%
========== ========== ========== ========== ==========
Ratio of net charge-offs
to average loans outstanding ---% ---% ---% ---% 0.95%
========== ========== ========== ========== ==========
</TABLE>
- ----------
(1) All related to multi-family residential properties.
- 12 -
<PAGE>
During 1996, the Bank made no provision for loan losses as compared to a
$20,000 provision in 1995. The 1995 provision was made due to the increase in
the size of the loan portfolio, and despite continued growth, management feels
that the current allowance for loan losses is commensurate with the high quality
of the Bank's loan portfolio. Management does not believe that the quality of
the loan portfolio has been compromised by its growth.
Although management utilizes its best judgment in providing for loan
losses, there can be no assurance that the Bank will not have to increase its
provision for loan losses in the future as a result of future increases in
non-performing loans or for other reasons.
The following table sets forth information concerning the allocation of
the Bank's allowance for loan losses (general and specific allowances) by loan
category at the dates indicated. The general valuation allowance is allocated
based upon the balance of the loan category to the total loan portfolio. Other
loans consist of loans secured by deposits of the Bank; therefore, no allowance
has been allocated to these loans.
<TABLE>
<CAPTION>
December 31, June 30,
--------------------------------------------------------------- -------------------
1996 1995 1994 1994
------------------- ------------------- ------------------- -------------------
Percentage Percentage Percentage Percentage
of Loans to of Loans to of Loans to of Loans to
Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ ----------- ------ -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Single-family residential $ 74 87.9% $ 76 89.6% $ 58 89.8% $ 57 88.5%
Multi-family residential 4 4.7 3 3.4 1 0.9 1 1.8
Commercial real estate 3 4.1 2 2.2 2 2.9 3 3.7
Other -- 3.3 -- 4.8 -- 6.4 -- 6.0
------ ----------- ------ ----------- ------ ----------- ------ -----------
Total $ 81 100.0% $ 81 100.0% $ 61 100.0% $ 61 100.0%
====== =========== ====== =========== ====== =========== ====== ===========
</TABLE>
Mortgage-Backed Securities and Investment Securities
General. Federally-chartered savings institutions have authority to
invest in various types of liquid assets, including United States Treasury
obligations, securities of various federal agencies and of state and municipal
governments, certificates of deposit at federally-insured banks and savings and
loan associations, certain bankers' acceptances and Federal funds. Subject to
various restrictions, federally-chartered savings institutions may also invest a
portion of their assets in commercial paper, corporate debt securities and
mutual funds, the assets of which conform to the investments that
federally-chartered savings institutions are otherwise authorized to make
directly.
The Bank's Chief Executive Officer has authority to implement the Bank's
Board approved investment policy. The Chief Executive Officer may make purchases
of up to $1.0 million without prior approval of the Board. All of such purchases
are required to be reported to the Board for ratification at the next scheduled
meeting. Pursuant to the Bank's investment policy, all securities are to be
purchased for investment, with the primary objective of safety of principal
- 13 -
<PAGE>
and liquidity and, secondarily, with consideration given to the yield to be
earned. The Bank is authorized to invest in U.S. Government and agency issues,
mortgage-backed securities issued by the FHLMC, FNMA and Government National
Mortgage Association ("GNMA"), municipal bonds issued by state or local
authorities (which generally must be rated in one of the top categories by one
of the nationally recognized rating services) and certificates of deposit in
insured institutions up to a maximum of $100,000 per institution.
Mortgage-Backed Securities. The Bank maintains a significant portfolio
of mortgage-backed securities as a means of investing in housing-related
mortgage instruments without the costs associated with originating mortgage
loans for portfolio retention and with limited credit risk of default which
arises in holding a portfolio of loans to maturity. Mortgage-backed securities
(which also are known as mortgage participation certificates or pass-through
certificates) represent a participation interest in a pool of single-family
mortgages. The principal and interest payments on mortgage-backed securities are
passed from the mortgage originators, as servicer, through intermediaries
(generally U.S. Government agencies and governmentsponsored enterprises) that
pool and repackage the participation interests in the form of securities, to
investors such as the Bank. Such U.S. Government agencies and government
sponsored enterprises, which guarantee the payment of principal and interest to
investors, primarily include the FHLMC, the FNMA and the GNMA.
The FHLMC is a public corporation chartered by the U.S. Government and
owned by the 12 Federal Home Loan Banks and federally-insured savings
institutions. The FHLMC issues participation certificates backed principally by
conventional mortgage loans. The FHLMC guarantees the timely payment of interest
and the ultimate return of principal on participation certificates. The FNMA is
a private corporation chartered by the U.S. Congress with a mandate to establish
a secondary market for mortgage loans. The FNMA guarantees the timely payment of
principal and interest on FNMA securities. FHLMC and FNMA securities are not
backed by the full faith and credit of the United States, but because the FHLMC
and the FNMA are U.S. Government-sponsored enterprises, these securities are
considered to be among the highest quality investments with minimal credit
risks. The GNMA is a government agency within the Department of Housing and
Urban Development which is intended to help finance governmentassisted housing
programs. GNMA securities are backed by FHA-insured and VA-guaranteed loans, and
the timely payment of principal and interest on GNMA securities are guaranteed
by the GNMA and backed by the full faith and credit of the U.S. Government.
Because the FHLMC, the FNMA and the GNMA were established to provide support for
low- and middleincome housing, there are limits to the maximum size of loans
that qualify for these programs.
Mortgage-backed securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed-rate or
adjustable-rate loans. As a result, the risk characteristics of the underlying
pool of mortgages, (i.e., fixed-rate or adjustable rate) as well as prepayment
risk, are passed on to the certificate holder. The life of a mortgage-backed
pass-through security thus approximates the life of the underlying mortgages.
- 14 -
<PAGE>
Mortgage-backed securities generally yield less than the loans which
underlie such securities because of their payment guarantees or credit
enhancements which offer nominal credit risk. In addition, mortgage-backed
securities are more liquid than individual mortgage loans and may be used to
collateralize certain obligations. At December 31, 1996, none of the Bank's
mortgage-backed securities were pledged as security for an obligation.
Mortgage-backed securities issued or guaranteed by the FNMA or the FHLMC (except
interest-only securities or the residual interests in CMOs) are weighted at no
more than 20.0% for risk-based capital purposes, compared to a weight of 50.0%
to 100.0% for residential loans. See "Regulation - The Bank - Regulatory Capital
Requirements."
The Bank's mortgage-backed securities are all classified as "held to
maturity" based upon the Bank's intent and ability to hold such securities to
maturity at the time of purchase, in accordance with GAAP. The mortgage-backed
securities of the Bank are carried at cost, adjusted for the amortization of
premiums and the accretion of discounts using a method which approximates a
level yield. See Notes 1, 4 and 16 of the Notes to Consolidated Financial
Statements incorporated by reference into Item 7 hereof.
The following table sets forth the composition of the Bank's
mortgage-backed securities at the dates indicated.
December 31, June 30,
---------------------------------- --------
1996 1995 1994 1994
-------- -------- -------- --------
(Dollars in Thousands)
GNMA certificates $ 1,531 $ 1,963 $ 2,264 $ 2,459
FNMA certificates 5,662 3,751 3,895 4,039
FHLMC certificates 20,623 22,068 23,551 25,000
-------- -------- -------- --------
27,816 27,782 29,710 31,498
Unamortized 3 5 8 10
premiums
Unearned discounts (156) (169) (205) (229)
-------- -------- -------- --------
$ 27,663 $ 27,618 $ 29,513 $ 31,279
======== ======== ======== ========
Weighted average
interest rate 6.52% 6.62% 6.65% 6.67%
======== ======== ======== ========
- 15 -
<PAGE>
The following table sets forth the activity in the Bank's
mortgage-backed securities portfolio during the periods indicated.
<TABLE>
<CAPTION>
As of or
For
As of or For the the Six
Year Ended Months Year Ended
December 31, Ended June 30,
----------------------------- December ----------
31,
----------
1996 1995 1994 1994 1994
---------- ---------- ---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Mortgage-backed
securities at
beginning of period $ 27,618 $ 29,513 $ 30,985 $ 31,279 $ 28,836
Purchases 5,827 1,875 4,871 505 10,883
Repayments (5,835) (3,823) (6,401) (2,298) (8,491)
Accretion and
amortization, net 53 53 58 27 51
---------- ---------- ---------- ---------- ----------
Mortgage-backed
securities at
end of period $ 27,663 $ 27,618 $ 29,513 $ 29,513 $ 31,279
========== ========== ========== ========== ==========
</TABLE>
At December 31, 1996, the weighted average contractual maturity of the
Bank's mortgage-backed securities was approximately 7.2 years. The actual
maturity of a mortgage-backed security is less than its stated maturity due to
prepayments of the underlying mortgages. Prepayments that are faster than
anticipated may shorten the life of the security and adversely affect its yield
to maturity. The yield is based upon the interest income and the amortization of
any premium or discount related to the mortgage-backed security. In accordance
with GAAP, premiums and discounts are amortized over the estimated lives of the
loans, which decrease and increase interest income, respectively. The prepayment
assumptions used to determine the amortization period for premiums and discounts
can significantly affect the yield of the mortgage-backed security, and these
assumptions are reviewed periodically to reflect actual prepayments. Although
prepayments of underlying mortgages depend on many factors, the difference
between the interest rates on the underlying mortgages and the prevailing
mortgage interest rates generally is the most significant determinant of the
rate of prepayments. During periods of falling mortgage interest rates, if the
coupon rate of the underlying mortgages exceeds the prevailing market interest
rates offered for mortgage loans, refinancing generally increases and
accelerates the prepayment of the underlying mortgages and the related security.
Under such circumstances, the Bank may be subject to reinvestment risk because
to the extent that the Bank's mortgage-related securities amortize or prepay
faster than anticipated, the Bank may not be able to reinvest the proceeds of
such repayments and prepayments at a comparable rate. The declining yields
earned during recent periods is a direct response to falling interest rates and
accelerated prepayments.
- 16 -
<PAGE>
Investment Securities. The following table sets forth certain
information relating to the Bank's investment portfolio at the dates indicated.
December 31, June 30,
---------------------------- --------
1996 1995 1994 1994
-------- -------- -------- --------
(In Thousands)
U.S. Treasury securities $ 2,999 $ 2,999 $ 6,998 $ 9,497
FHLB bonds 4,450 10,349 5,685 4,949
FNMA bonds 4,540 2,536 3,048 2,550
FHLMC bonds 3,246 1,250 750 746
Municipal bonds 480 553 663 710
FHLB stock 794 741 693 672
Intrieve, Inc. stock 15 15 15 15
Government money
market fund 1,000 3,000 3,000 3,000
-------- -------- -------- --------
Total $ 17,524 $ 21,443 $ 20,852 $ 22,139
======== ======== ======== ========
The following table sets forth certain information regarding the
maturities of the Bank's investment securities at December 31, 1996.
<TABLE>
<CAPTION>
Contractually Maturing
------------------------------------------------------------------------------
Under 1 Year 1-5 Years 6-10 Years Over 10 Years
------------------ ------------------ ------------------ ------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Yield Amount Yield Amount Yield Amount Yield
-------- -------- -------- -------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury
securities $ -- --% $ 2,999 5.13% $ -- --% $ -- --%
FHLB bonds 1,700 4.69 1,500 6.30 -- -- 1,250 7.34
FNMA bonds -- -- 1,000 6.37 3,040 6.72 500 8.00
FHLMC bonds -- -- 496 5.99 1,750 7.20 1,000 7.99
Municipal bonds -- -- -- -- 340 7.18 140 6.43
FHLB stock 794 7.00 -- -- -- -- -- --
Intrieve, Inc. stock 15 -- -- -- -- -- -- --
Government money
market fund 1,000 5.32 -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Total $ 3,509 5.37% $ 5,995 5.70% $ 5,130 6.91% $ 2,890 7.64%
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
The Bank's investment securities are classified as "held to maturity"
based upon the Bank's intent and ability to hold such securities to maturity at
the time of purchase, in accordance with GAAP. Investment securities are carried
at cost, with any discounts or premiums recognized in interest income using the
interest method over the period to maturity.
Sources of Funds
General. The Bank's principal source of funds for use in lending and for
other general business purposes has traditionally come from deposits obtained
through its branch offices. The
- 17 -
<PAGE>
Bank also derives funds from amortization and prepayments of outstanding loans
and mortgage-backed securities, from maturing investment securities and,
occasionally, from advances from the FHLB of Cincinnati. Loan repayments are a
relatively stable source of funds, while deposits inflows and outflows are
significantly influenced by general interest rates and money market conditions.
The Bank may use borrowings to supplement its deposits as a source of funds.
Deposits. The Bank's current deposit products include passbook accounts
and certificates of deposit ranging in terms from seven days to 5 years. The
Bank's deposit products also include Individual Retirement Account ("IRA")
certificates.
The Bank's deposits are obtained from residents in its primary market
area. The Bank attracts local deposit accounts by offering competitive interest
rates. The Bank utilizes traditional marketing methods to attract new customers
and savings deposits, including print media and radio advertising.
The following table sets forth the dollar amount and average interest
rates of deposits in the various types of deposit programs offered by the Bank
at the dates indicated.
<TABLE>
<CAPTION>
December 31, June 30,
------------------------------------------------------------------------ ----------------------
1996 1995 1994 1994
---------------------- ---------------------- ---------------------- ----------------------
Amount Percentage Amount Percentage Amount Percentage Amount Percentage
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Certificate accounts:
2.00 - 4.00% $ 9,340 19.0% $ 8,689 16.3% $ 16,726 27.7% $ 24,389 42.1%
4.01 - 6.00% 36,792 74.8 40,890 76.7 35,293 58.3 21,929 37.9
6.01 - 8.00% 106 0.2 131 0.3 129 0.2 129 0.2
8.01 - 10.00% 95 0.2 91 0.1 125 0.2 144 0.2
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total certificate
accounts(1) 46,333 94.2 49,801 93.4 52,273 86.4 46,591 80.4
Transaction accounts:
Passbook accounts 2,862 5.8 3,487 6.6 8,213 13.6 11,338 19.6
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total deposits $ 49,195 100.0% $ 53,288 100.0% $ 60,486 100.0% $ 57,929 100.0%
========== ========== ========== ========== ========== ========== ========== ==========
</TABLE>
- ---------------
(1) Includes $6.7 million and $6.9 million in IRA accounts at December 31, 1996
and 1995.
- 18 -
<PAGE>
The following table sets forth the savings activities of the Bank during
the periods indicated.
<TABLE>
<CAPTION>
Six Months
Year Ended Ended Year Ended
December 31, December 31, June 30,
------------------------------------------ ------------ ------------
1996 1995 1994 1994 1994
------------ ------------ ------------ ------------ ------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Deposits $ 14,028 $ 28,986 $ 24,454 $ 16,021 $ 17,089
Withdrawals 20,364 38,424 23,278 14,488 17,147
------------ ------------ ------------ ------------ ------------
Net increase (decrease)
before interest credited (6,336) (9,438) 1,176 1,533 (58)
Interest credited 2,243 2,240 2,041 1,024 2,092
------------ ------------ ------------ ------------ ------------
Net increase (decrease)
in deposits $ (4,093) $ (7,198) $ 3,217 $ 2,557 $ 2,034
============ ============ ============ ============ ============
</TABLE>
Deposits decreased $4.1 million, or 7.7%, during 1996 due to a $6.3
million net decrease before interest credited of $2.2 million. Passbook accounts
declined $625,000 while certificates of deposit decreased $3.5 million. The
decrease in deposits resulted from customers moving funds to alternate capital
markets yielding higher short-term rates of return during 1996 as compared to
interest rates being offered by the Bank.
Deposits decreased $7.2 million, or 11.9%, during fiscal 1995 due to a
$9.4 million net decrease in deposits before interest credited of $2.2 million.
Passbook accounts declined $4.7 million while certificates of deposit decreased
$2.5 million. A significant portion of the decrease in deposits is due to the
Bank having held funds for the Company's stock subscription proceeds in a
passbook savings account at December 31, 1994, which funds were utilized to
purchase the Company's stock in January 1995. The decrease in certificates of
deposit can be attributed in part to customer withdrawals for the purchase of
the Company's stock.
The following table shows the contractual interest rate and maturity
information for the Bank's certificates of deposit at December 31, 1996.
Contractually Maturing
-----------------------------------------------------
One Year Over
or Less 1-2 Years 2-3 Years 3 Years Total
--------- --------- --------- --------- ---------
(In Thousands)
2.00 - 4.00% $ 9,340 $ -- $ -- $ -- $ 9,340
4.01 - 6.00% 24,576 9,361 2,855 -- 36,792
6.01 - 8.00% 74 2 30 -- 106
8.01 - 10.00% 95 -- -- -- 95
--------- --------- --------- --------- ---------
Total $ 34,085 $ 9,363 $ 2,885 $ -- $ 46,333
========= ========= ========= ========= =========
- 19 -
<PAGE>
The following table sets forth the maturities of the Bank's certificates
of deposit having principal amounts of $100,000 or more at December 31, 1996.
Certificates of deposit maturing
in quarter ending: Amount
- ------------------------------------------------------- --------------
(In Thousands)
March 31, 1997 $ 2,166
June 30, 1997 596
September 30, 1997 825
December 31, 1997 841
After December 31, 1997 1,781
--------------
Total certificates of deposit with
balances of $100,000 or more $ 6,209
==============
Borrowings. The Bank may obtain advances from the FHLB of Cincinnati
upon the security of the common stock it owns in that bank and certain of its
residential mortgage loans and securities held to maturity, provided certain
standards related to creditworthiness have been met. Such advances are made
pursuant to several credit programs, each of which has its own interest rate and
range of maturities. At December 31, 1996, the Bank had no outstanding advances
from the FHLB of Cincinnati.
Subsidiaries
The Bank is permitted to invest up to 2% of its assets in the capital
stock of, or secured or unsecured loans to, subsidiary corporations, with an
additional investment of 1% of assets when such additional investment is
utilized primarily for community development purposes. The Bank's only
subsidiary, C&F Services, Inc., was formed in 1977 to purchase stock in a data
processing company, Intrieve, Inc. (formerly Savings & Loan Data Corporation.)
The subsidiary is otherwise inactive. This subsidiary had no income or expenses
during the year ended June 30, 1994, the six months ended December 31, 1994 and
the three years ended December 31, 1996. As of December 31, 1996, the net book
value of the Bank's investment in its service corporations was $15,000.
Competition
The Bank faces strong competition both in attracting deposits and making
real estate loans. Its most direct competition for deposits has historically
come from other savings institutions, credit unions and commercial banks located
within 15 miles of Catlettsburg, which covers Boyd County, Kentucky, Cabell
County, West Virginia and Lawrence County, Ohio, including many large financial
institutions which have greater financial and marketing resources available to
them. In addition, during times of high interest rates, the Bank has faced
additional significant competition for investors' funds from short-term money
market securities, mutual funds and other
- 20 -
<PAGE>
corporate and government securities. The ability of the Bank to attract and
retain savings deposits depends on its ability to generally provide a rate of
return, liquidity and risk comparable to that offered by competing investment
opportunities.
The Bank experiences strong competition for real estate loans
principally from other savings institutions, commercial banks and mortgage
banking companies. The Bank competes for loans principally through the interest
rates and, currently, by not charging loan fees, and the efficiency and quality
of services it provides borrowers. Competition may increase as a result of the
continuing reduction of restrictions on the interstate operations of financial
institutions.
Regulation
Set forth below is a brief description of certain laws and regulations
which relate to the regulation of the Company and the Bank. The description of
these laws and regulations, as well as descriptions of laws and regulations
contained elsewhere herein, does not purport to be complete and is qualified in
its entirety by reference to applicable laws and regulations.
The Company. The Company is a registered savings and loan holding
company and is subject to OTS regulations, examinations, supervision and
reporting requirements. As a subsidiary of a savings and loan holding company,
the Bank is subject to certain restrictions in its dealings with the Company and
affiliates thereof.
Federal Activities Restrictions. There are generally no restrictions on
the activities of a savings and loan holding company which holds only one
subsidiary savings institution. However, if the Director of the 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 institution, the
Director may impose such restrictions as deemed necessary to address such risk,
including limiting (i) payment of dividends by the savings institution; (ii)
transactions between the savings institution and its affiliates; and (iii) any
activities of the savings institution that might create a serious risk that the
liabilities of the holding company and its affiliates may be imposed on the
savings institution. Notwithstanding the above rules as to permissible business
activities of unitary savings and loan holding companies, if the savings
institution subsidiary of such a holding company fails to meet a QTL test, then
such unitary holding company also shall become subject to the activities
restrictions applicable to multiple savings and loan holding companies and,
unless the savings institution requalifies as a QTL within one year thereafter,
shall register as, and become subject to the restrictions applicable to, a bank
holding company. See "- The Bank - Qualified Thrift Lender Test."
If the Company were to acquire control of another savings institution,
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 institution
- 21 -
<PAGE>
meets the QTL test, as set forth below, 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. No multiple savings and
loan holding company or subsidiary thereof which is not a savings institution
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, other than: (i) furnishing or performing management services for a
subsidiary savings institution; (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 authorized by regulation as of March 5,
1987 to be engaged in by multiple savings and loan holding companies; or (vii)
unless the Director of the OTS by regulation prohibits or limits such activities
for savings and loan holding companies, those activities authorized by the
Federal Reserve Board as permissible for bank holding companies. The activities
described in (i) through (vi) above may only be engaged in after giving the OTS
prior notice and being informed that the OTS does not object to such activities.
In addition, the activities described in (vii) above also must be approved by
the Director of the OTS prior to being engaged in by a multiple savings and loan
holding company.
Limitations on Transactions with Affiliates. Transactions between
savings institutions and any affiliate are governed by Sections 23A and 23B of
the Federal Reserve Act ("FRA"). 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 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.
In addition, Sections 22(h) and (g) of the FRA place restrictions on
loans to executive officers, directors and principal stockholders. Under Section
22(h), loans to a director, an executive officer and to a greater than 10%
stockholder of a savings institution (a "principal stockholder"), and certain
affiliated interests of either, may not exceed, together with all other
outstanding loans to such person and affiliated interests, the savings
institution's loans to one borrower limit (generally equal to 15% of the
institution's unimpaired capital and surplus). Section 22(h) also requires that
loans to directors, executive officers and principal stockholders
- 22 -
<PAGE>
be made on terms substantially the same as offered in comparable transactions to
other persons and also requires prior board approval for certain loans. In
addition, the aggregate amount of extensions of credit by a savings institution
to all insiders cannot exceed the institution's unimpaired capital and surplus.
Furthermore, Section 22(g) places additional restrictions on loans to executive
officers. At December 31, 1996, the Bank was in compliance with the above
restrictions.
Restrictions on Acquisitions. Except under limited circumstances,
savings and loan holding companies are prohibited from acquiring, without prior
approval of the Director of the OTS, (i) control of any other savings
institution or savings and loan holding company or substantially all the assets
thereof or (ii) more than 5% of the voting shares of a savings institution or
holding company thereof which is not a subsidiary. Except with the prior
approval of the Director of the 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 acquire control of any savings
institution, other than a subsidiary savings institution, or of any other
savings and loan holding company.
The Director of the OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
institutions 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 located in the state of the institution to be acquired as of March 5,
1987; (ii) the acquiror is authorized to acquire control of the savings
institution pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act ("FDIA"); or (iii) the statutes of the state in which the
institution to be acquired is located specifically permit institutions to be
acquired by the state-chartered institutions 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).
Under applicable law, the Federal Reserve Board is authorized to approve
an application by a bank holding company to acquire control of a savings
institution. In addition, a bank holding company that controls a savings
institution may merge or consolidate the assets and liabilities of the savings
institution with, or transfer assets and liabilities to, any subsidiary bank
which is a member of the Bank Insurance Fund ("BIF") with the approval of the
appropriate federal banking agency and the Federal Reserve Board. There have
been a number of acquisitions of savings institutions by bank holding companies
in recent years.
The Bank. The OTS has extensive regulatory authority over the operations
of savings institutions. As part of this authority, savings institutions are
required to file periodic reports with the OTS and are subject to periodic
examinations by the OTS. The investment and lending authority of savings
institutions are prescribed by federal laws and regulations and they are
prohibited from engaging in any activities not permitted by such laws and
regulations. Those laws and regulations generally are applicable to all
federally-chartered savings institutions and may also apply to state-chartered
savings institutions. Such regulation and supervision is primarily intended for
the protection of depositors.
- 23 -
<PAGE>
The OTS' enforcement authority over all savings institutions and their
holding companies includes, among other things, the ability to assess civil
money penalties, to issue cease and desist or removal orders and to initiate
injunctive actions. In general, these enforcement actions may be initiated for
violations of laws and regulations and unsafe or unsound practices. Other
actions or inactions may provide the basis for enforcement action, including
misleading or untimely reports filed with the OTS. The OTS is required, except
under certain circumstances, to make public disclosure of final enforcement
actions.
Insurance of Accounts. The deposits of the Bank are insured to the
maximum extent permitted by the SAIF, which is administered by the FDIC, and are
backed by the full faith and credit of the United States Government. As insurer,
the FDIC is authorized to conduct examinations of, and to require reporting by,
FDIC-insured institutions. It also may prohibit any FDIC-insured institution
from engaging in any activity the FDIC determines by regulation or order to pose
a serious threat to the FDIC. The FDIC also has the authority to initiate
enforcement actions against savings institutions, after giving the OTS an
opportunity to take such action.
Both the SAIF and BIF are statutorily required to be capitalized to a
ratio of 1.25% of insured reserve deposits. While the BIF has reached the
required reserve ratio, the SAIF is not expected to be recapitalized until 2002
at the earliest. Legislation has authorized $8 billion for the SAIF; however,
such funds only become available to the SAIF if the FDIC determines that the
funds are needed to cover losses of the SAIF and several other stringent
criteria are met.
Under current FDIC regulations, SAIF member institutions are assigned to
one of three capital groups which are based solely on the level of an
institution's capital--"well capitalized," "adequately capitalized," and
"undercapitalized." These three groups are then divided into three subgroups
which reflect varying levels of supervisory concern, from those which are
considered to be healthy to those which are considered to be of substantial
supervisory concern. The matrix so created results in nine assessment risk
classifications, with rates ranging from .23% for well capitalized, healthy
institutions to .31% for undercapitalized institutions with substantial
supervisory concerns. The insurance premiums for the Bank for the first
semi-annual period in 1996 was .23% of insured deposits.
On November 14, 1995, the FDIC approved a final rule regarding deposit
insurance premiums. The final rule will reduce deposit insurance premiums for
BIF member institutions to zero basis points (subject to a $2,000 minimum) for
institutions in the lowest risk category, while holding deposit insurance
premiums for SAIF members at their current levels (23 basis points for
institutions in the lowest risk category). The reduction was effective with
respect to the semiannual premium assessment beginning January 1, 1996.
On September 30, 1996, President Clinton signed into law legislation
which eliminates the premium differential between SAIF-insured institutions and
BIF-insured institutions by recapitalizing the SAIF's reserves to the required
ratio. The legislation required all SAIF member institutions to pay a one-time
special assessment to recapitalize the SAIF, with the aggregate
- 24 -
<PAGE>
amount to be sufficient to bring the reserve ratio in the SAIF to 1.25% of
insured deposits. The legislation also provides for the merger of the BIF and
the SAIF, with such merger being conditioned upon the prior elimination of the
thrift charter.
Implementing FDIC regulations imposed a one-time special assessment
equal to 65.7 basis points for all SAIF-assessable deposits as of March 31,
1995, which was accrued as an expense on September 30, 1996. The Bank's one-time
special assessment amounted to $335,937. Net of related tax benefits, the
one-time special assessment amounted to $221,718. The payment of such special
assessment had the effect of immediately reducing the Bank's capital by such
amount. Nevertheless, management does not believe that this one-time special
assessment had a material adverse effect on the Bank's consolidated financial
condition.
In the fourth quarter of 1996, the FDIC lowered the assessment rates for
SAIF members to reduce the disparity in the assessment rates paid by BIF and
SAIF members. Beginning October 1, 1996, effective SAIF rates generally range
from zero basis points to 27 basis points, except that during the fourth quarter
of 1996, the rates for SAIF members ranged from 18 basis points to 27 basis
points in order to include assessments paid to the Financing Corporation
("FICO"). From 1997 through 1999, SAIF members will pay 6.4 basis points to fund
the FICO, while BIF member institutions will pay approximately 1.3 basis points.
The Bank's insurance premiums, which had amounted to 23 basis points, were thus
reduced to 6.4 basis points effective January 1, 1997. Based upon the $49.2
million of assessable deposits at December 31, 1996, the Bank would expect to
pay $20,400 less in insurance premiums per quarter during 1997.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which could result in
termination of the Bank's deposit insurance.
Regulatory Capital Requirements. Federally insured savings institutions
are required to maintain minimum levels of regulatory capital. The OTS has
established capital standards applicable to all savings institutions. These
standards generally must be as stringent as the comparable capital requirements
imposed on national banks. The OTS also is authorized to impose capital
requirements in excess of these standards on individual institutions on a
case-by-case basis.
Current OTS capital standards require savings institutions to satisfy
three different capital requirements. Under these standards, savings
institutions must maintain "tangible" capital equal to 1.5% of adjusted total
assets, "core" capital equal to 3% of adjusted total assets and "total"
- 25 -
<PAGE>
capital (a combination of core and "supplementary" capital) equal to 8.0% of
"risk-weighted" assets. For purposes of the regulation, core capital generally
consists of common stockholders' equity (including retained earnings),
noncumulative perpetual preferred stock and related surplus, minority interests
in the equity accounts of fully consolidated subsidiaries, certain
nonwithdrawable accounts and pledged deposits and "qualifying supervisory
goodwill." Tangible capital is given the same definition as core capital but
does not include qualifying supervisory goodwill and is reduced by the amount of
all the savings institution's intangible assets, with only a limited exception
for purchased mortgage servicing rights. Both core and tangible capital are
further reduced by an amount equal to a savings institution's debt and equity
investments in subsidiaries engaged in activities not permissible to national
banks (other than subsidiaries engaged in activities undertaken as agent for
customers or in mortgage banking activities and subsidiary depository
institutions or their holding companies). At December 31, 1996, the Bank had no
investment in subsidiaries which was impermissible and required to be deducted
from its capital calculation.
A savings institution is allowed to include both core capital and
supplementary capital in the calculation of its total capital for purposes of
the risk-based capital requirements, provided that the amount of supplementary
capital does not exceed the savings institution's core capital. Supplementary
capital generally consists of hybrid capital instruments; perpetual preferred
stock which is not eligible to be included as core capital; subordinated debt
and intermediate-term preferred stock; and, subject to limitations, general
allowances for loan losses. Assets are adjusted under the risk-based guidelines
to take into account different risk characteristics, with the categories ranging
from 0% (requiring no additional capital) for assets such as cash to 100% for
repossessed assets or loans more than 90 days past due. Single-family
residential real estate loans which are not past-due or non-performing and which
have been made in accordance with prudent underwriting standards are assigned a
50% level in the risk-weighing system, as are certain privately-issued
mortgage-backed securities representing indirect ownership of such loans.
Off-balance sheet items also are adjusted to take into account certain risk
characteristics.
In August 1995, the OTS and other federal banking agencies published a
final rule modifying their existing risk-based capital standards to provide for
consideration of interest rate risk when assessing capital adequacy of a bank.
Under the final rule, the OTS must explicitly include a bank's exposure to
declines in the economic value of its capital due to changes in interest rates
as a factor in evaluating a bank's capital adequacy. In addition, in August
1995, the OTS and the other federal banking agencies published a joint policy
statement for public comment that describes the process the banking agencies
will use to measure and assess the exposure of a bank's net economic value to
changes in interest rates. Under the policy statement, the OTS will consider
results of supervisory and internal interest rate risk models as one factor in
evaluating capital adequacy. The OTS intends, at a future date, to incorporate
explicit minimum requirements for interest rate risk in its risk-based capital
standards through the use of a model developed from the policy statement, a
future proposed rule and the public comments received therefrom.
- 26 -
<PAGE>
The following table sets forth the Bank's compliance with each of its
three capital requirements at December 31, 1996.
Tangible Core Risk-Based
Capital Capital Capital
---------- ---------- ----------
(Dollars in Thousands)
Actual regulatory capital $ 16,848 $ 16,848 $ 16,928
Amount currently required 995 1,991 1,571
---------- ---------- ----------
Excess regulatory capital $ 15,853 $ 14,857 $ 15,357
========== ========== ==========
Actual regulatory capital as a
percentage(1) 25.39% 25.39% 86.22%
Percentage currently required 1.50 3.00 8.00
---------- ---------- ----------
Excess regulatory capital as a
percentage in excess of requirement 23.89% 22.39% 78.22%
========== ========== ==========
- ---------------
(1) Tangible and core capital are computed as a percentage of adjusted total
assets of $66.4 million. Risk-based capital is computed as a percentage
of adjusted risk-weighted assets of $19.6 million.
Any savings institution that fails any of the capital requirements is
subject to possible enforcement actions by the OTS or the FDIC. Such actions
could include a capital directive, a cease and desist order, civil money
penalties, the establishment of restrictions on the institution's operations,
termination of federal deposit insurance and the appointment of a conservator or
receiver. The OTS' capital regulation provides that such actions, through
enforcement proceedings or otherwise, could require one or more of a variety of
correction actions.
Liquidity Requirements. All savings institutions are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings institutions. At the present time, the required minimum
liquid asset ratio is 5%. The Bank has consistently exceeded such regulatory
liquidity requirement and, at December 31, 1996, had a liquidity ratio of 10.7%.
Qualified Thrift Lender Test. Under Section 2303 of the Economic Growth
and Regulatory Paperwork Reduction Act of 1996, a savings association can comply
with the QTL test by either meeting the QTL test set forth in the HOLA and
implementing regulations or qualifying as a domestic building and loan
association as defined in Section 7701(a)(19) of the Internal Revenue Code of
1986, as amended ("Code"). The QTL test set forth in the HOLA requires a thrift
institution to maintain 65% of portfolio assets in Qualified Thrift Investments
("QTIs"). Portfolio assets are defined as total assets less intangibles,
property used by a savings institution in its
- 27 -
<PAGE>
business and liquidity investments in an amount not exceeding 20% of assets.
Generally, QTIs are residential housing related assets. At December 31, 1996,
the amount of the Bank's assets which were invested in QTIs was 76.8%, which
exceeded the percentage required to qualify the Bank under the QTL test. A
savings institution that does not meet the QTL test must either convert to a
bank charter or comply with the following restrictions on its operations: (i)
the institution may not engage in any new activity or make any new investment,
directly or indirectly, unless such activity or investment is permissible for a
national bank; (ii) the branching powers of the institution shall be restricted
to those of a national bank; (iii) the institution shall not be eligible to
obtain any advances from its FHLB; and (iv) payment of dividends by the
institution shall be subject to the rules regarding payment of dividends by a
national bank. Upon the expiration of three years from the date the institution
ceases to be a QTL, it must cease any activity and not retain any investment not
permissible for a national bank and immediately repay any outstanding FHLB
advances (subject to safety and soundness considerations).
Capital Distributions. OTS regulations govern capital distributions by
savings institutions, which include cash dividends, stock redemptions or
repurchases, cash-out mergers, interest payments on certain convertible debt and
other transactions charged to the capital account of a savings institution to
make capital distributions. Generally, the regulation creates a safe harbor for
specified levels of capital distributions from institutions meeting at least
their minimum capital requirements, so long as such institutions notify the OTS
and receive no objection to the distribution from the OTS. Savings institutions
and distributions that do not qualify for the safe harbor are required to obtain
prior OTS approval before making any capital distributions.
Generally, savings institutions that before and after the proposed
distribution meet or exceed their fully phased-in capital requirements, or Tier
1 institutions, may make capital distributions during any calendar year equal to
the higher of (i) 100% of net income for the calendar year-to-date plus 50% of
its "surplus capital ratio" at the beginning of the calendar year or (ii) 75% of
net income over the most recent four-quarter period. The "surplus capital ratio"
is defined to mean the percentage by which the institution's ratio of total
capital to assets exceeds the ratio of its fully phased-in capital requirement
to assets. "Fully phased-in capital requirement" is defined to mean an
institution's capital requirement under the statutory and regulatory standards
applicable on December 31, 1994, as modified to reflect any applicable
individual minimum capital requirement imposed upon the institution. Failure to
meet fully phased-in or minimum capital requirements will result in further
restrictions on capital distributions including possible prohibition without
explicit OTS approval.
In order to make distributions under these safe harbors, Tier 1 and Tier
2 institutions must submit written notice to the OTS 30 days prior to making the
distribution. The OTS may object to the distribution during that 30-day period
based on safety and soundness concerns. In addition, a Tier 1 institution deemed
to be in need of more than normal supervision by the OTS may be downgraded to a
Tier 2 or Tier 3 institution as a result of such a determination. The Bank
currently is a Tier 1 institution for purposes of the regulation dealing with
capital distributions.
- 28 -
<PAGE>
OTS regulations also prohibit the Bank from declaring or paying any
dividends or from repurchasing any of its stock if, as a result, the regulatory
(or total) capital of the Bank would be reduced below the amount required to be
maintained for the liquidation account established by it for certain depositors
in connection with its conversion from mutual to stock form. In addition, such
regulations prohibit an institution from repurchasing any of its stock for a
period of at least one year from the date of its conversion.
Community Reinvestment. Under the Community Reinvestment Act of 1977, as
amended ("CRA"), as implemented by OTS regulations, a savings institution has a
continuing and affirmative obligation consistent with its safe and sound
operation to help meet the credit needs of its entire community, including low
and moderate income neighborhoods. The CRA does not establish specific lending
requirements or programs for financial institutions nor does it limit an
institution's discretion to develop the types of products and services that it
believes are best suited to its particular community, consistent with the CRA.
The CRA requires the OTS, in connection with its examination of a savings
institution, to assess the institution's record of meeting the credit needs of
its community and to take such record into account in its evaluation of certain
applications by such institution. FIRREA amended the CRA to require public
disclosure of an institution's CRA rating and require the OTS to provide a
written evaluation of an institution's CRA performance utilizing a rating system
which identifies four levels of performance that may describe an institution's
record of meeting community needs: outstanding, satisfactory, needs to improve
and substantial noncompliance. The CRA also requires all institutions to make
public disclosure of their CRA ratings. The Bank received a "satisfactory"
rating as a result of its most recent evaluation.
Loans to One Borrower. The permissible amount of loans-to-one borrower
now generally follows the national bank standard for all loans made by savings
institutions, as compared to the pre-FIRREA rule that applied that standard only
to commercial loans made by federally chartered savings institutions. The
national bank standard generally does not permit loans-to-one borrower to exceed
the greater of $500,000 or 15% of unimpaired capital and surplus. Loans in an
amount equal to an additional 10% of unimpaired capital and surplus also may be
made to a borrower if the loans are fully secured by readily marketable
securities. For information about the largest borrowers from the Bank, see
"Description of Business - Lending Activities - Single-Family Residential
Loans."
Branching by Federal Savings Institutions. The OTS' policy statement on
branching by federally-chartered savings institutions permits nationwide
branching to the extent allowed by federal statute. Current OTS policy generally
permits a federally-chartered savings institution to establish branch offices
outside of its home state if the institution meets the domestic building and
loan test under the Internal Revenue Code or an asset composition test set forth
in the Code, and if, with respect to each state outside of its home state where
the institution has established branches, the branches, taken alone, also
satisfy one of the two tax tests. An institution seeking to take advantage of
this authority would have to have a branching application approved by the OTS,
which would consider the regulatory capital of the institution and its record
under the CRA, as amended, among other things.
- 29 -
<PAGE>
Accounting Requirements. Applicable OTS accounting regulations and
reporting requirements apply the following standards: (i) regulatory reports
will incorporate GAAP when GAAP is used by federal banking agencies; (ii)
savings institution transactions, financial condition and regulatory capital
must be reported and disclosed in accordance with OTS regulatory reporting
requirements that will be at least as stringent as for national banks; and (iii)
the Director of the OTS may prescribe regulatory reporting requirements more
stringent than GAAP whenever the Director determines that such requirements are
necessary to ensure the safe and sound reporting and operation of savings
institutions.
Federal Home Loan Bank System. The Bank is a member of the FHLB of
Cincinnati, which is one of 12 regional FHLBs that administers the home
financing credit function of savings institutions. Each FHLB serves as a reserve
or central bank for its members within its assigned region. It is funded
primarily from proceeds derived from the sale of consolidated obligations of the
FHLB System. It makes loans to members (i.e., advances) in accordance with
policies and procedures established by the Board of Directors of the FHLB.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Cincinnati in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts and similar obligations at
the beginning of each year or 5% of its advances from the FHLB of Cincinnati,
whichever is greater. At December 31, 1996, the Bank had $794,300 in FHLB stock,
which was in compliance with this requirement. For the year ended June 30, 1994,
the six months ended December 31, 1994, and the years ended December 31, 1994,
1995 and 1996, dividends paid by the FHLB of Cincinnati to the Bank totalled
approximately $31,800, $21,100, $38,100, $48,400 and $53,300, respectively.
Federal Reserve System. The Federal Reserve Board requires all
depository institutions to maintain reserves against their transaction accounts
and non-personal time deposits. At December 31, 1996, the Bank was in compliance
with applicable requirements. However, because required reserves must be
maintained in the form of vault cash or a noninterest-bearing account at a
Federal Reserve Bank, the effect of this reserve requirement is to reduce an
institution's earning assets.
Federal Taxation
General. The Company and the Bank are subject to the corporate tax
provisions of the Code, as well as certain additional provisions of the Code
which apply to thrift and other types of financial institutions. The following
discussion of tax matters is intended only as a summary and does not purport to
be a comprehensive description of the tax rules applicable to the Company and
the Bank.
Fiscal Year. For the fiscal year ending December 31, 1996, it is
expected that the Company and the Bank will file separate tax returns. Filing
separate tax returns has no adverse effect on the Company or the Bank.
- 30 -
<PAGE>
Method of Accounting. The Bank maintains its books and records for
federal income tax purposes using the accrual method of accounting. The accrual
method of accounting generally requires that items of income be recognized when
all events have occurred that establish the right to receive the income and the
amount of income can be determined with reasonable accuracy, and that items of
expense be deducted at the later of (i) the time when all events have occurred
that establish the liability to pay the expense and the amount of such liability
can be determined with reasonable accuracy or (ii) the time when economic
performance with respect to the item of expense has occurred.
Bad Debt Reserves. Prior to the enactment, on August 20, 1996, of the
Small Business Job Protection Act of 1996 (the "Small Business Act"), for
federal income tax purposes, thrift institutions such as the Bank, which met
certain definitional tests primarily relating to their assets and the nature of
their business, were permitted to establish tax reserves for bad debts and to
make annual additions thereto, which additions could, within specified
limitations, be deducted in arriving at their taxable income. The Bank's
deduction with respect to "qualifying loans," which are generally loans secured
by certain interests in real property, could be computed using an amount based
on a six-year moving average of the Bank's actual loss experience (the
"Experience Method"), or a percentage equal to 8.0% of the Bank's taxable income
(the "PTI Method"), computed without regard to this deduction and with
additional modifications and reduced by the amount of any permitted addition to
the non-qualifying reserve.
Under the Small Business Act, the PTI Method was repealed and the Bank
will be required to use the Experience Method of computing additions to its bad
debt reserve for taxable years beginning with the Bank's taxable year beginning
January 1, 1996. In addition, the Bank will be required to recapture (i.e., take
into taxable income) over a six-year period, beginning with the Bank's taxable
year beginning January 1, 1996, the excess of the balance of its bad debt
reserves (other than the supplemental reserve) as of December 31, 1995 over (a)
the greater of the balance of such reserves as of December 31, 1987 or (b) an
amount that would have been the balance of such reserves as of December 31, 1995
had the Bank always computed the additions to its reserves using the Experience
Method. However, under the Small Business Act such recapture requirements will
be suspended for each of the two successive taxable years beginning January 1,
1996 in which the Bank originates a minimum amount of certain residential loans
during such years that is not less than the average of the principal amounts of
such loans made by the Bank during its six taxable years preceding January 1,
1996.
At December 31, 1996, the federal income tax reserves of the Bank
included $2,445,443 million for which no federal income tax has been provided,
of this amount, $2,365,694 and $79,749 are attributable to pre-1987 and
post-1987 bad debt reserves, respectively. The Bank will recapture into income
approximately $13,291 per year over the six year period beginning January 1,
1996, subject to suspension for two years in the event the residential loan
exemption is met as discussed above.
Distributions. If the Bank distributes cash or property to its
stockholders, and the distribution is treated as being from its pre-1987 bad
debt reserves, the distribution will cause the
- 31 -
<PAGE>
Bank to have additional taxable income. A distribution is deemed to have been
made from pre- 1987 bad debt reserves to the extent that (a) the reserves exceed
the amount that would have been accumulated on the basis of actual loss
experience, and (b) the distribution is a "non-qualified distribution." A
distribution with respect to stock is a non-dividend distribution to the extent
that, for federal income tax purposes, (i) it is in redemption of shares, (ii)
it is pursuant to a liquidation of the institution, or (iii) in the case of a
current distribution, together with all other such distributions during the
taxable year, it exceeds the institution's current and post-1951 accumulated
earnings and profits. The amount of additional taxable income created by a
nondividend distribution is an amount that when reduced by the tax attributable
to it is equal to the amount of the distribution.
Minimum Tax. The Code imposes an alternative minimum tax at a rate of
20% on a base of regular taxable income plus certain tax preferences
("alternative minimum taxable income" or "AMTI"). The alternative minimum tax is
payable to the extent such AMTI is in excess of an exemption amount. The Code
provides that an item of tax preference is the excess of the bad debt deduction
allowable for a taxable year pursuant to the percentage of taxable income method
over the amount allowable under the experience method. The other items of tax
preference that constitute AMTI include (a) tax exempt interest on newly-issued
(generally, issued on or after August 8, 1986) private activity bonds other than
certain qualified bonds and (b) for taxable years beginning after 1989, 75% of
the excess (if any) of (i) adjusted current earnings as defined in the Code,
over (ii) AMTI (determined without regard to this preference and prior to
reduction by net operating losses). Net operating losses can offset no more than
90% of AMTI. Certain payments of alternative minimum tax may be used as credits
against regular tax liabilities in future years.
Audit by IRS. The Bank's consolidated federal income tax returns for
taxable years through 1993 have been closed for the purpose of examination by
the IRS.
State Taxation
The State of Kentucky imposes no income or franchise taxes on savings
institutions. However, the Company (on an unconsolidated basis) and the Bank's
wholly-owned subsidiaries must pay a Kentucky state income tax, as well as a tax
on capital. The tax on income is 4.0% for the first $25,000 of taxable income,
5.0% for the next $25,000, 6.0% for the next $60,000, 7.0% for the next $150,000
and 8.25% for all income over $250,000. The tax on capital is .0021 times the
capital employed.
The Bank is subject to an annual Kentucky ad valorem tax. Assessed at
the beginning of each calendar year, 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. During the year ended December 31,
1996, the amount of such expense for the Bank was $55,400.
- 32 -
<PAGE>
Item 2. Description of Property
The following table sets forth certain information with respect to the
offices and other properties of the Company at December 31, 1996.
<TABLE>
<CAPTION>
Net Book
Value
Description/Address Leased/Owned of Property Deposits
- ---------------------------------- ------------ ------------ -------------
(In Thousands)
<S> <C> <C> <C>
Main Office
2713 - 2717 Louisa Street
Catlettsburg, KY Own $ 15,303 $ 40,518
Branch Office
380 South Carol Malone Boulevard
Grayson, KY Own $ 182,656 $ 8,677
</TABLE>
Item 3. Legal Proceedings.
The Company and the Bank are involved in routine legal proceedings
occurring in the ordinary course of business which, in the aggregate, are
believed by management to be immaterial to the financial condition of the
Company.
Item 4. Submission of Matters to a Vote of Security-Holders.
Not applicable.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
The information required herein is incorporated by reference from the
inside back cover of the Registrant's 1996 Annual Report to Stockholders
("Annual Report").
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The information required herein is incorporated by reference from pages
three to 14 of the Registrant's 1996 Annual Report.
- 33 -
<PAGE>
Item 7. Financial Statements.
The information required herein is incorporated by reference from page
two and pages 15 to 38 of the Registrant's 1996 Annual Report.
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act.
The information required herein is incorporated by reference from the
Registrant's definitive Proxy Statement for the Annual Meeting of Stockholders
to be filed within 120 days after the Registrant's fiscal year end ("Definitive
Proxy Statement").
Item 10. Executive Compensation.
The information required herein is incorporated by reference from the
Registrant's Definitive Proxy Statement.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The information required herein is incorporated by reference from the
Registrant's Definitive Proxy Statement.
Item 12. Certain Relationships and Related Transactions.
The information required herein is incorporated by reference from the
Registrant's Definitive Proxy Statement.
- 34 -
<PAGE>
PART IV
Item 13. Exhibits, List and Reports on Form 8-K.
(a)(1) The following exhibits are filed as part of this Form 10-KSB, and
this list includes the Exhibit Index.
No. Description
- --------- ------------------------------------------------------------------
3.1 Articles of Incorporation of Gateway Bancorp, Inc.(1)
3.2 Bylaws of Gateway Bancorp, Inc.(1)
4 Specimen Stock Certificate of Gateway Bancorp, Inc.(2)
10.1 Employee Stock Ownership Plan and Trust of Gateway Bancorp,
Inc.(2)(*)
10.2 Employment Agreement among the Registrant, Catlettsburg Federal
Savings Bank and Rebecca R. Jackson(2)(*)
10.3 1995 Stock Option Plan(2)(*)
10.4 Gateway Bancorp, Inc. Recognition and Retention Plan and Trust
Agreement(2)(*)
13 1996 Annual Report to Stockholders specified portion (pages two to
38 and the inside back cover of the Registrant's Annual Report to
Stockholders for the year ended December 31, 1996).
21 Subsidiaries of the Registrant - Reference is made to Item 1.
"Business" for the required information
27 Financial Data Schedule
- -----------------------
(1) Incorporated by reference from the Registration Statement on Form S-1
(Registration No. 33-84784) filed by the Registrant with the Securities and
Exchange Commission on October 4, 1994, as amended.
(2) Incorporated by reference from the Transitional Report on Form 10-KSB
for the transition period from June 30, 1994 to December 31, 1994 filed by the
Registrant with the SEC on June 9, 1995.
(*) Management contract or compensatory plan or arrangement.
(a)(2) The following documents are filed as part of this Form 10-KSB and
are incorporated herein by reference from the Registrant's 1996 Annual Report.
Independent Auditor's Report.
Consolidated Balance Sheets (December 31, 1996 and 1995).
- 35 -
<PAGE>
Consolidated Statements of Income (for the years ended December 31, 1996
(audited), 1995 (audited) and 1994 (unaudited), for the six months ended
December 31, 1994 (audited) and for the year ended June 30, 1994
(audited)).
Consolidated Statements of Changes in Stockholders' Equity (for the
years ended December 31, 1996 and 1995, for the six months ended
December 31, 1994 and for the year ended June 30, 1994).
Consolidated Statements of Cash Flows (for the years ended December 31,
1996 (audited), 1995 (audited) and 1994 (unaudited), for the six months
ended December 31, 1994 (audited) and for the year ended June 30, 1994
(audited)).
Notes to Consolidated Financial Statements (for the years ended December
31, 1996 (audited), 1995 (audited) and 1994 (unaudited), for the six
months ended December 31, 1994 (audited) and for the year ended June 30,
1994 (audited)).
(a)(3) All schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are omitted
because they are not applicable or the required information is included in the
Consolidated Financial Statements or notes thereto.
(b) Reports filed on Form 8-K.
None.
- 36 -
<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.
GATEWAY BANCORP, INC.
By: /s/ Rebecca R. Jackson
------------------------------------------
Rebecca R. Jackson
President and Chief Executive Officer
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/ Rebecca R. Jackson March 28, 1997
- -----------------------------------------
Rebecca R. Jackson
President, Chief Executive Officer
and Director
(Principal Executive Officer)
/s/ Pamela Howard March 28, 1997
- -----------------------------------------
Pamela Howard
Assistant Secretary/Treasurer
(Principal Accounting Officer)
/s/ John H. Fugeman March 28, 1997
- -----------------------------------------
John H. Fugeman
Chairman of the Board
/s/ Harold Freedman March 28, 1997
- -----------------------------------------
Harold Freedman
Vice President and Director
<PAGE>
Hunter E. Clark March 28, 1997
- -----------------------------------------
Hunter E. Clark
Secretary/Treasurer and Director
March 28, 1997
Charles M. Hedrick
- -----------------------------------------
Charles M. Hedrick
Director
<PAGE>
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL DATA
December 31, June 30,
---------------------------- ------------------
1996 1995 1994 1994 1993
-------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition
and Other Data:
Total assets $ 66,439 $ 73,409 $ 70,357 $ 67,355 $ 64,614
Cash and cash equivalents 1,348 6,542 7,394 2,970 9,252
Investment securities 17,524 21,443 20,852 22,139 15,204
Mortgage-backed securities 27,663 27,618 29,513 31,279 28,836
Loans receivable, net 19,076 16,920 11,451 10,110 10,645
Real estate owned -- -- -- -- 49
Deposits 49,195 53,288 60,486 57,929 55,895
FHLB advances -- -- -- -- --
Stockholders' equity, net 17,029 18,478 9,593 9,274 8,562
Full service offices 2 2 2 2 2
</TABLE>
<TABLE>
<CAPTION>
At and
For the Six
At and For the Year Ended Months Ended At and For the Year Ended
December 31, December 31, June 30,
--------------------------------------- ----------- -------------------------
(Unaudited)
1996 1995 1994 1994 1994 1993
----------- ----------- ----------- ----------- ----------- -----------
(Dollars in Thousands Except Per Share Amounts)
<S> <C> <C> <C> <C> <C> <C>
Selected Operating Data:
Total interest income $ 4,710 $ 4,827 $ 4,161 $ 2,096 $ 4,146 $ 4,388
Total interest expense 2,653 2,673 2,385 1,187 2,455 2,743
----------- ----------- ----------- ----------- ----------- -----------
Net interest income 2,057 2,154 1,776 909 1,691 1,645
Provision for loan losses -- 20 -- -- -- 47
----------- ----------- ----------- ----------- ----------- -----------
Net interest income after
provision for loan losses 2,057 2,134 1,776 909 1,691 1,598
Non-interest income 29 10 25 14 55 32
Non-interest expense 1,313 893 770 449 669 582
----------- ----------- ----------- ----------- ----------- -----------
Income before provision for
income taxes 773 1,251 1,031 474 1,077 1,048
Provision for income taxes 243 430 337 155 365 345
----------- ----------- ----------- ----------- ----------- -----------
Net income $ 530 $ 821 $ 694 $ 319 $ 712 $ 703
=========== =========== =========== =========== =========== ===========
Net income per share $ .48 $ .69 N/A N/A N/A N/A
Book value per share $ 15.83 $ 15.44 N/A N/A N/A N/A
Selected Operating Ratios (1):
Return on average assets 0.75% 1.11% 1.04% 0.97% 1.07% 1.14%
Return on average equity 2.99 3.99 7.48 6.90 7.99 8.57
Average equity to average assets 25.12 27.88 13.92 14.03 13.42 13.38
Equity to assets at end of year 25.63 25.17 13.63 13.64 13.77 13.26
Interest rate spread (2) 1.70 1.55 2.13 2.18 2.00 2.01
Interest rate margin (2) 2.96 2.96 2.69 2.77 2.57 2.71
Non-performing loans to total
loans at end of period (3) 1.09 2.45 2.81 2.81 1.86 4.56
Non-performing assets to total
assets at end of period (3) 0.31 0.56 0.46 0.46 0.28 0.84
Allowance for loan losses to total
loans outstanding at end of period 0.42 0.48 0.53 0.53 0.60 1.45
Allowance for loan losses to total
non-performing loans at end of
period (3) 38.76 19.57 18.94 18.94 32.29 31.80
Average interest-earning assets
to average interest-bearing
liabilities 132.90 138.25 115.57 116.42 115.10 115.41
Net interest income after provision
for loan losses to total expense 156.66 238.97 230.65 202.45 252.77 281.80
Non-interest expense to average
total assets 1.86 1.21 1.15 1.36 1.01 0.95
</TABLE>
(1) With the exception of end of year ratios, all ratios are based on average
monthly balances during the periods.
(2) Interest rate spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average rate on
interest-bearing liabilities. Net interest margin represents net interest
income as a percentage of average interest-earning assets.
(3) Non-performing loans consist of non-accrual loans and loans that are
contractually past due 90 days or more but still accruing interest, and
non-performing assets consist of non-performing loans and real estate
acquired by foreclosure or deed-in lieu thereof.
- 2 -
<PAGE>
Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
Gateway Bancorp, Inc. (the "Company") is a Kentucky corporation organized in
1994 by Catlettsburg Federal Savings and Loan Association (the "Association")
for the purpose of acquiring all of the capital stock of the Association issued
in the conversion (the "Conversion") of the Association from a federally-
chartered mutual savings and loan association to a federally-chartered stock
savings bank known as Catlettsburg Federal Savings Bank (the "Bank"). The
Conversion was completed on January 18, 1995. The only significant assets of the
Company are the capital stock of the Bank and the net conversion proceeds
retained by the Company. To date, the business of the Company has consisted of
the business of the Bank.
The Bank conducts business from its main office located in Catlettsburg,
Kentucky and one full-service branch office located in Grayson, Kentucky. The
Bank's deposits are insured by the Savings Association Insurance Fund ("SAIF")
of the Federal Deposit Insurance Corporation ("FDIC") to the maximum extent
permitted by law. At December 31, 1996, the Company had total consolidated
assets of $66.4 million, total consolidated liabilities of $49.4 million, and
consolidated stockholders' equity of $17.0 million.
The Bank is primarily engaged in attracting deposits from the general public and
using those funds to invest in mortgage-backed securities and United States
Government and federal agency securities and to originate loans secured by
single-family residences located in Boyd County and surrounding counties in
Northeastern Kentucky. To a lesser extent, the Bank also makes loans secured by
savings accounts.
The operating results of the Company depend primarily upon its net interest
income, which is determined by the difference between interest income on
interest-earnings assets, principally loans, mortgage-backed securities and
investment securities, and interest expense on interest-bearing liabilities,
which consist of passbook savings accounts and certificates of deposit. The
Company's net income is also affected by its provision for loan losses, as well
as its non-interest income, including fees and gains or losses on sales of
assets, and its operating expenses, including compensation and benefits,
occupancy and equipment expenses, federal deposit insurance, miscellaneous other
expenses and federal income taxes.
The Company established December 31 as its fiscal year end, effective as of
December 31, 1994. The Company took such action in order to report its results
as a public company in a manner which is consistent with the way the Bank has
traditionally conducted its business. Although the Bank has historically
operated its business and filed its tax returns on a calendar year basis, its
financial accounting records were maintained on a June 30 fiscal year basis.
The financial information presented herein, with the exception of December 31,
1996 and 1995 and the years then ended, is for the Bank only, since prior to
1995, the Company had not yet completed the Conversion or issued any stock.
- 3 -
<PAGE>
Financial Condition
Assets. Total assets decreased by $7.0 million, or 9.5%, from $73.4 million at
December 31, 1995 to $66.4 million at December 31, 1996. The decrease consisted
primarily of decreases in cash of $5.2 million and investment securities of $3.9
million, offset by a $2.2 million increase in loans receivable.
Cash. These balances consist of cash on hand and short-term (liquid)
interest-earning deposits in other financial institutions. The $5.2 million
decrease in cash is attributable to the funding of loan originations, the
decrease in deposits, the payment of cash dividends, and the repurchase of the
Company's common stock, offset by the decrease in investment securities.
Investment Securities. Investment securities consist primarily of U.S. Treasury
and U.S. Governmental agency securities. During the year ended December 31,
1996, the Company purchased $13.3 million of investment securities. Proceeds
from calls and maturities of investment securities totaled $17.2 million.
Mortgage-Backed Securities. Mortgage-backed securities have always been a
primary component of the Company's interest-earning assets, due to the
relatively low demand for competitive-rate, single family mortgage loans in the
Company's lending area. The Company received $5.8 million in principal payments
on its mortgage-backed securities during the year and reinvested the $5.8
million in new mortgage-backed securities.
At December 31, 1996, the carrying value of the Company's investment securities
exceeded the market value by approximately $100,000, as compared to an
unrealized gain of approximately $100,000 at December 31, 1995. The market value
of the Company's mortgage-backed securities exceeded the carrying value by
approximately $40,000 at December 31, 1996, as compared to approximately
$500,000 at December 31, 1995. These changes in market values are indicative of
the declining interest rates experienced during 1996. However, the Company
intends to hold its investment securities and mortgage-backed securities to
maturity.
Loans Receivable, net. Loans receivable, net, increased $2.2 million, or 13.0%,
from $16.9 million at December 31, 1995 to $19.1 million at December 31, 1996.
Loan originations totaled $5.6 million during the year ended December 31, 1996.
The increase is attributable to continued emphasis on competitive loan pricing
as part of the Company's strategy to increase its mortgage loan market share.
Office Properties and Equipment. The Company's net investment in facilities and
equipment totaled $358,000 and $367,000 at December 31, 1996 and 1995,
respectively.
Liabilities. Total liabilities of the Company, consisting primarily of deposits,
decreased $5.5 million, or 10.0%, from $54.9 million at December 31, 1995 to
$49.4 million at December 31, 1996. The decrease is primarily attributable to a
$4.1 million, or 7.7%, decrease in deposits caused by relatively unchanged
market rates of interest paid during the year as compared to higher yielding
investment alternatives available to the Bank's customers. Also, the Company had
no dividends payable at December 31, 1996, as compared to $1.4 million at
December 31, 1995.
- 4 -
<PAGE>
Stockholders' Equity. The Company's stockholders' equity totaled $17.0 million
at December 31, 1996, as compared to $18.5 million at December 31, 1995. The
decrease is primarily due to the Company's repurchase of 121,216 shares of its
common stock during the year at a cost of approximately $1.7 million and the
payment of dividends of approximately $433,000, offset by the addition of net
income.
- 5 -
<PAGE>
Results of Operations
Average Balances, Net Interest Income, and Yields Earned and Rates Paid. The
following table presents for the period indicated the total dollar amount of
interest from average interest-earning assets and the resultant yields, as well
as the interest expense on average interest-bearing liabilities, expressed both
in dollars and rates, and the net interest margin. The table does not reflect
any effect of income taxes. All average balances are based on month-end
balances.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------------------
1996 1995 1994
---------------------------- ---------------------------- ----------------------------
(Dollars in Thousands)
Average Yield/ Average Yield/ Average Yield
Balance Interest Rate (2) Balance Interest Rate Balance Interest Rate
-------- -------- -------- -------- -------- -------- -------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (3) $ 17,789 $ 1,358 7.63% $ 14,675 $ 1,133 7.72% $ 10,313 $ 877 8.50%
Mortgage-backed securities 28,792 1,935 6.72 29,331 2,019 6.88 30,706 2,092 6.81
Investment securities 20,134 1,258 6.25 23,266 1,371 5.89 21,629 1,080 4.99
Other interest-earning assets 2,830 159 5.62 5,609 304 5.42 3,310 112 3.38
-------- -------- -------- -------- -------- --------
Total interest-earning assets 69,545 4,710 6.77 72,881 4,827 6.62 65,958 4,161 6.31
-------- -------- -------- -------- -------- --------
Non-interest-earning assets 930 997 730
-------- -------- --------
Total assets $ 70,475 $ 73,878 $ 66,688
======== ======== ========
Interest-bearing liabilities:
Deposits:
Passbook accounts $ 3,228 115 3.56 $ 4,521 163 3.61 $ 10,539 365 3.46
Certificate accounts 49,101 2,539 5.17 48,196 2,510 5.21 46,535 2,020 4.34
-------- -------- -------- -------- -------- --------
Total interest-bearing liabilities 52,329 2,654 5.07 52,717 2,673 5.07 57,074 2,385 4.18
-------- -------- --------
Non-interest-bearing liabilities 444 565 332
-------- -------- --------
Total liabilities 52,773 53,282 57,406
Retained earnings 17,702 20,596 9,282
-------- -------- --------
Total liabilities and
retained earnings $ 70,475 $ 73,878 $ 66,688
======== ======== ========
Net interest income; Interest rate
spread $ 2,056 1.70% $ 2,154 1.55% $ 1,776 2.13%
======== ======== ======== ======== ======== ========
Net interest margin (4) 2.96% 2.96% 2.69%
======== ======== ========
Average interest-earning assets
to average interest-bearings
liabilities 132.90% 138.25% 115.57%
======== ======== ========
<CAPTION>
Six Months Ended December 31, Year Ended June 30,
---------------------------- ----------------------------
1994 1994
---------------------------- ----------------------------
Average Yield/ Average Yield/
Balance Interest Rate(1) Balance Interest Rate
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (3) $ 10,747 $ 430 8.01% $ 10,154 $ 854 8.41%
Mortgage-backed securities 30,455 1,054 6.92 30,384 2,178 7.17
Investment securities 21,453 562 5.24 19,256 936 4.86
Other interest-earning assets 2,942 50 3.43 5,987 178 2.97
-------- -------- -------- --------
Total interest-earning assets 65,597 2,096 6.39 65,781 4,146 6.30
-------- -------- -------- --------
Non-interest-earning assets 535 593
-------- --------
Total assets $ 66,132 $ 66,374
======== ========
Interest-bearing liabilities:
Deposits:
Passbook accounts $ 9,760 171 3.50 $ 10,822 394 3.64
Certificate accounts 46,585 1,016 4.36 46,328 2,061 4.45
-------- -------- -------- --------
Total interest-bearing liabilities 56,345 1,187 4.21 57,150 2,455 4.30
-------- -------- -------- -------- -------- --------
Non-interest-bearing liabilities 331 317
-------- --------
Total liabilities 56,676 57,467
Retained earnings 9,456 8,907
-------- --------
Total liabilities and
retained earnings $ 66,132 $ 66,374
======== ========
Net interest income; Interest rate
spread $ 909 2.18% $ 1,691 2.00%
======== ======== ======== ========
Net interest margin (4) 2.77% 2.57%
======== ========
Average interest-earning assets
to average interest-bearings
liabilities 116.42% 115.10%
======== ========
</TABLE>
- ----------
(1) Annualized.
(2) At December 31, 1996, the yields earned and rates paid were as follows:
loans receivable, 7.85%; mortgage-backed securities, 6.52%;investment
securities, 6.36%; other interest earning assets, 6.19%; total
interest-earning assets, 6.86%; deposits, 4.92%; total interest-bearing
liabilities, 4.92%; interest rate spread, 1.94%.
(3) Includes non-accrual loans.
(4) Net interest margin is net interest income divided by average
interest-earning assets.
- 6 -
<PAGE>
Rate/Volume Analysis. The following table describes the extent to which changes
in interest rates and changes in volume of interest-related assets and
liabilities have affected the Company's interest income and expense during the
periods indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in volume (change in volume multiplied by prior year rate), (ii)
changes in rate (change in rate multiplied by prior year volume), and (iii)
total change in rate and volume. The combined effect of changes in both rate and
volume has been allocated proportionately to the change due to rate and the
change due to volume.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------
1996 Compared to 1995 1995 Compared to 1994 (Unaudited)
----------------------------- ---------------------------------
Increase Increase
(Decrease) Total (Decrease) Total
Due To Increase Due To Increase
--------------- --------------
Rate Volume (Decrease) Rate Volume (Decrease)
----- ------ ---------- ----- ------ ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $ (14) $ 239 $ 225 $(114) $ 370 $ 256
Mortgage-backed securities (47) (37) (84) (94) 21 (73)
Investment securities 77 (190) (113) 209 82 291
Other interest-earning assets 9 (154) (145) 114 78 192
----- ------ ---------- ----- ------ ----------
Total interest-earning assets 25 (142) (117) 115 551 666
----- ------ ---------- ----- ------ ----------
Interest-bearing liabilities:
Deposits:
Passbook accounts (2) (47) (49) 30 (223) (193)
Certificate accounts (19) 49 30 410 71 481
----- ------ ---------- ----- ------ ----------
Total interest-bearing liabilities (21) 2 (19) 440 (152) 288
----- ------ ---------- ----- ------ ----------
Increase (decrease) in net interest
income $ 46 $ (144) $ (98) $(325) $ 703 $ 378
===== ====== ========== ===== ====== ==========
<CAPTION>
Six Months Ended December 31,
------------------------------------
1994 Compared to 1993 (Unaudited)
------------------------------------
Increase
(Decrease) Total
Due To Increase
--------------
Rate Volume (Decrease)
----- ------ ----------
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable $ (42) $ 14 $ (28)
Mortgage-backed securities (74) 37 (37)
Investment securities 67 94 161
Other interest-earning assets (6) (76) (82)
----- ------ ----------
Total interest-earning assets (55) 69 14
----- ------ ----------
Interest-bearing liabilities:
Deposits:
Passbook accounts (13) (16) (29)
Certificate accounts (57) 16 (41)
----- ------ ----------
Total interest-bearing liabilities (70) -- (70)
----- ------ ----------
Increase (decrease) in net interest
income $ 15 $ 69 $ 84
===== ====== ==========
</TABLE>
- 7 -
<PAGE>
Comparison of Operating Results for the Years Ended
December 31, 1996 and December 31, 1995
Net Income. Net income decreased $291,000, or 35.5%, for the year ended December
31, 1996 as compared to the year ended December 31, 1995. The 1996 decrease was
primarily due to a one-time assessment by the FDIC to restore the SAIF to the
statutorily prescribed level of 1.25% of insured deposits. The pretax amount of
this assessment was $336,000, without which net income for the year ended
December 31, 1996 would have been $751,000.
Interest Income. Interest income decreased $117,000, or 2.4%, for the year ended
December 31, 1996 as compared to the year ended December 31, 1995. The decrease
resulted primarily from lower volumes of investment securities and other
interest-earning assets, offset by an increase in the average balance of loans
receivable. The average yield on interest-earning assets increased modestly from
6.62% for 1995 to 6.77% for 1996.
Interest Expense. Interest expense decreased $19,000, or .7%, for 1996 as
compared to 1995 primarily due to a slightly lower volume of interest-bearing
liabilities during the year. The average rate paid on interest-bearing
liabilities remained at approximately 5.07% for 1996, the same as 1995.
The difference in the yield on interest-earning assets and the rate paid on
interest-bearing liabilities resulted in an interest rate spread of 1.70% for
the year ended December 31, 1996 as compared to 1.55% for the year ended
December 31, 1995, primarily due to the increased yield on investment
securities.
Provision for Loan Losses. The Company recorded no provision for loan losses
during the year ended December 31, 1996, as compared to a provision of $20,000
for the year ended December 31, 1995. Management's decision to make no provision
for loan losses reflects their assessment that the current allowance for loan
losses is adequate, given that non-performing assets to total assets continues
to remain at historically low levels, constituting .31% and .56% at December 31,
1996 and 1995, respectively. The allowance for loan losses to total loans
outstanding at December 31, 1996 and 1995 was .42% and .48%, respectively.
Although management utilizes its best judgement in providing for loan losses,
there can be no assurance that the Company will not have to increase its
provision for loan losses in the future as a result of future increases in
non-performing loans or for other reasons.
Non-Interest Income. Non-interest income increased $19,000 for the year ended
December 31, 1996 as compared to 1995. The increase was due primarily to $14,000
in gains recognized on foreclosed real estate during 1996. Such gains
represented partial recoveries of losses sustained in prior years.
Non-Interest Expense. Non-interest expense increased $420,000, or 47.0%, from
$893,000 for the year ended December 31, 1995 to $1,313,000 for the year ended
December 31, 1996. The increase resulted largely from increased SAIF deposit
insurance premiums of $336,000, and increased compensation and benefits and
professional services expenses of $42,000 and $25,000, respectively. The
increased costs of SAIF deposit insurance resulted from the special one-time
assessment referred to above. The special assessment was paid by all SAIF
insured institutions as part of the recapitalization of the SAIF. Compensation
and benefits expenses increased primarily due to increased costs associated with
operating as a public company.
- 8 -
<PAGE>
Provision for Income Taxes. The provision for income taxes decreased by
$187,000, or 43.5%, for the year ended December 31, 1996 as compared to 1995,
due to the decrease in pre-tax income. The effective tax rate for the year ended
December 31, 1996 was 31.4% as compared to 34.4% for 1995. The decrease was the
result of a reduction in the amount of income subject to state income tax for
the year ended December 31, 1996 as compared to December 31, 1995, at an
effective rate of approximately 5.28%.
Comparison of Operating Results for the Year Ended December 31, 1995
(audited) and the Year Ended December 31, 1994 (unaudited)
Net Income. Net income increased $127,000, or 18.3%, for the year ended December
31, 1995 as compared to the year ended December 31, 1994. The increase resulted
primarily from increased interest income of $666,000, or 16.0%, which was
partially offset by increases in interest expense of $288,000, or 12.1%, the
provision for loan losses of $20,000, or 100.0%, non-interest expense of
$123,000, or 16.0%, and $93,000, or 27.6%, in the provision for income taxes.
Interest Income. The $666,000 increase in interest income for 1995 as compared
to 1994 was primarily due to the increased volume of the loan portfolio, and
increased yields earned on investment securities, other interest-earning assets
and mortgage-backed securities, which was partially offset by a decline in the
yield earned on loans. The yield on loans declined due to an aggressive loan
pricing program implemented to regain mortgage loan market share. The average
yield earned on interest-earning assets increased from 6.31% for 1994 to 6.62%
for 1995.
Interest Expense. The $288,000 increase in interest expense for 1995 as compared
to 1994 resulted primarily from an .87% increase in the rates paid on
certificate accounts, which was partially offset by a $4.4 million, or 7.7%,
decrease in the average balance of deposits for the year ended December 31, 1995
as compared to 1994.
The difference in the yield on interest-earning assets and the rate paid on
interest-bearing liabilities was reflective of rising market rates of interest,
resulting in an interest rate spread of 1.55% for the year ended December 31,
1995 as compared to 2.13% for the year ended December 31, 1994.
Provision for Loan Losses. During the year ended December 31, 1995, the Company
provided $20,000 for possible loan losses, as compared to no provision for 1994.
The provision was made due to the increase in the size of the loan portfolio.
Management does not believe that the quality of the loan portfolio has been
compromised by its growth. Non-performing assets to total assets remained at
historically low levels, constituting .56% and .46% at December 31, 1995 and
1994, respectively, while the allowance for loan losses to total loans
outstanding was .48% and .53% at the end of each respective year.
Although management utilizes its best judgment in providing for loan losses,
there can be no assurance that the Company will not have to increase its
provision for loan losses in the future as a result of future increases in
non-performing loans or for other reasons.
- 9 -
<PAGE>
Non-Interest Income. Non-interest income decreased $15,000, or 60.0%, during the
year ended December 31, 1995 as compared to 1994. The decrease resulted
primarily from a $13,000 decrease in loan fees and other fee income,
attributable to the discontinuance of loan origination fees as part of the
Bank's new loan pricing policy.
Non-Interest Expense. The $123,000 increase in non-interest expense for 1995 as
compared to 1994 resulted primarily from increases in compensation and benefits
of $107,000 and other non-interest expense of $121,000, which was offset by the
lack of a contingency reserve in 1995 and SAIF deposit insurance premiums of
$7,800. Occupancy expenses remained relatively unchanged with a 1995 increase of
$2,900, to $39,000.
Of the $107,000 increase in compensation and benefits, approximately $63,000 is
attributable to the Company's contributions to the ESOP, while $45,000 is
attributable to expense recognized in connection with the Company's RRP Plan
which was approved by the stockholders during 1995.
The $121,000 increase in other non-interest expenses reflects increased costs
associated with operating as a public company.
During 1994, the Bank established a $100,000 contingency reserve to be used to
refund to certain borrowers and former borrowers of the Bank certain interest
payments which had been improperly collected in prior periods. Such refunds were
made in January, 1995.
The decrease in the SAIF insurance premiums is due to reduced insured deposits
during 1995 as compared to 1994.
Provision for Income Taxes. The provision for income taxes increased by $93,000,
from $337,000 for the year ended December 31, 1994 to $430,000 for the year
ended December 31, 1995, due to increased pre-tax income. The effective tax rate
for the year ended December 31, 1995 was 34.4% as compared to 32.7% for 1994.
The increase in the effective tax rate is due to the Company (excluding income
earned by the Bank) paying Kentucky state income taxes for 1995, the first year
of its operations.
Asset and Liability Management
The lending activities of savings and loan associations have historically
emphasized long-term, fixed-rate loans secured by single-family residences, and
the primary source of funds of such institutions has been deposits. The deposit
accounts of savings associations generally bear interest rates that reflect
market rates and largely mature or are subject to repricing within a short
period of time. This factor, in combination with substantial investments in
long-term, fixed-rate loans and investments securities, has historically caused
the income earned by savings associations on their loan and investment
portfolios to adjust more slowly to changes in interest rates than their cost of
funds.
The Bank originates both fixed-rate and adjustable-rate residential real estate
loans as market conditions dictate. Historically, the Bank only originates loans
to hold until maturity. The Bank also purchases substantial amounts of
fixed-rate, mortgage-backed securities to hold until maturity. Adjustable rate
loans comprise approximately 57.3% of the mortgage loan portfolio at December
31, 1996. The Company has ample liquidity in the form of interest-bearing cash
and short-term investments. These items, repricing within six months,
constituted 5.2% of the Company's total assets at December 31, 1996.
- 10 -
<PAGE>
With loan demand being slow in the Bank's market area during the past ten years,
management has looked for alternate ways to enhance net income and improve the
yield on interest-earning assets. Cash flow from loan repayments and new
deposits have historically been invested principally in mortgage-backed
securities, with such balances amounting to $27.7 million, or 41.7%, of total
assets at December 31, 1996. The Bank maintains a significant portfolio of
mortgage-backed securities as a means of investing in housing-related mortgage
instruments without the costs associated with originating mortgage loans for
portfolio retention and with limited credit risk of default which arises in
holding a portfolio of loans to maturity. Mortgage-backed securities represent a
participation interest in a pool of single-family mortgages. The principal and
interest payments on mortgage-backed securities are passed from the mortgage
originators, as servicer, through intermediaries (generally U.S. Government
agencies and government-sponsored enterprises) that pool and repackage the
participation interests in the form of securities, to investors such as the
Bank. Such U.S. Government agencies and government sponsored enterprises, which
guarantee the payment of principal and interest to investors, primarily include
the Federal Home Loan Mortgage Corporation, Federal National Mortgage
Association and Government National Mortgage Association.
Mortgage-backed securities generally yield less than the loans which underlie
such securities because of their payment guarantees or credit enhancements which
offer nominal credit risk. At December 31, 1996, the weighted average
contractual maturity of the Bank's mortgage-backed securities was approximately
7.20 years.
As part of its efforts to maximize net interest income and manage the risks
associated with changing interest rates, management of the Bank uses the "market
value of portfolio equity" ("NPV") methodology which the Office of Thrift
Supervision ("OTS") has adopted as part of its capital regulations. Although the
Bank would not be subject to the NPV regulation because such regulation does not
apply to institutions with less than $300 million in assets and risk based
capital in excess of 12%, the application of the NPV methodology may illustrate
the Bank's interest rate risk.
Under this methodology, interest rate risk exposure is assessed by reviewing the
estimated changes in the Bank's NPV which would hypothetically occur if interest
rates rapidly rise or fall all along the yield curve. Projected values of NPV at
both higher and lower regulatory defined rate scenarios are compared to base
case values (no changes in rates) to determine the sensitivity to changing
interest rates.
Presented below, as of December 31, 1996, is an analysis of the Bank's interest
rate risk ("IRR") as measured by changes in NPV for instantaneous and sustained
parallel shifts of 100 basis points in market interest rates. The table also
contains the policy that the Board of Directors deems advisable in the event of
various changes in interest rates. Such limits have been established with
consideration of the impact of various rate changes and the Bank's currently
strong capital position.
- 11 -
<PAGE>
<TABLE>
<CAPTION>
As of December 31, 1996
-----------------------
Market Value of Portfolio Equity
Changes in --------------------------------
Interest Rates Board Limit
(Basis Points) % Change $ Change in NPV % Change in NPV
-------------- -------- --------------- ---------------
(In Thousands)
<S> <C> <C> <C> <C>
+400 (40) % $ (5,742) (33) %
+300 (30) (4,226) (24)
+200 (20) (2,709) (15)
+100 (10) (1,281) (7)
-- -- -- --
-100 (10) 1,174 7
-200 (20) 2,324 13
-300 (30) 3,425 20
-400 (40) 4,664 27
</TABLE>
The OTS uses the above NPV calculation to monitor an institution's IRR. The OTS
has promulgated regulations regarding a required adjustment to the institution's
risk-based capital based on IRR. The application of the OTS' methodology
quantifies IRR as the change in the NPV which results from a theoretical 200
basis point increase or decrease in market interest rates. If the NPV from
either calculation would decrease by more than 2% of the present value of the
institution's assets, the institution must deduct 50% of the amount of the
decrease in excess of such 2% in the calculation of risk-based capital. At
December 31, 1996, 2% of the present value of the Bank's assets was
approximately $1.3 million, and, as shown in the table, a 200 basis point
increase or decrease in market interest rates would not significantly impact the
Bank's regulatory capital calculation. However, if the regulation were
applicable, the Bank would deduct an interest rate risk component from its
regulatory capital of approximately $685,000, bringing its risk-based capital
ratio to 82.7%, as compared to the 8% regulatory requirement.
Liquidity and Capital Resources
The Company's liquidity, represented by cash and cash equivalents, is a product
of its operating, investing and financing activities. The Bank's primary sources
of funds are deposits, amortization, prepayments and maturities of outstanding
loans and mortgage-backed securities, maturities of investment securities and
other short-term investments and funds provided from operations. While scheduled
payments from the amortization of loans and mortgage-backed securities and
maturing investment securities and short term investments are relatively
predictable sources of funds, deposit flows and loan prepayments are greatly
influenced by general interest rates, economic conditions and competition. In
addition, the Bank invests excess funds in overnight deposits and other
short-term interest-earning assets which provide liquidity to meet lending
requirements. The Bank has been able to generate sufficient cash through its
deposits. At December 31, 1996, the Bank had no outstanding advances from the
Federal Home Loan Bank of Cincinnati or other borrowings.
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term investments
such as overnight deposits. On a longer-term basis, the Bank maintains a
strategy of investing in various investment and mortgage-backed securities and
residential mortgage loans. The Bank uses its sources of funds primarily to meet
its ongoing commitments, and to maintain a portfolio of mortgage-backed and
investment securities. At December 31, 1996, the total approved loan commitments
outstanding amounted to $466,600. At the same date, there were no commitments
under unused lines of credit. Certificates of deposit
- 12 -
<PAGE>
scheduled to mature in one year or less at December 31, 1996, totaled $34.2
million. Management believes that a significant portion of maturing deposits
will remain with the Bank. At December 31, 1996, the Bank had a liquidity ratio
of 10.68% which exceeded the required minimum liquid asset ratio of 5.0% of
assets.
Recapitalization of SAIF
The deposits of the Bank are currently insured by the SAIF. Both the SAIF and
the Bank Insurance Fund ("BIF"), the federal deposit insurance fund that covers
commercial bank deposits, are required by law to attain and thereafter maintain
a reserve ratio of 1.25% of insured deposits.
The BIF fund met its target reserve level in September 1995, but the SAIF was
not expected to meet its target reserve level until at least 2002. Consequently,
in late 1995, the FDIC approved a final rule regarding deposit insurance
premiums which, effective with respect to the semiannual premium assessment
beginning January 1, 1996, reduced deposit insurance premiums for BIF member
institutions to zero basis points (subject to an annual minimum of $2,000) for
institutions in the lowest risk category. Deposit insurance premiums for SAIF
members were maintained at their existing levels (23 basis points for
institutions in the lowest risk category).
On September 30, 1996, President Clinton signed into law legislation which
eliminates the premium differential between SAIF-insured institutions and
BIF-insured institutions by recapitalizing the SAIF's reserves to the required
ratio. The legislation required all SAIF member institutions to pay a one-time
special assessment to recapitalize the SAIF, with the aggregate amount to be
sufficient to bring the reserve ratio of the SAIF to 1.25% of insured deposits.
The legislation also provides for the merger of the BIF and the SAIF, with such
merger being conditioned upon the prior elimination of the thrift charter.
Implementing FDIC regulations imposed a one-time special assessment of 65.7
basis points on SAIF-assessable deposits as of March 31, 1995, which was accrued
as an expense on September 30, 1996. The Bank's one-time special assessment
amounted to approximately $336,000 ($221,800 net of related tax benefits). The
payment of such special assessment had the effect of immediately reducing the
Bank's capital by such an amount. Nevertheless, management does not believe that
this one-time special assessment will have a material adverse effect on the
Company's consolidated financial condition or cause non-compliance with the
Bank's regulatory capital requirements.
In the fourth quarter of 1996, the FDIC lowered the assessment rates for SAIF
members to reduce the disparity in the assessment rates paid by BIF and SAIF
members. Beginning October 1, 1996, effective SAIF rates generally range from
zero basis points to 27 basis points, except that during the fourth quarter of
1996, the rates for SAIF members ranged from 18 basis points to 27 basis points
in order to increase assessments paid to the Financing Corporation ("FICO").
From 1997 through 1999, SAIF members will pay 6.4 basis points to fund the FICO
while BIF member institutions will pay about 1.3 basis points. The Bank's
insurance premiums, which had amounted to 23 basis points were reduced to 6.4
basis points effective January 1, 1997. Based upon the $49.2 million of
assessable deposits at December 31, 1996, the Bank would expect to pay $20,400
less in insurance premiums per quarter during 1997.
Recent Accounting Pronouncements
In management's opinion, there are no recent accounting pronouncements which
have been adopted, or pending pronouncements that, if adopted, which have had or
would have a significant effect on the Company's financial position or results
of operations.
- 13 -
<PAGE>
Impact of Inflation and Changing Prices
The Financial Statements of the Company and related notes 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 changes in the relative purchasing power
of money over time due to inflation.
Unlike most industrial companies, substantially all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general levels of inflation. Interest rates do
not necessarily move in the same direction or in the same magnitude as the price
of goods and services, since such prices are affected by inflation to a larger
extent than interest rates. In the current interest rate environment, liquidity
and the maturity structure of the Company's assets and liabilities are critical
to the maintenance of acceptable performance levels.
- 14 -
<PAGE>
[LETTERHEAHD OF KELLEY, GALLOWAY & COMPANY, PSC]
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and
Board of Directors
Gateway Bancorp, Inc.
Catlettsburg, Kentucky 41129
We have audited the accompanying consolidated balance sheets of Gateway Bancorp,
Inc. and subsidiary as of December 31, 1996 and 1995, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for the years ended December 31, 1996 and 1995, for the six months ended
December 31, 1994, and for the year ended June 30, 1994. These consolidated
financial statements are the responsibility of the Company's management. 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 consolidated financial position of Gateway
Bancorp, Inc. and subsidiary as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for the years ended December 31, 1996
and 1995, for the six months ended December 31, 1994, and for the year ended
June 30, 1994, in conformity with generally accepted accounting principles.
As discussed in Notes 1 and 8 to the consolidated financial statements, the
Company changed its method of accounting for fees and costs associated with loan
originations and its method of accounting for pensions in 1995, and its method
of accounting for investment securities in 1994.
/s/ Kelley, Galloway & Company, PSC
February 7, 1997
- 15 -
<PAGE>
GATEWAY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
ASSETS
1996 1995
----------- -----------
<S> <C> <C>
CASH, including interest-bearing deposits of $1,270,685
and $6,305,467, respectively $ 1,348,415 $ 6,542,257
INVESTMENT SECURITIES HELD TO MATURITY, approximate
market value of $17,414,800 and $21,539,900,
respectively 17,523,931 21,443,489
LOANS RECEIVABLE, less allowance for loan losses
of $80,758 19,075,792 16,920,304
MORTGAGE-BACKED SECURITIES HELD TO MATURITY,
approximate market value of $27,703,100 and
$28,128,100, respectively 27,663,022 27,618,404
ACCRUED INTEREST RECEIVABLE 430,055 493,502
OFFICE PROPERTIES AND EQUIPMENT 358,497 366,995
INCOME TAXES REFUNDABLE 15,323 --
OTHER ASSETS 23,902 23,725
----------- -----------
$66,438,937 $73,408,676
=========== ===========
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS $ 49,194,746 $ 53,287,904
INCOME TAXES PAYABLE:
Current -- 66,730
Deferred 111,808 96,872
DIVIDENDS PAYABLE -- 1,366,717
ACCRUED INTEREST PAYABLE 32,864 35,155
OTHER LIABILITIES 70,866 77,035
------------ ------------
Total liabilities 49,410,284 54,930,413
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, no par value, 1,000,000
shares authorized -- --
Common stock, $.01 par value, 4,000,000
shares authorized; 1,075,754 and 1,196,970
shares issued and outstanding, respectively 10,758 11,970
Employee benefit plans (918,319) (1,098,907)
Additional paid-in capital 7,930,355 9,502,671
Retained earnings - substantially restricted 10,005,859 10,062,529
------------ ------------
Total stockholders' equity 17,028,653 18,478,263
------------ ------------
$ 66,438,937 $ 73,408,676
============ ============
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
- 16 -
<PAGE>
GATEWAY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994,
FOR THE SIX MONTHS ENDED DECEMBER 31, 1994 AND
FOR THE YEAR ENDED JUNE 30, 1994
<TABLE>
<CAPTION>
Year Ended Six Months Year
December 31, Ended Ended
---------------------------------------- December 31, June 30,
1996 1995 1994 1994 1994
------------ ------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
INTEREST INCOME:
Loans receivable -
Mortgage loans $ 1,314,190 $ 1,083,388 $ 835,991 $ 409,848 $ 810,919
Other loans 43,715 49,681 40,807 20,332 43,745
Investment securities 1,258,253 1,370,562 1,080,478 561,882 935,616
Mortgage-backed and related securities 1,934,639 2,019,289 2,091,863 1,053,690 2,178,285
Other interest-earning assets 159,387 303,977 111,659 50,427 177,831
------------ ------------ ------------ ------------ ------------
Total interest income 4,710,184 4,826,897 4,160,798 2,096,179 4,146,396
------------ ------------ ------------ ------------ ------------
INTEREST EXPENSE:
Passbook savings 115,238 162,771 364,814 170,673 393,655
Certificates of deposit 2,538,392 2,509,682 2,019,925 1,016,579 2,060,909
------------ ------------ ------------ ------------ ------------
Total interest expense 2,653,630 2,672,453 2,384,739 1,187,252 2,454,564
------------ ------------ ------------ ------------ ------------
Net interest income 2,056,554 2,154,444 1,776,059 908,927 1,691,832
PROVISION FOR LOAN LOSSES -- 20,000 -- -- --
------------ ------------ ------------ ------------ ------------
Net interest income after
provision for loan losses 2,056,554 2,134,444 1,776,059 908,927 1,691,832
------------ ------------ ------------ ------------ ------------
NON-INTEREST INCOME:
Gain on sale of office building -- -- -- -- 21,756
Loss on foreclosed real estate 14,181 -- -- -- (102)
Gains on sale of investments 2,000 1,563 2,250 -- --
Loan fees -- -- 5,655 2,300 15,601
Other 13,152 8,095 17,111 12,053 17,113
------------ ------------ ------------ ------------ ------------
Total non-interest income 29,333 9,658 25,016 14,353 54,368
------------ ------------ ------------ ------------ ------------
NON-INTEREST EXPENSE:
Compensation and benefits 414,055 371,675 264,449 140,917 248,716
Occupancy and equipment 40,219 39,181 36,270 18,408 40,420
SAIF deposit insurance premium 457,790 123,195 131,003 65,899 128,298
Contingency reserve -- -- 100,000 100,000 --
Other 400,845 359,338 238,011 123,429 251,746
------------ ------------ ------------ ------------ ------------
Total non-interest expense 1,312,909 893,389 769,733 448,653 669,180
------------ ------------ ------------ ------------ ------------
INCOME BEFORE PROVISION
FOR INCOME TAXES 772,978 1,250,713 1,031,342 474,627 1,077,020
PROVISION FOR INCOME TAXES 243,396 430,052 337,295 155,439 365,082
------------ ------------ ------------ ------------ ------------
NET INCOME $ 529,582 $ 820,661 $ 694,047 $ 319,188 $ 711,938
============ ============ ============ ============ ============
NET INCOME PER SHARE $ .48 $ .69 N/A N/A N/A
============ ============ ============ ============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
- 17 -
<PAGE>
GATEWAY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995,
FOR THE SIX MONTHS ENDED DECEMBER 31, 1994, AND
FOR THE YEAR ENDED JUNE 30, 1994
<TABLE>
<CAPTION>
Retained
Employee Additional Earnings - Total
Common Benefit Paid-In Substantially Stockholders'
Stock Plans Capital Restricted Equity
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, June 30, 1993 $ -- $ -- $ -- $ 8,562,264 $ 8,562,264
NET INCOME, year ended June 30, 1994 -- -- -- 711,938 711,938
------------- ------------- ------------- ------------- -------------
BALANCE, June 30, 1994 -- -- -- 9,274,202 9,274,202
NET INCOME, six months ended
December 31, 1994 -- -- -- 319,188 319,188
------------- ------------- ------------- ------------- -------------
BALANCE, December 31, 1994 -- -- -- 9,593,390 9,593,390
NET INCOME, year ended
December 31, 1995 -- -- -- 820,661 820,661
COMMON STOCK ISSUED, $.01 par value 12,446 (500,000) 11,698,818 -- 11,211,264
DIVIDENDS DECLARED, $1.50 per share -- -- (1,734,162) (110,173) (1,844,335)
ESOP SHARES RELEASED, 7,746 shares -- 77,460 (14,545) -- 62,915
RRP STOCK PURCHASED, 49,782 shares -- (721,839) -- -- (721,839)
RRP STOCK AMORTIZED, 3,136 shares -- 45,472 -- -- 45,472
PURCHASE OF 47,600
TREASURY SHARES (476) -- (447,440) (241,349) (689,265)
------------- ------------- ------------- ------------- -------------
BALANCE, December 31, 1995 11,970 (1,098,907) 9,502,671 10,062,529 18,478,263
NET INCOME, year ended
December 31, 1996 -- -- -- 529,582 529,582
DIVIDENDS DECLARED, $.40 per share -- -- (432,777) -- (432,777)
ESOP SHARES RELEASED, 6,461 shares -- 64,610 (108) -- 64,502
RRP STOCK AMORTIZED, 7,998 shares -- 115,978 -- -- 115,978
PURCHASE OF 121,216
TREASURY SHARES (1,212) -- (1,139,431) (586,252) (1,726,895)
------------- ------------- ------------- ------------- -------------
BALANCE, December 31, 1996 $ 10,758 $ (918,319) $ 7,930,355 $ 10,005,859 $ 17,028,653
============= ============= ============= ============= =============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
- 18 -
<PAGE>
GATEWAY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994,
FOR THE SIX MONTHS ENDED DECEMBER 31, 1994 AND
FOR THE YEAR ENDED JUNE 30, 1994
<TABLE>
<CAPTION>
Year End Six Months Year
December 31, Ended Ended
------------------------------------------ December 31, June 30,
1996 1995 1994 1994 1994
------------ ------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 529,582 $ 820,661 $ 694,047 $ 319,188 $ 711,938
Adjustments to reconcile net income to net
cash provided by operating activities-
Provision for loan losses and
uncollected interest -- 20,000 165 165 (8,916)
Provision for depreciation 20,808 18,869 16,269 9,207 18,630
Amortization and accretion (75,426) (76,789) (77,663) (41,676) (60,538)
Provision (credit) for deferred income taxes 14,936 3,660 1,241 (5,668) 13,487
ESOP compensation 14,502 62,915 -- -- --
RRP compensation 115,978 45,472 -- -- --
Gain on sale of investment securities (2,000) (1,563) -- -- --
Gain on sale of office building -- -- -- -- (21,756)
Net loss on sale of foreclosed real estate -- -- -- -- 102
FHLB stock dividends (53,100) (48,300) (38,000) (21,000) (31,500)
Decrease (increase) in
accrued interest receivable 63,447 (29,413) 11,603 10,582 14,974
Decrease (increase) in other assets (177) (3,004) 336 (12,216) 26
Decrease (increase) in income taxes refundable (15,323) 18,227 (11,927) (7,893) (10,334)
Increase (decrease) in income taxes payable
and other liabilities (75,190) (5,041) 102,438 130,639 (17,768)
------------ ------------ ------------ ------------ ------------
Net cash provided by
operating activities 538,037 825,694 698,509 381,328 608,345
------------ ------------ ------------ ------------ ------------
INVESTING ACTIVITIES:
Net decrease (increase) in loans receivable (2,155,488) (5,489,040) (1,490,389) (1,341,297) 461,111
Purchases of investment securities (13,280,500) (11,473,118) (5,052,542) (1,251,875) (8,777,439)
Proceeds from sales and maturities of
investment securities 17,277,000 10,954,844 4,045,979 2,575,000 1,882,020
Purchases of mortgage-backed securities (5,826,994) (1,875,339) (4,871,378) (504,900) (10,883,001)
Principal collected on
mortgage-backed securities 5,835,960 3,823,466 6,400,549 2,297,820 8,491,498
Purchases of office property and equipment (12,310) (20,860) (11,624) (10,886) (264,015)
Proceeds from sale of office properties
and equipment -- -- -- -- 28,250
Proceeds from sale of foreclosed real estate -- -- -- -- 136,596
------------ ------------ ------------ ------------ ------------
Net cash provided by (used for)
investing activities 1,837,668 (4,080,047) (979,405) 1,763,862 (8,924,980)
------------ ------------ ------------ ------------ ------------
FINANCING ACTIVITIES:
Net increase (decrease) in savings accounts (625,117) (4,726,715) (2,886,355) (3,124,767) 1,121,527
Net increase (decrease) in certificates of
deposit accounts (3,468,041) (2,471,541) 6,103,467 5,682,108 912,431
Decrease (increase) in prepaid stock
conversion costs -- 278,054 (278,054) (278,054) --
Proceeds from sale of stock -- 11,211,264 -- -- --
Purchase of RRP stock -- (721,839) -- -- --
Dividends paid (1,749,494) (477,618) -- -- --
Purchase of common stock (1,726,895) (689,265) -- -- --
------------ ------------ ------------ ------------ ------------
Net cash provided by (used for)
financing activities (7,569,547) 2,402,340 2,939,058 2,279,287 2,033,958
------------ ------------ ------------ ------------ ------------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (5,193,842) (852,013) 2,658,162 4,424,477 (6,282,677)
CASH AND CASH EQUIVALENTS,
beginning of period 6,542,257 7,394,270 4,736,108 2,969,793 9,252,470
------------ ------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS,
end of period $ 1,348,415 $ 6,542,257 $ 7,394,270 $ 7,394,270 $ 2,969,793
============ ============ ============ ============ ============
NONCASH INVESTING ACTIVITIES:
Loans taken into foreclosed real estate $ -- $ -- $ -- $ -- $ 139,749
Foreclose real estate sold and financed $ -- $ -- $ -- $ -- $ 52,376
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Income taxes paid $ 242,000 $ 300,000 $ 349,000 $ 169,000 $ 370,300
Interest paid on deposit accounts $ 2,655,921 $ 2,663,684 $ 2,381,017 $ 1,183,615 $ 2,461,469
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
- 19 -
<PAGE>
GATEWAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994,
FOR THE SIX MONTHS ENDED DECEMBER 31, 1994
AND FOR THE YEAR ENDED JUNE 30, 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Gateway Bancorp, Inc. (the "Company") was incorporated under Kentucky
law in October 1994 by Catlettsburg Federal Savings and Loan Association (the
"Association") in connection with the conversion of the Association from a
federally-chartered mutual savings and loan association to a federally-chartered
stock savings bank to be known as Catlettsburg Federal Savings Bank (the "Bank",
in mutual or stock form) and the issuance of the Bank's common stock to the
Company and the offer and sale of the Company's common stock by the Company (the
"Conversion"). As part of the Conversion, the Bank issued 1,244,570 shares of
its common stock. Total proceeds of $12,445,700 were reduced by approximately
$735,000 in conversion expenses. The financial statements for the year ended
December 31, 1994 (unaudited), for the six months ended December 31, 1994, and
for the year ended June 30, 1994, are for the Bank only, because as of December
31, 1994, the Company had not yet issued any stock, had no assets and no
liabilities and had not yet conducted any business other than of an
organizational nature.
The Company's principal business is conducted through the Bank which
conducts business from its main office located in Catlettsburg, Kentucky, and
one full-service branch located in Grayson, Kentucky. The Bank's deposits are
insured by the Savings Association Insurance Fund ("SAIF") to the maximum extent
permitted by law. The Bank is subject to examination and comprehensive
regulation by the Office of Thrift Supervision ("OTS"), which is the Bank's
chartering authority and primary regulator. The Bank is also subject to
regulation by the Federal Deposit Insurance Corporation ("FDIC"), as the
administrator of the SAIF, and to certain reserve requirements established by
the Federal Reserve Board ("FRB"). The Bank is a member of the Federal Home Loan
Bank of Cincinnati ("FHLB").
Principles of Consolidation
The consolidated financial statements at December 31, 1996 and 1995,
and for the years then ended, include the accounts of the Company, the Bank, and
the Bank's one wholly-owned subsidiary. The consolidated financial statements
for the year ended December 31, 1994 (unaudited), for the six months ended
December 31, 1994, and for the year ended June 30, 1994, include the accounts of
the Bank and its one wholly-owned subsidiary. All significant intercompany
transactions have been eliminated in consolidation. Additionally, certain
reclassifications may have been made in order to conform with the current
period's presentation. The accompanying consolidated financial statements have
been prepared on the accrual basis.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts
- 20 -
<PAGE>
of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Material estimates that are particularly susceptible to significant
change in the near-term relate to the determination of the allowance for loan
losses, and the effect of prepayments on premiums and discounts associated with
investments and mortgage-backed securities. Management believes that the
allowance for loan losses and the effect of prepayments on premiums and
discounts associated with investments and mortgage-backed securities have been
adequately evaluated. Various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan losses
and valuations of foreclosed real estate. Such agencies may require the Bank to
recognize additions to the allowance or adjustments to the valuations based on
their judgments about information available to them at the time of their
examination. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of the statement of cash flows, cash and cash equivalents
include cash and readily available interest bearing deposits in other financial
institutions. The Bank maintains cash deposits in other depository institutions
which occasionally exceed the amount of deposit insurance available. Management
periodically assesses the financial condition of these institutions.
Federal regulations require the maintenance of certain daily reserve
balances. Based upon the regulatory calculation, the Bank's reserve requirements
at December 31, 1996 and 1995 were $-0-. However, aggregate reserves (in the
form of vault cash) are maintained to satisfy federal regulatory requirements
should they be needed.
Investments and Mortgage-Backed Securities
Bonds and notes held to maturity are carried at amortized cost based
upon management's intent and ability to hold such securities to maturity.
Adjustments for premiums and discounts are recognized in interest income using
the interest method over the period to maturity.
Equity securities that are nonmarketable and restricted are carried at
cost. The Bank is required to maintain stock in the Federal Home Loan Bank of
Cincinnati in an amount equal to 1% of mortgage related assets (residential
mortgages and mortgage-backed securities) or 0.3% of the Bank's total assets at
December 31 of each year.
Mortgage-backed securities are stated at amortized cost since
management intends to hold such securities to maturity and they have the ability
to do so. Amortization of premiums and accretion of discounts are recognized
using the level yield method. Certain factors such as prepayments and interest
rates may impact the yields and effective maturities of mortgage-backed
securities.
During 1993, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities, which requires, among other things,
that debt and equity securities (including mortgage-backed securities)
classified as available for sale be reported at fair value, with unrealized
gains and losses excluded from net income and reported as a separate component
of stockholders' equity, net of income taxes. Management adopted SFAS No. 115
effective June 30, 1994, and classified all investment securities and
mortgage-backed securities as held to maturity (carried at amortized cost),
since it is their intent to do so. Should any be sold, gains or losses will be
recognized in
- 21 -
<PAGE>
income using the specific identification method. This change had no effect on
the Bank's consolidated financial position or results of operations for any
periods presented in the accompanying financial statements.
Realized gains and losses are recognized in the statements of income
using the specific identification method.
Loans Receivable
Loans receivable are stated at unpaid principal balances, increased by
net deferred loan costs, and reduced by the allowance for loan losses.
Effective January 1, 1995, the Bank adopted the provisions of
Statement of Financial Accounting Standards No. 91, Accounting for Nonrefundable
Fees and Costs Associated with Originating or Acquiring Loans. In accordance
with this statement, certain direct origination costs on loans made after
December 31, 1994 are deferred and amortized as a yield adjustment over the
lives of the related loans. It was determined that the implementation of SFAS
No. 91 to loans originated prior to January 1, 1995 would not have a material
effect on the consolidated financial statements.
Loans are placed on nonaccrual when a loan is specifically determined
to be impaired or when principal or interest is delinquent for 90 days or more.
Any unpaid interest previously accrued on those loans is reversed from income.
Interest income generally is not recognized on specific impaired loans unless
the likelihood of further loss is remote. Interest payments received on such
loans are applied as a reduction of the loan principal balance. Interest income
on other nonaccrual loans is recognized only to the extent of interest payments
received.
It is the policy of the Bank to provide a valuation allowance for
estimated losses on loans when a significant and probable decline in value
occurs. The allowance for loan losses is increased by charges to income and
decreased by charge-offs (net of recoveries). Management's periodic evaluation
of the adequacy of the allowance is based on the Bank's past loan loss
experience, known and inherent risks in the portfolio, adverse situations that
may affect the borrower's ability to repay, the estimated value of any
underlying collateral, and current economic conditions.
Office Properties and Equipment
Office properties and equipment are stated at cost, net of accumulated
depreciation. Depreciation is computed over the estimated useful lives of the
assets using the straight-line method.
Income Taxes
Deferred income taxes are recognized for temporary differences between
transactions recognized for financial reporting purposes and income tax
purposes. Income taxes are accounted for in accordance with the provisions of
Statement of Financial Accounting Standards No. 109.
Net Income Per Share
Net income per share for the years ended December 31, 1996 and 1995
was computed using the weighted average number (1,094,395 and 1,194,033,
respectively) of outstanding common shares and common stock equivalents, if
dilutive. The only common stock equivalents are stock options. The weighted
average number of common stock equivalents is calculated using the treasury
stock method. There were no shares of stock outstanding for periods earlier than
- 22 -
<PAGE>
1995. Shares which have not been committed to be released to the ESOP are not
considered to be outstanding for purposes of calculating net income per share.
Fair Values of Financial Instruments
Statement of Financial Accounting Standards No. 107, Disclosures about
Fair Value of Financial Instruments, requires disclosure of fair value
information about financial instruments, whether or not recognized in the
consolidated balance sheet. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instruments. SFAS No. 107 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.
The following methods and assumptions were used in estimating fair
value disclosures for financial instruments:
Cash: The carrying amount reported in the balance sheet for cash
approximates fair value.
Investment securities and mortgage-backed securities: Fair values for
investment securities and mortgage-backed 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.
Loans: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying amounts.
The fair values for other loans (for example, fixed rate mortgage loans) are
estimated using discounted cash flow analysis, based on interest rates currently
being offered for loans with similar terms to borrowers of similar credit
quality. Loan fair value estimates include judgments regarding future expected
loss experience and risk characteristics. The carrying amount of accrued
interest receivable approximates fair value.
Deposits: The fair values disclosed for passbook accounts are, by
definition, equal to the amount payable on demand at the reporting date (that is
their carrying amounts). The fair values for certificates of deposit are
considered to approximate carrying value if they have original maturities of
less than 1 year. For other certificates of deposit, fair values are estimated
using a discounted cash flow calculation that applies interest rates currently
being offered to a schedule of aggregated contractual maturities on such
deposits. The carrying amount of accrued interest payable approximates fair
value.
- 23 -
<PAGE>
(2) INVESTMENT SECURITIES HELD TO MATURITY
Investment securities held to maturity consist of the following:
<TABLE>
<CAPTION>
December 31, 1996
-----------------------------------------------------------------------
Gross Gross
Carrying Unrealized Unrealized Market
Value Gains Losses Value
----------------- ------------- ------------ ----------------
<S> <C> <C> <C> <C>
Bonds and Certificates:
U.S. Treasury securities $ 2,999,375 $ - $ 19,075 $ 2,980,300
FHLB bonds 4,450,000 - 39,700 4,410,300
FNMA bonds 4,539,807 15,598 74,405 4,481,000
FHLMC bonds 3,246,172 10,353 27,725 3,228,800
Government money market 1,000,000 - - 1,000,000
Municipal bonds 479,277 26,817 994 505,100
----------------- ------------- ------------ ----------------
16,714,631 52,768 161,899 16,605,500
----------------- ------------- ------------ ----------------
Restricted Equity Securities:
Stock in FHLB, at cost 794,300 - - 794,300
Stock in Intrieve, Inc., at cost 15,000 - - 15,000
----------------- ------------- ------------ ----------------
809,300 - - 809,300
----------------- ------------- ------------ ----------------
$ 17,523,931 $ 52,768 $ 161,899 $ 17,414,800
================= ============= ============ ================
Weighted average interest rate 6.36 %
=================
<CAPTION>
December 31, 1995
-----------------------------------------------------------------------
Gross Gross
Carrying Unrealized Unrealized Market
Value Gains Losses Value
----------------- ------------- ------------ ----------------
<S> <C> <C> <C> <C>
Bonds and Certificates:
U.S. Treasury securities $ 2,998,750 $ - $ 3,950 $ 2,994,800
FHLB bonds 10,349,417 16,782 18,999 10,347,200
FNMA bonds 2,535,769 64,631 - 2,600,400
FHLMC bonds 1,250,000 1,200 - 1,251,200
Government money market 3,000,000 - - 3,000,000
Municipal bonds 553,353 36,747 - 590,100
----------------- ------------- ------------ ----------------
20,687,289 119,360 22,949 20,783,700
----------------- ------------- ------------ ----------------
Restricted Equity Securities:
Stock in FHLB, at cost 741,200 - - 741,200
Stock in Intrieve, Inc., at cost 15,000 - - 15,000
----------------- ------------- ------------ ----------------
756,200 - - 756,200
----------------- ------------- ------------ ----------------
$ 21,443,489 $ 119,360 $ 22,949 $ 21,539,900
================= ============= ============ ================
Weighted average interest rate 6.27 %
=================
</TABLE>
- 24 -
<PAGE>
During the years ended December 31, 1996, 1995 and 1994
(unaudited), the Company had investment securities held to maturity called, with
amortized costs of $100,000, $1,000,000 and $73,000, respectively, at gains of
$2,000, $1,563 and $2,250, respectively. There were no sales or calls of
investment securities held to maturity during the six months ended December 31,
1994 or the year ended June 30, 1994.
The amortized cost and estimated market value of investment
securities held to maturity at December 31, 1996 by contractual maturity are
shown below. Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations without call or
prepayment penalties.
<TABLE>
<CAPTION>
Estimated
Amortized Market
Cost Value
---------------- ----------------
<S> <C> <C>
Due in one year or less $ 3,509,300 $ 3,506,200
Due after one year through five years 5,995,078 5,961,000
Due after five years through ten years 5,129,920 5,075,700
Due after ten years 2,889,633 2,871,900
---------------- ----------------
$ 17,523,931 $ 17,414,800
================ ================
</TABLE>
Investment securities held to maturity with amortized costs of
approximately $200,000 and $500,000 and estimated market values of approximately
$198,700 and $499,100 were pledged to secure deposits at December 31, 1996 and
1995, respectively.
(3) LOANS RECEIVABLE
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------------
1996 1995
---------------- ----------------
<S> <C> <C>
Real estate loans:
Single family residential $ 16,785,592 $ 15,205,716
Multi-family residential 903,493 585,800
Commercial real estate 790,993 361,678
---------------- ----------------
Total real estate loans 18,480,078 16,153,194
Other loans:
Loans on deposit accounts 620,672 809,761
---------------- ----------------
Total loans 19,100,750 16,962,955
Net deferred cost reserve 55,800 38,107
Allowance for loan losses (80,758) (80,758)
---------------- ----------------
Loans - net $ 19,075,792 $ 16,920,304
================ ================
Weighted average interest rate 7.85% 7.80%
=============== ================
</TABLE>
- 25 -
<PAGE>
Activity in the allowance for loan losses is summarized as
follows:
<TABLE>
<CAPTION>
Year Ended Six Months Year
December 31, Ended Ended
---------------------------------------- December 31, June 30,
1996 1995 1994 1994 1994
------------ ------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Balance, beginning of period $ 80,758 $ 60,758 $ 60,758 $ 60,758 $ 157,098
Provision charged to expense -- 20,000 -- -- --
Loans charged-off -- -- -- -- (96,340)
------------ ------------ ------------ ------------ ------------
Balance, end of period $ 80,758 $ 80,758 $ 60,758 $ 60,758 $ 60,758
============ ============ ============ ============ ============
</TABLE>
Nonaccrual loans for which interest had been discontinued or
reduced and for which impairment had not been recognized totaled approximately
$81,500 and $264,800 at December 31, 1996 and 1995, respectively. Interest
income that would have been recorded under the original terms of the loans
totaled $1,394 and $3,050 for the years ended December 31, 1996 and 1995,
respectively.
The Bank is not committed to lend additional funds to debtors
whose loans are impaired or in nonaccrual status.
(4) MORTGAGE-BACKED SECURITIES HELD TO MATURITY
Mortgage-backed securities held to maturity consist of the
following:
<TABLE>
<CAPTION>
December 31,
------------------------------------
1996 1995
--------------- ---------------
<S> <C> <C>
GNMA certificates $ 1,530,864 $ 1,963,710
FNMA certificates 5,661,647 3,750,543
FHLMC certificates 20,623,373 22,067,943
--------------- ---------------
27,815,884 27,782,196
Unamortized premiums 2,880 5,579
Unearned discounts (155,742) (169,371)
--------------- ---------------
$ 27,663,022 $ 27,618,404
=============== ===============
Weighted average interest rate 6.52% 6.62%
=============== ===============
</TABLE>
The carrying values and estimated market values of mortgage-backed
securities held to maturity consist of the following:
December 31, 1996
--------------------------------------------------
Gross Gross
Carrying Unrealized Unrealized Market
Value Gains Losses Value
----------- ----------- ----------- -----------
GNMA certificates $ 1,502,662 $ 122,582 $ 44 $ 1,625,200
FNMA certificates 5,626,378 50,648 196,726 5,480,300
FHLMC certificates 20,533,982 495,302 431,684 20,597,600
----------- ----------- ----------- -----------
$27,663,022 $ 668,532 $ 628,454 $27,703,100
=========== =========== =========== ===========
- 26 -
<PAGE>
December 31, 1995
--------------------------------------------------
Gross Gross
Carrying Unrealized Unrealized Market
Value Gains Losses Value
----------- ----------- ----------- -----------
GNMA certificates $ 1,936,803 $ 147,797 $ -- $ 2,084,600
FNMA certificates 3,732,375 43,367 92,142 3,683,600
FHLMC certificates 21,949,226 600,221 189,547 22,359,900
----------- ----------- ----------- -----------
$27,618,404 $ 791,385 $ 281,689 $28,128,100
=========== =========== =========== ===========
There were no sales of mortgage-backed securities held to maturity
during the years ended December 31, 1996, 1995 and 1994 (unaudited), the six
months ended December 31, 1994, or the year ended June 30, 1994.
(5) OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are summarized as follows:
December 31,
----------------------
1996 1995
--------- ---------
Land $ 90,000 $ 90,000
Buildings and improvements 339,145 339,145
Furniture, fixtures and equipment 164,474 152,164
--------- ---------
593,619 581,309
Less - accumulated depreciation (235,122) (214,314)
--------- ---------
$ 358,497 $ 366,995
========= =========
(6) DEPOSITS
Deposits are summarized as follows:
<TABLE>
<CAPTION>
Weighted December 31, December 31,
Average Rate 1996 1995
at December 31, --------------------------------- ---------------------------------
1996 Amount Percent Amount Percent
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Passbook 3.50% $ 2,861,487 5.8% $ 3,486,604 6.5%
--------------- --------------- --------------- --------------- ---------------
Certificates:
3.0-3.99% 3.65 9,339,968 19.0 8,688,795 16.3
4.0-4.99% 4.72 12,119,114 24.6 3,077,260 5.8
5.0-5.99% 5.64 24,672,498 50.2 37,812,482 71.0
6.0-6.99% 6.50 4,500 -- 11,522 --
7.0-7.99% 7.52 102,161 .2 120,079 .2
8.0-8.99% 8.00 95,018 .2 91,162 .2
--------------- --------------- --------------- --------------- ---------------
5.01 46,333,259 94.2 49,801,300 93.5
--------------- --------------- --------------- --------------- ---------------
4.92% $ 49,194,746 100.0% $ 53,287,904 100.0%
=============== =============== =============== =============== ===============
</TABLE>
The aggregate amount of short-term jumbo certificates of deposit
with a minimum denomination of $100,000 was approximately $6,209,000 and
$6,948,000 at December 31, 1996 and 1995, respectively.
- 27 -
<PAGE>
At December 31, 1996, scheduled maturities of certificates of
deposit are as follows:
Year
Ending
December 31, Amount Percent
------------ ----------------- -------
1997 $ 34,213,149 73.8%
1998 8,172,166 17.6
1999 2,175,554 4.7
2000 1,571,675 3.4
2001 and after 200,715 0.5
----------------- -------
$ 46,333,259 100.0%
================= =======
(7) INCOME TAXES
The provision for income taxes consists of the following
components:
<TABLE>
<CAPTION>
Year Ended Six Months Year
December 31, Ended Ended
------------------------------------------ December 31, June 30,
1996 1995 1994 1994 1994
------------ ------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Federal:
Current $ 240,357 $ 412,592 $ 336,054 $ 161,107 $ 351,595
Deferred 19,873 6,843 1,241 (5,668) 13,487
State:
Current (11,897) 13,800 -- -- --
Deferred (4,937) (3,183) -- -- --
------------ ------------ ------------ ------------ ------------
$ 243,396 $ 430,052 $ 337,295 $ 155,439 $ 365,082
============ ============ ============ ============ ============
</TABLE>
The provision for income taxes differs from the amount computed by
applying the Federal income tax rate of 34% and the effective state income tax
rate of 5.28% (year ended December 31, 1996 and 1995 only) to income before
provision for income taxes as a result of the following:
<TABLE>
<CAPTION>
Six Months Year
Year Ended Ended Ended
December 31, December 31, June 30,
1996 1995 1994 1994 1994
------------ ------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Expected provision for
income taxes $ 303,626 $ 491,280 $ 350,656 $ 161,373 $ 366,187
Income of Bank not
subject to state
income tax (49,684) (57,802) -- -- --
Tax-exempt interest (15,293) (11,816) (14,983) (7,535) (15,086)
Loan loss provision -- 6,800 -- -- --
Others - net 4,747 1,590 1,622 1,601 13,981
------------ ------------ ------------ ------------ ------------
$ 243,396 $ 430,052 $ 337,295 $ 155,439 $ 365,082
============ ============ ============ ============ ============
</TABLE>
- 28 -
<PAGE>
The net deferred income tax liability consists of income taxes
applicable to the following temporary differences between transactions
recognized for financial reporting and tax reporting purposes:
December 31,
----------------------
1996 1995
--------- ---------
Components of the deferred tax asset:
Bad debts $ 27,802 $ 27,802
Depreciation 4,993 5,968
Pension expense 5,055 2,619
Contingency reserve -- 4,452
RRP compensation expense 23,982 18,643
Other 1,033 205
--------- ---------
Total deferred tax asset 62,865 59,689
Valuation allowance - bad debts (27,802) (27,802)
--------- ---------
Total deferred tax asset,
net of valuation allowance 35,063 31,887
--------- ---------
Components of the deferred tax liability:
FHLB stock dividends 146,204 128,150
Accretion 667 609
--------- ---------
Total deferred tax liability 146,871 128,759
--------- ---------
Net deferred tax liability $ 111,808 $ 96,872
========= =========
Retained earnings at December 31, 1996 and 1995 include
approximately $2,445,000 for which no deferred federal income tax liability has
been recognized. These amounts represent an allocation of income to bad debt
deductions for tax purposes only. Reduction of amounts so allocated for purposes
other than bad debt losses or adjustments arising from carryback of net
operating losses would create income for tax purposes only, which would be
subject to the then current corporate income tax rate. The unrecorded deferred
income tax liability on the above amount was approximately $831,000 at December
31, 1996 and 1995.
(8) PENSION PLAN
The Bank has a qualified, non-contributory defined benefit pension
plan which covers all employees who are at least twenty and one-half years of
age and have completed six months of employment. Employees become fully vested
after seven years of service. It is the Bank's policy to fund the Plan in the
amount which is deductible for Federal income tax purposes, as actuarially
determined. Contributions to the Plan for the years ended December 31, 1996 and
1995 were $11,336 and $9,039, respectively. There were no contributions made for
any other period presented in the accompanying consolidated financial
statements.
The Bank adopted the provisions of FASB Statement of Financial
Accounting Standards No. 87, Employers' Accounting for Pensions, effective
January 1, 1995. The effect of adopting Statement No. 87 had no material effect
on the 1995 consolidated financial statements.
- 29 -
<PAGE>
The following is a summary of the plan's funded status as of
December 31, 1996 and 1995:
1996 1995
--------- ---------
Plan assets (principally life
insurance and annuity contracts),
at estimated fair value $ 151,327 $ 123,722
Projected benefit obligation (including
vested accumulated benefit obligation
of $96,131 and $82,678, respectively) (181,374) (171,190)
--------- ---------
Funded status (30,047) (47,468)
Unrecognized net gain from actuarial experience (11,887) (721)
Unamortized transition amount 38,726 40,486
--------- ---------
Net pension liability included in other
liabilities $ (3,208) $ (7,703)
========= =========
The weighted average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation for 1996 and 1995 were 8.0% and 4.5%, respectively.
Net pension cost for the years ended December 31, 1996 and 1995
includes the following components:
1996 1995
-------- --------
Service cost $ 11,427 $ 11,964
Interest cost on projected benefit obligation 12,808 11,966
Actual return on assets (13,144) (14,067)
Amortization and deferral 4,789 6,879
-------- --------
Net periodic pension cost $ 15,880 $ 16,742
======== ========
During 1996 and 1995, no distributions were made to participants.
There was no amount charged to pension expense during any of the
other periods presented in the accompanying consolidated financial statements.
(9) PURCHASE OF COMMON STOCK
The Company purchased 121,216 and 47,600 shares of its outstanding
common stock on the open market during 1996 and 1995, respectively. In
accordance with the 1988 amendment to the Kentucky Business Corporation Act, the
purchase of these shares has been recorded as a purchase of common stock shares,
which are authorized but unissued. The shares are available for reissuance.
(10) EMPLOYEE STOCK OWNERSHIP PLAN
The Company established an ESOP for employees of the Company and
the Bank effective upon the Conversion. Full-time employees of the Company and
the Bank who have been credited with at least 1,000 hours of service during a
twelve month period and who have attained age 21 are eligible to participate in
the ESOP. The Company loaned the ESOP $500,000 for the initial purchase of the
ESOP shares. The loan is due and payable in forty (40) equal quarterly
installments of $12,500 beginning March 31, 1995, plus interest at the rate of
8.75% per annum. The Company and the Bank will make scheduled discretionary cash
contributions to the ESOP sufficient to
- 30 -
<PAGE>
amortize the principal and interest on the loan. The Company accounts for its
ESOP in accordance with Statement of Position 93-6, "Employer's Accounting For
Employee Stock Ownership Plans." As shares are committed to be released to
participants, the Company reports compensation expense equal to the average
market price of the shares during the period. To the extent that the fair value
of ESOP shares differs from the cost of such shares, this differential will be
charged or credited to equity. ESOP compensation expense recorded during the
years ended December 31, 1996 and 1995 was $14,502 and $62,915, respectively,
which represents the estimated market value of the 6,461 and 7,746 shares which
were released during each respective year, less dividends paid on unallocated
shares used for debt service.
The fair value of the unreleased ESOP shares was approximately
$501,000 and $592,000 at December 31, 1996 and 1995, respectively. The Company
used $67,492 and $20,000, respectively, of dividends paid on unallocated ESOP
shares during 1996 and 1995 for debt service on the outstanding ESOP loan.
(11) STOCK-BASED COMPENSATION PLANS
In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation, which established
financial accounting and reporting standards for stock-based compensation. The
new standard defines a fair value method of accounting for an employee stock
option or similar equity instrument. This statement gives entities the choice
between adopting the fair value method or continuing to use the intrinsic value
method under Accounting Principles Board (APB) Opinion No. 25 with footnote
disclosures of the pro forma effects if the fair value method had been adopted.
The Company has opted for the latter approach. Accordingly, no compensation
expense has been recognized for the stock option plan. Had compensation expense
for the Company's stock option plan been determined based on the fair value at
the grant date for awards in 1996 and 1995 consistent with the provisions of
FASB No. 123, the Company's results of operations would have been reduced to the
pro forma amounts indicated below:
December 31,
--------------------------
1996 1995
------------ -------------
Net income-as reported $ 529,582 $ 820,661
Net income-pro forma 503,439 805,515
Net income per share-as reported .48 .69
Net income per share-pro forma .46 .68
The fair value of each option granted is estimated on the date of
the grant using the Black-Scholes option pricing model with the following
assumptions:
December 31,
---------------------------
1996 1995
------------ -------------
Expected dividend yield $ .40 $ .40
Expected stock price volatility 5.26% 5.26%
Risk-free interest rate 6.05% 6.42%
Expected life of options 7 years 7 years
The weighted average fair value of options granted during 1996 and
1995 was $1.86 and $2.68, respectively.
- 31 -
<PAGE>
The following table summarizes information about fixed stock
options outstanding at December 31, 1996:
Options Outstanding Options Exercisable
-------------------------------------------------- ------------------------
Weighted
Average
Remaining Weighted Number Weighted
Range of Contracted Average Exercisable Average
Exercise Number Life Exercise at Exercise
Prices Outstanding (Years) Price 12/31/96 Price
----------- ----------- ----------- ----------- ----------- -----------
$ 13.50 74,667 6.2 $ 13.50 14,685 $ 13.50
Recognition and Retention Plan and Trust ("RRP")
The Company's stockholders approved the RRP in 1995. As of
December 31, 1996, 49,782 shares are available for awards to the Company's Board
of Directors and the Bank's executive officers and key employees. During 1995,
the Company purchased 49,782 shares in the open market to fully fund the RRP at
an aggregate cost of $721,839. Awards are subject to five year vesting periods
and other provisions as more fully described in the RRP document. The deferred
cost of unearned RRP shares totaled $560,389 and $676,367 at December 31, 1996
and 1995, respectively, and is recorded as a charge against stockholders'
equity. Compensation expense will be recognized ratably over the five year
vesting periods only for those shares awarded. Compensation cost charged to
expense for the years ended December 31, 1996 and 1995 was $115,978 and $45,472,
respectively. RRP shares available which have not been awarded totaled 17,430 at
December 31, 1996 and 1995. 8,186 shares vested during the year ended December
31, 1996 while no shares vested during the year ended December 31, 1995.
(12) REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements
administered by its primary federal regulator, the Office of Thrift Supervision
(the "OTS"). Failure to meet minimum regulatory capital requirements can
initiate certain mandatory, and possible additional discretionary actions by
regulators, that if undertaken, could have a direct material affect on the Bank
and the consolidated financial statements. Under the regulatory capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines involving quantitative measures of the
Bank's assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification under the prompt corrective action guidelines are also subject to
qualitative judgements by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios of: total
risk-based capital and Tier I capital to riskweighted assets (as defined in the
regulations), Tier I capital to adjusted total assets (as defined), and tangible
capital to adjusted total assets (as defined). Management believes, as of
December 31, 1996, the Bank meets all capital adequacy requirements to which it
is subject.
As of September 30, 1996, the most recent notification from the
OTS, the Bank was categorized as well capitalized under the regulatory framework
for prompt corrective action. To be categorized as adequately capitalized, the
Bank would have to maintain minimum total risk-based, Tier I risk-based, and
Tier I leverage ratios as disclosed in the table below. There are no conditions
- 32 -
<PAGE>
or events since the most recent notification that management believes have
changed the Bank's category.
<TABLE>
<CAPTION>
For Capital
Adequacy Purposes and to
Be Adequately Capitalized
Under The
Prompt Corrective Action
Actual Provisions
Amount Ratio Amount Ratio
------------- ------------- --------------- ------------
<S> <C> <C> <C> <C>
As of December 31, 1996:
Total Risk-Based Capital
(to Risk-Weighted Assets) $ 16,928,064 86.22% >= $ 1,570,660 >= 8.0%
Tier I Capital
(to Risk-Weighted Assets) $ 16,848,064 85.81% >= $ 785,330 >= 4.0%
Tier I Capital
(to Adjusted Total Assets) $ 16,848,064 25.39% >= $ 1,990,774 >= 3.0%
Tangible Capital
(to Adjusted Total Assets) $ 16,848,064 25.39% >= $ 995,387 >= 1.5%
As of December 31, 1995:
Total Risk-Based Capital
(to Risk-Weighted Assets) $ 16,302,277 80.78% >= $ 1,614,508 >= 8.0%
Tier I Capital
(to Risk-Weighted Assets) $ 16,222,277 80.38% >= $ 807,254 >= 4.0%
Tier I Capital
(to Adjusted Total Assets) $ 16,222,277 23.25% >= $ 2,092,983 >= 3.0%
Tangible Capital
(to Adjusted Total Assets) $ 16,222,277 23.25% >= $ 1,046,492 >= 1.5%
</TABLE>
(13) OTHER NON-INTEREST INCOME AND EXPENSE
Other non-interest income and expense amounts are summarized as
follows:
<TABLE>
<CAPTION>
Year Ended Six Months Year
December 31, Ended Ended
---------------------------------------- December 31, June 30,
1996 1995 1994 1994 1994
------------ ------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Other non-interest income:
Rents $ 676 $ 566 $ 942 $ 663 $ 4,763
Insurance premiums 2,659 3,190 3,185 1,935 3,203
Other fee income 2,706 1,752 9,184 5,988 6,897
Miscellaneous 7,111 2,587 3,800 3,467 2,250
------------ ------------ ------------ ------------ ------------
$ 13,152 $ 8,095 $ 17,111 $ 12,053 $ 17,113
============ ============ ============ ============ ============
</TABLE>
- 33 -
<PAGE>
<TABLE>
<CAPTION>
Year Ended Six Months Year
December 31, Ended Ended
---------------------------------------- December 31, June 30,
1996 1995 1994 1994 1994
------------ ------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Other non-interest expense:
Data processing $ 38,225 $ 40,187 $ 35,193 $ 19,649 $ 32,951
Other insurance 23,007 22,820 25,434 12,549 30,792
Building and loan tax 55,447 46,800 47,433 25,800 45,633
OTS assessment 18,034 23,033 22,977 11,592 22,395
Advertising and promotion 18,768 17,713 16,426 8,853 15,869
Telephone and postage 20,575 18,151 14,125 7,458 14,039
Professional services 152,421 127,577 20,615 13,676 25,478
Other 74,368 63,057 55,808 23,852 64,589
------------ ------------ ------------ ------------ ------------
$ 400,845 $ 359,338 $ 238,011 $ 123,429 $ 251,746
============ ============ ============ ============ ============
</TABLE>
(14) CONCENTRATION OF CREDIT RISKS, COMMITMENTS AND CONTINGENCIES
The Bank is principally a local lender and, therefore, has a
significant concentration of loans to borrowers who reside in and/or which are
collateralized by real estate located in Boyd, Carter and Greenup County,
Kentucky. Employment in these areas is highly concentrated in the petroleum and
steel industries. Therefore, many debtors' ability to honor their contracts is
dependent upon these economic sectors.
In the ordinary course of business, the Bank has various
outstanding commitments and contingent liabilities that are not reflected in the
accompanying consolidated financial statements. The principal commitments are
loan commitments which approximated $466,600 and $471,125 at December 31, 1996
and 1995, respectively. The Bank uses the same credit policies for making loan
commitments as it does for other loans.
The Bank was not committed to sell or purchase loans or securities
at December 31, 1996 or 1995.
(15) RELATED PARTY TRANSACTIONS
Included in loans are loans to directors, officers and their
related interests. Management's opinion is that these loans are comparable to
other loans made in the ordinary course of business. An analysis of the activity
of loans to directors and executive officers is as follows:
<TABLE>
<CAPTION>
Six Months Year
Year Ended Ended Ended
December 31, December 31, June 30,
--------------------------- ------------ ------------
1996 1995 1994 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance, beginning of period $ 80,124 $ 250,774 $ 148,217 $ 197,656
New loans advanced 200,814 59,537 215,757 64,714
Repayments (138,870) (230,187) (113,200) (114,153)
------------ ------------ ------------ ------------
Balance, end of period $ 142,068 $ 80,124 $ 250,774 $ 148,217
============ ============ ============ ============
</TABLE>
- 34 -
<PAGE>
(16) FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments
at December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
------------------------ ------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Financial assets:
Cash $ 1,348,415 $ 1,348,415 $ 6,542,257 $ 6,542,257
Investment securities
held to maturity 17,523,931 17,414,800 21,443,489 21,539,900
Loans receivable, less allowance 19,075,792 19,025,849 16,920,304 16,839,964
Mortgage-backed securities held
to maturity 27,663,022 27,703,100 27,618,404 28,128,100
Accrued interest receivable 430,055 430,055 493,502 493,502
Financial liabilities:
Deposits 49,194,746 49,418,277 53,287,904 53,385,202
Accrued interest
payable 32,864 32,864 35,155 35,155
</TABLE>
The carrying amounts in the preceding tables are included in the
consolidated balance sheets under the applicable captions.
While these estimates of fair value are based on management's
judgment of the most appropriate factors, there is no assurance that if the
Company were to have disposed of such items at December 31, 1996 and 1995, the
estimated fair values would necessarily have been achieved at that date, since
market values may differ depending on various circumstances. The estimated fair
values should not necessarily be considered to apply at subsequent dates.
In addition, other assets and liabilities of the Company that are
not defined as financial instruments are not included in the above disclosures,
such as property and equipment. Also, non-financial instruments typically not
recognized in the financial statements nevertheless may have value but are not
included in the above disclosures. These include, among other items, the trained
work force, customer goodwill, and similar items.
(17) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data for the year ended December 31,
1996 is as follows:
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------------------
March 31 June 30 September 30 December 31
------------ ------------ ------------ ------------
(Dollars in thousands except per share data)
<S> <C> <C> <C> <C>
Total interest income $ 1,184 $ 1,181 $ 1,197 $ 1,148
Total interest expense 695 687 649 622
------------ ------------ ------------ ------------
Net interest income 489 494 548 526
Provision for loan losses -- -- -- --
------------ ------------ ------------ ------------
- 35 -
<PAGE>
<S> <C> <C> <C> <C>
Net interest income after
provision for loan losses 489 494 548 526
Non-interest income 6 15 3 5
Non-interest expense 242 271 549 251
------------ ------------ ------------ ------------
Income before provision for
income taxes 253 238 2 280
Provision (credit) for income taxes 84 68 (2) 93
------------ ------------ ------------ ------------
Net income $ 169 $ 170 $ 4 $ 187
============ ============ ============ ============
Net income per share $ .15 $ .15 $ .00 $ .18
============ ============ ============ ============
Dividends declared per share $ .10 $ .10 $ .10 $ .10
============ ============ ============ ============
</TABLE>
(18) CONDENSED PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for the parent company only
(Gateway Bancorp, Inc.) as of and for the years ended December 31, 1996 and 1995
is as follows:
BALANCE SHEETS
December 31,
-------------------------
Assets 1996 1995
----------- -----------
Cash and cash equivalents $ 64,500 $ 1,608,863
Investment in subsidiary 16,848,064 16,222,277
Investment securities held to maturity -- 1,986,394
Accrued interest receivable -- 47,302
Income taxes refundable 92,460 --
Other assets 23,629 --
----------- -----------
$17,028,653 $19,864,836
=========== ===========
Liabilities and Stockholders' Equity
Income taxes payable $ -- $ 19,856
Dividends payable -- 1,366,717
----------- -----------
Total liabilities -- 1,386,573
----------- -----------
Common stock 10,758 11,970
Employee benefit plans (918,319) (1,098,907)
Additional paid-in capital 7,930,355 9,502,671
Retained earnings 10,005,859 10,062,529
----------- -----------
Total stockholders' equity 17,028,653 18,478,263
----------- -----------
$17,028,653 $19,864,836
=========== ===========
- 36 -
<PAGE>
STATEMENTS OF INCOME
Year Ended
December 31,
-------------------------
1996 1995
----------- -----------
Interest on investment securities $ 57,171 $ 269,997
Interest on other interest-earning assets 29,302 43,585
----------- -----------
86,473 313,582
Non-interest income 2,969 1,563
Compensation and benefits (115,978) (45,472)
Other non-interest expense (141,472) (113,704)
----------- -----------
Income (loss) before income taxes and
equity in undistributed income of
subsidiary (168,008) 155,969
Provision (credit) for income taxes (71,803) 65,857
----------- -----------
Income (loss) before equity in
undistributed income of subsidiary (96,205) 90,112
Equity in undistributed income of subsidiary 625,787 730,549
----------- -----------
Net income $ 529,582 $ 820,661
=========== ===========
STATEMENTS OF CASH FLOWS
Year Ended
December 31,
-------------------------
Assets 1996 1995
----------- -----------
Operating activities:
Net income $ 529,582 $ 820,661
Adjustments to reconcile net income to net
cash flows provided by (used for) operating
activities -
Equity in undistributed income of subsidiary (625,787) (730,549)
Accretion (13,606) (6,556)
Interest received on ESOP loan 14,502 20,061
Gain on sale of investment securities (2,969) (1,563)
RRP compensation 115,978 45,472
Changes in -
Accrued interest receivable 47,302 (47,302)
Other assets (23,629) --
Income taxes refundable (92,460) --
Income taxes payable (19,856) 19,856
----------- -----------
Net cash provided by (used for)
operating activities (70,943) 120,080
----------- -----------
- 37 -
<PAGE>
Investing activities:
Capital contribution to subsidiary -- (5,905,484)
Purchases of investment securities held
to maturity -- (3,073,118)
Principal payments received on ESOP loan 50,000 50,000
Proceeds from maturities and sales of
investment securities held to maturity 2,002,969 1,094,843
----------- -----------
Net cash provided by (used for)
investing activities 2,052,969 (7,833,759)
----------- -----------
Financing activities:
Proceeds from sale of stock -- 11,211,264
Purchase of RRP stock -- (721,839)
Dividends paid (1,799,494) (477,618)
Purchase of common stock (1,726,895) (689,265)
----------- -----------
Net cash (used for) provided by
financing activities (3,526,389) 9,322,542
----------- -----------
Net increase (decrease) in cash (1,544,363) 1,608,863
Cash and cash equivalents, beginning of year 1,608,863 --
----------- -----------
Cash and cash equivalents, end of year $ 64,500 $ 1,608,863
=========== ===========
- 38 -
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements of Gateway Bancorp, Inc. and subsidiary as of
December 31, 1996 and for the year then ended and is qualified in its entirety
by reference to such consolidated financial statements
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> Dollars
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 77,730
<INT-BEARING-DEPOSITS> 1,270,685
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 45,186,953
<INVESTMENTS-MARKET> 45,117,900
<LOANS> 19,156,550
<ALLOWANCE> 80,758
<TOTAL-ASSETS> 66,438,937
<DEPOSITS> 49,194,746
<SHORT-TERM> 0
<LIABILITIES-OTHER> 215,538
<LONG-TERM> 0
0
0
<COMMON> 10,758
<OTHER-SE> 17,017,895
<TOTAL-LIABILITIES-AND-EQUITY> 66,438,937
<INTEREST-LOAN> 1,357,905
<INTEREST-INVEST> 3,192,892
<INTEREST-OTHER> 159,387
<INTEREST-TOTAL> 4,710,184
<INTEREST-DEPOSIT> 2,653,630
<INTEREST-EXPENSE> 2,653,630
<INTEREST-INCOME-NET> 2,056,554
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 2,000
<EXPENSE-OTHER> 1,312,909<F1>
<INCOME-PRETAX> 772,978
<INCOME-PRE-EXTRAORDINARY> 772,978
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 529,582
<EPS-PRIMARY> .48
<EPS-DILUTED> .48
<YIELD-ACTUAL> 2.96
<LOANS-NON> 81,000
<LOANS-PAST> 128,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 80,758
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 80,758
<ALLOWANCE-DOMESTIC> 80,758
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>9.04(14) INCLUDES SAIF SPECIAL ASSESSMENT OF $335,937
</FN>
</TABLE>
