SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] Annual report pursuant to section 13 or 15 (d) of the Securities Exchange
Act of 1934 (Fee required)
For the fiscal year ended June 30, 1997
---------------
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 (No fee required)
For the transition period from to .
------------ ------------
Commission File No. 0-26510
NCF FINANCIAL CORPORATION
---------------------------------------------------------
(Name of Small Business Issuer in Its Charter)
Delaware 61-1285330
- --------------------------------------------- ------------------
(State or Other Jurisdiction of Incorporation I.R.S. Employer
or Organization) Identification No.
106 A W. John Rowan Blvd., Bardstown, Kentucky 40004
- ---------------------------------------------- -------------------
(Address of Principal Executive Offices (Zip Code)
Issuer's Telephone Number, Including Area Code: (502) 348-9278
---------------
Securities registered under to Section 12(b) of the Exchange Act: None
------
Securities registered under to Section 12(g) of the Exchange Act:
Common Stock, par value $0.10 per share
---------------------------------------
(Title of Class)
Check whether the issuer: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
YES X NO .
----- ----
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B 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. [ ]
State issuer's revenues for its most recent fiscal year. $2,592,371
------------
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based on the average bid and asked price of the registrant's
Common Stock on September 19, 1997 was $9.13 million ($14.375 per share based on
635,330 shares of Common Stock).
As of September 19, 1997, there were issued and outstanding 792,609 shares
of the registrant's Common Stock.
Transition Small Business Disclosure Format (check one):
YES NO X
--- ----
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the Fiscal Year
ended June 30, 1997. (Part II)
2. Portions of the Proxy Statement for the Annual Meeting of Stockholders
for the Fiscal Year ended June 30, 1997. (Part III)
1
<PAGE>
PART I
Item 1. Business
- -----------------
Business of the Company
NCF Financial Corporation (the "Company") is a bank holding company
incorporated under Delaware law. The Company owns 100% of the common stock of
NCF Bank & Trust Co. (the "Bank"). Organized in June 1995 at the direction of
the predecessor of the Bank, the Company acquired all of the capital stock that
the predecessor of the Bank issued in a conversion during October 1995 from the
mutual to stock form of ownership (the "Conversion"). The principal business of
the Company is the operation of the Bank and the Company does not engage in any
significant unrelated activities. Accordingly, references throughout this
document to the operation of the Bank include, unless inappropriate, the
operation of the Company.
Business of the Bank
The Bank is a state chartered stock commercial bank headquartered in
Bardstown, Kentucky. The Bank is a wholly owned subsidiary of the Company. The
Bank was founded in 1925 under the name "Nelson County Building and Loan Bank."
During the Conversion, the Bank, then known as "Nelson County Federal Savings
and Loan Association," converted from a federally chartered mutual savings
association to a federally chartered stock savings association. In July 1996 the
Bank changed its name to "Nelson County Federal Savings Bank." In April 1997,
the Bank changed its charter to that of a commercial bank chartered by the
Commonwealth of Kentucky and changed its name to "NCF Bank & Trust Co."
The Bank's deposits had been federally insured by the Savings Association
Insurance Fund ("SAIF") and its predecessor, the Federal Savings and Loan
Insurance Corporation, since 1973. The Bank is a member of the Federal Home Loan
Bank (the "FHLB") of Cincinnati. The Bank has one subsidiary, Nelson Service
Corporation ("NSC"), which has no operating activity other than to own stock in
a third party service bureau.
The Bank is primarily engaged in attracting deposits from the general
public and using those funds to originate real estate loans on
one-to-four-family residences and to a lesser extent, residential construction,
multi-family real estate and consumer loans. In addition, the Bank holds
interest earning deposits in other financial institutions and invests in
mortgage-backed securities and investment securities. The Bank offers its
customers adjustable-rate mortgage loans as well as residential construction,
multi-family real estate and consumer loans. The Bank does not typically
originate fixed-rate loans of any kind, relying instead on adjustable-rate loans
that annually reprice. For its mortgage loan portfolio, the Bank originates and
retains adjustable-rate loans and does not purchase or sell mortgage loans.
The principal sources of funds for the Bank's lending activities are
deposits and the amortization, repayment and maturity of loans, and FHLB
advances. Principal sources of income are interest on loans and principal
expense is interest paid on deposits.
Market Area and Competition
Nelson County, Kentucky is the Bank's primary market area. The local
economy is economically diverse with a significant number of residents employed
by a greeting card company, alcohol distillers, automotive parts factories, and
other manufactures and government offices. Although the surrounding
2
<PAGE>
area is affected by agriculture, the Bank does not make loans secured by farm
real estate or make farm operating loans.
Economic growth in the Bank's market area remains dependent upon the local
economy. In addition, the deposit and loan activity of the Bank is significantly
affected by economic conditions in its market area.
The Bank is one of five financial institutions serving its market area and
must also compete with investment and mortgage bankers. The competition for
deposit products comes from a savings association with a branch in the Bank's
market area, local independent community banks, and credit unions. Deposit
competition also includes a number of insurance products sold by local agents
and investment products such as mutual funds and other securities sold by local
and regional brokers. Loan competition varies depending upon market conditions
and includes a savings association with a branch in the Bank's market area, two
local banks, and mortgage bankers who serve the area with a field sales staff.
Lending Activities
General. The Bank's loan portfolio predominantly consists of
adjustable-rate mortgage loans secured by one-to-four-family residences and, to
a lesser extent, residential construction, multi-family real estate and consumer
loans. The Bank does not purchase or sell mortgage loans.
Analysis of Loan Portfolio. Set forth below is selected data relating to
the composition of the Company's loan portfolio by type of loan and type of
security on the dates indicated:
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1996
--------------------- --------------------
Type of Loan: $ % $ %
- ------------ ----- ----- ----- -----
(Dollars in Thousands)
Real estate loans:
<S> <C> <C> <C> <C>
Construction (1) ............................ $ 3,673 13.58% $ 3,314 11.48%
One-to-four-family .......................... 23,438 86.66 25,662 88.92
Multi-family residential .................... 460 1.70 151 .52
Non-residential ............................. 629 2.33 315 1.09
Consumer loans:
Other ....................................... 60 .22 -- --
Share loans ................................. 103 .38 69 .24
------- ------ ------- ------
Gross loans ................................... 28,363 104.87 29,511 102.25
Less:
Loans in process ............................ 1,133 4.19 481 1.67
Net deferred loan origination fees and costs. 7 .03 8 .03
Allowance for loan losses ................... 177 .65 161 .55
------- ------ ------- ------
Total loans, net .............................. $27,046 100.00% $28,861 100.00%
======= ====== ======= ======
</TABLE>
- -----------------
(1) Consists only of loans secured by one-to-four-
family residences
3
<PAGE>
Average Balances, Interest, Yields and Rates
The following table sets forth certain information relating to the
Company's average balance sheet and reflects the average yield on assets and
average cost of liabilities for the periods indicated and the average yields
earned and rates paid. Such yields and costs are derived by dividing income or
expense by the average balance of assets or liabilities, respectively, for the
periods presented. Average balances are derived from month-end balances.
Management does not believe that the use of month-end balances instead of daily
average balances has caused any material differences in the information
presented. The table also presents information for the periods and at the date
indicated with respect to the difference between the average yield earned on
interest-earning assets and average rate paid on interest-bearing liabilities,
or "interest rate spread," which savings institutions have traditionally used as
an indicator of profitability. Another indicator of an institution's net
interest income is its "net interest margin," which is its net interest income
divided by the average balance of interest-earning assets. Net interest income
is affected by the interest rate spread and by the relative amounts of
interest-earning assets and interest-bearing liabilities. When interest-earning
assets approximate or exceed interest-bearing liabilities, any positive interest
rate spread will generate net interest income.
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------------------------
1997 1996
---------------------------------- ------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
---------- -------- ---------- ------- -------- ----------
Interest-earning assets: (Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans receivable (1)......................... $ 28,098 $ 2,249 8.00% $28,056 $ 2,245 8.00%
Mortgage-backed securities................... 136 20 14.46 164 20 12.28
Short-term investments and other interest-
earning assets............................. 5,166(2) 274 5.30 4,494 230 5.12
FHLB stock................................... 426 30 7.00 397 28 6.96
------ ------ ------ ------
Total interest-earning assets................ 33,826 $ 2,573 7.61 33,111 $ 2,523 7.62
====== ======
Non-interest-earning assets.................... 1,585 1,232
------- -------
Total assets................................. $ 35,411 $34,343
======= ======
Interest-bearing liabilities:
Deposits..................................... $ 22,271 $ 1,043 4.68 $23,073 $ 1,105 4.79
Borrowings................................... -- -- -- 217 17 8.13
------- ------ ------- --------
Total interest-bearing liabilities............. 22,271 $ 1,043 4.68 23,290 $ 1,122 4.82
====== ======
Non-interest-bearing liabilities............... 1,180 1,592
------- ------
Total liabilities............................ 23,451 24,882
Stockholder's equity........................... 11,960 9,461
------- ------
Total liabilities and stockholder's equity... $ 35,411 $34,343
======= ======
Net interest income............................ $ 1,530 $ 1,401
====== ======
Interest rate spread(3)........................ 2.93 2.80
Net interest margin(4)......................... 4.52 4.23
Average interest-earning assets as a percentage
of average interest-bearing liabilities...... 151.89 142.17
</TABLE>
(Footnotes on following page.)
4
<PAGE>
- ---------------------------------
(1) Average balances include non-accrual loans.
(2) Includes interest-earning deposits in other financial institutions.
(3) Interest-rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(4) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
Rate/Volume Analysis
The table below sets forth certain information regarding changes in
interest income and interest expense of the Company for 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
(changes in average volume multiplied by old rate); (ii) changes in rates
(changes in rate multiplied by old average volume); (iii) changes in rate-volume
(changes in rate multiplied by the change in average volume).
<TABLE>
<CAPTION>
Year Ended June 30, Year Ended June 30,
-------------------------------- ---------------------------------
1997 vs. 1996 1996 vs. 1995
-------------------------------- ---------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
-------------------------------- ---------------------------------
Rate/ Rate/
Volume Rate Volume Net Volume Rate Volume Net
------ ---- ------ --- ------ ---- ------ ---
(In Thousands)
Interest income:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable............. $ 3 $ -- $ 1 $ 4 $ 150 $ 185 $ 14 $ 349
Mortgage-backed securities... (3) 4 (1) -- (7) (1) -- (8)
Interest-earning assets...... 34 8 2 44 160 (4) (9) 147
FHLB stock................... 2 -- -- 2 2 2 -- 4
------ ------ ----- ----- ----- ----- ------ ------
Total....................... $ 36 $ 12 $ 2 $ 50 $ 305 $ 182 $ 5 $ 492
====== ====== ===== ===== ===== ===== ====== ======
Interest expense:
Savings accounts............. $ (38) $ (25) $ 1 $(62) $ 3 122 $ (1) $ 124
Other borrowings............. (17) -- -- (17) (15) 13 (8) (10)
----- ----- ----- ---- ---- ---- ----- -----
Total...................... $ (55) $ (25) $ 1 $(79) $(12) $ 135 $ (9) $ 114
====== ===== ===== ==== ==== ===== ===== =====
Net change in net interest
income...................... $ 91 $ 37 $ 1 $129 $317 $ 47 $ 14 $ 378
====== ===== ===== ==== ===== ===== ====== ======
</TABLE>
5
<PAGE>
Asset/Liability Management
The Company monitors its interest rate risk, or sensitivity of its net
interest income to changes in interest rates, since the level of such risk may
affect certain aspects of its operating strategies. Net interest income is
subject to volatility due to a mismatch in the timing of maturity or repricing
of interest-earning assets and interest-bearing liabilities.
During periods of increasing interest rates, the Bank's interest rate
sensitive liabilities would reprice faster than its interest rate sensitive
assets (repricing periods on adjustable-rate loans affect the repricing of
interest rate sensitive assets, with longer repricing periods delaying the
repricing of such assets more than shorter repricing periods would delay the
repricing of such assets), causing a decline in the Bank's interest rate spread
and margin. This would result from an increase in the Bank's cost of funds that
would not be immediately offset by an increase in its yield on funds. An
increase in the cost of funds without a equivalent increase in the yield on
funds would tend to reduce net interest income. However, the Company feels it
has implemented a strategy to partially offset the possibility of increasing
rates by establishing a policy that substantially all loans carry a one-year
adjustable rate. This helps to minimize the time period in which the Company is
exposed to short-term interest rate risk. Also, the Company and the Bank
maintain liquidity levels in excess of regulatory requirements, which allows for
alternative investments to improve interest rate sensitivity. The Bank is
planning to increase the availability of non-interest bearing demand deposits to
its customers in the future which the Bank believes will be beneficial to its
interest spread and interest margin.
Loan Maturity Tables
The following table sets forth the maturity of the Bank's loan portfolio
at June 30, 1997, based on contractual maturities, including schedule repayments
of principal. Demand loans, loans having no stated schedule of repayments and no
stated maturity, and overdrafts are reported as due in one year or less.
<TABLE>
<CAPTION>
Due after
Due within 1 through Due after
1 year 5 years 5 years Total
----------- --------- --------- -----
(In Thousands)
Real estate:
<S> <C> <C> <C> <C>
One-to-four family ..... $ 476 $ 1,330 $21,632 $23,438
Construction ........... 2,748 -- 925 3,673
Multi-family residential -- 4 456 460
Non-residential ........ -- 63 566 629
Consumer ................. 149 14 -- 163
------- ------- ------- -------
Total .................. $ 3,373 $ 1,411 $23,579 $28,363
======= ======= ======= =======
</TABLE>
6
<PAGE>
The following table sets forth the dollar amount of all loans due after
June 30, 1998 which have predetermined interest rates and have floating or
adjustable interest rates.
<TABLE>
<CAPTION>
Predetermined Floating or
Rates Adjustable Rates
------------- ----------------
(In Thousands)
<S> <C> <C>
Real estate one-to-four-family $ 826 $22,136
Real estate construction ....... 480 445
Real estate multi-family ....... -- 460
Non-residential ................ 220 409
Consumer ....................... -- 14
------- -------
Total ........................ $ 1,526 $23,464
======= =======
</TABLE>
One-to-Four-Family Residential Loans. The Bank's primary lending activity
consists of the origination of one-to-four-family residential mortgage loans
secured by property located in the Bank's primary market area. The Bank
generally originates one-to-four-family residential mortgage loans in amounts up
to 85% of the lesser of the appraised value or selling price of the mortgaged
property. To a very limited extent, the Bank may originate a mortgage loan in an
amount up to 90% of the lesser of the appraised value or selling price of
mortgaged property without requiring private mortgage insurance for the
borrower. The Bank originates and retains adjustable-rate loans. The Bank ceased
originating long term fixed-rate loans in 1979 although fixed-rate loans remain
in the loan portfolio and the Bank may occasionally originate a shorter term
fixed-rate loan to an existing borrower.
The Bank requires for all adjustable rate mortgage loans that the borrower
qualify at the fully indexed rate. The Bank's adjustable rate loans provide for
periodic interest rate adjustments of 1% to 2% with a maximum adjustment over
the term of the loan between 2% and 5%. Adjustable rate loans typically reprice
every year, and provide for terms of up to 30 years with most loans having terms
of between 20 and 25 years. The Bank does not originate loans with initial
interest rates set below market rates ("teaser rates").
The Bank offers adjustable-rate loans using a national average contract
interest rate index, although other indices have been used in the past. Interest
rates charged on mortgage loans are competitively priced based on market
conditions and the Bank's cost of funds. Generally, the Bank's standard
underwriting guidelines for mortgage loans conform to FHLMC guidelines. It is
the current policy of the Bank to remain a portfolio lender. The Bank does not
charge origination fees. At June 30, 1997, the Bank did not service loans for
others.
Adjustable-rate mortgage loans decrease the risks associated with changes
in interest rates by more closely reflecting these changes, but involve other
risks because as interest rates increase, the underlying payments by the
borrower increase, thus increasing the potential for default. At the same time,
the marketability of the underlying collateral may be adversely affected by
higher interest rates. Upward adjustment of the contractual interest rate is
also limited by the adjustable-rate mortgage loan documents, thereby potentially
limiting their effectiveness during periods of rising interest rates. These
risks have not had an adverse effect on the Bank during the past five years.
7
<PAGE>
Residential Construction Loans. Residential construction loans are made on
one-to-four-family residential property to the individuals who will be the
owners and occupants upon completion of construction. These loans are made on a
long term basis and are classified as construction/permanent loans, usually with
no principal payments required during the first six months, after which the
payments are set at an amount that will amortize over the terms of the loan. The
maximum loan to value ratio is 85%. Because residential construction loans are
not rewritten if permanent financing is obtained from the Bank, these loans are
made on terms similar to those of the Bank's single family residential loans and
may be amortized over terms of up to 30 years.
In addition to loans originated for the construction of a residence for
which the ultimate purchaser has been identified, the Bank originates
speculative loans to residential builders who have established business
relationships with the Bank. These speculative loans are typically made for a 12
month period and may not require any interest or principal payments during the
term of the loan. In underwriting such loans, the Bank considers the number of
units that the builder has on a speculative bid basis that remain unsold. The
Bank's experience during the past 24 years has been that most speculative loans
are repaired well within the twelve month period. Speculative loans are
generally originated with a loan to value ratio that does not exceed 85%.
Construction lending is generally considered to involve a higher degree of
credit risk than long term financing of residential properties. The Bank's risk
of loss on a construction loan is dependent largely upon the accuracy of the
initial estimate of the property's value at completion of construction or
development and the estimated cost of construction. If the estimate of
construction cost and the marketability of the property upon completion of the
project prove to be inaccurate, the Bank may be compelled to advance additional
funds to complete the development. Furthermore, if the estimate of value proves
to be inaccurate, the Bank may be confronted, at or prior to the maturity of the
loan, with a property with a value that is insufficient to assure full
repayment. For speculative loans originated to builders, the ability of the
builder to sell completed dwelling units will depend, among other things, on
demand, pricing the availability of comparable properties, and economic
conditions.
Non-Residential Loans. At June 30, 1997, the non-residential real estate
portfolio consisted of two commercial real estate loans and several loans
secured by unimproved real estate. Loans secured by unimproved real estate are
originated in amounts up to 75% of the appraised value and are originated with
terms of up to five years. Once repaid, single, family residences are often
constructed on the lots securing these loans. The Bank has seldom originated
commercial real estate loans and since the Conversion, it is the Bank's policy
not to originate commercial real estate loans.
Multi-Family Loans. The Bank also makes adjustable-rate multi-family
loans, including loans on apartment complexes. Multi-family loans generally
provide higher interest rates that can be obtained from single-family mortgage
loans. Multi-family lending, however, entails significant additional risks
compared with one-to-four-family residential lending. For example, multi-family
loans typically involve larger loan balances to single borrowers or groups of
related borrowers, the payment experience on such loans typically is dependent
on the successful operation of the real estate project, and these risks can be
significantly impacted by supply and demand conditions in the market for
multi-family residential units and commercial office, retail and warehouse
space.
8
<PAGE>
Consumer Loans. The Bank originates automobile, recreational vehicle and
share loans. Automobile and recreational vehicle loans are issued using fixed
rate terms for periods of three to five years, depending upon whether the
collateral is new or used. Generally, the underlying collateral is valued based
on the dealer sticker price or the NADA loan value. Share loans are only made
when secured by a savings account in the Bank (share loans) and generally have
rates that adjust with the rate on the underlying account and are typically
between one and two percent above the rate on the underlying savings account.
Share loans are offered subject to a 90% loan to collateral value limit.
Although the Bank also makes home equity loans, these loans are secured by liens
on primary residences and are categorized as single family residential loans.
Loan Commitments. The Bank issues verbal commitments to prospective
borrowers on all approved real estate loans. Generally, the commitment requires
acceptance within 30 days of the date of issuance. At June 30, 1997, the Bank
had $450,000 of commitments to cover originations and $1,132,277 in undisbursed
funds for loans in process. Management believes that virtually all of the Bank's
commitments will be funded.
Loans to One Borrower. Regulations limit loans-to-one borrower in an
amount equal to 20% of paid-in capital and actual surplus of the Bank. The Bank
is authorized to lend up to an additional 10% of paid-in capital and actual
surplus if the loan is fully secured by readily marketable collateral with a
cash value exceeding the amounts of the loan. The Bank's maximum loan-to-one
borrower limit at June 30, 1997 was approximately $1,721,000 at June 30, 1997
and approximately $2,582,000 for such fully secured loans.
At June 30, 1997, the Bank's largest amount of loans to one borrower were
all performing residential real estate loans aggregating $497,075, secured by
single-family residential rental properties located in the Bank's market area.
Non-Performing and Problem Assets
Loan Delinquencies. Loans are reviewed on a monthly basis and are
generally placed on a non-accrual status when the loans becomes more than 90
days delinquent or when, in the opinion of management, the collection of
additional interest is doubtful. Interest accrued and unpaid at the time a loan
is placed on non-accrual status is charged against interest income. Subsequent
interest payments, if any, are either applied to the outstanding principal
balance or recorded as interest income, depending on the assessment of the
ultimate collectibility of the loan.
9
<PAGE>
Non-Performing Assets. The following table sets forth information
regarding non-accrual loans, real estate owned, and certain other repossessed
assets and loans. As of the dates indicated, the Bank had no loans categorized
as troubled debt restructuring within the meaning of SFAS 15.
<TABLE>
<CAPTION>
At June 30,
-------------------
1997 1996
--------- -------
Loans accounted for on a non-accrual basis: (1)
Real Estate:
<S> <C> <C>
Construction ................................. $ -- $ 704
One-to-four-family ........................... 191 646
Non-residential .............................. -- --
--------- ------
Total ...................................... $ 191 $1,350
========= ======
Accruing loans which are contractually past due
90 days or more:
Real estate:
Construction ................................. $ -- $ --
One-to-four-family ........................... -- --
Non-residential .............................. -- --
--------- ------
Total ...................................... $ -- $ --
========= ======
Total non-performing loans ................. $ 191 $1,350
======
Real estate owned (2) .......................... $ 724 $ --
========= ======
Total non-performing assets ................ $ 915 $1,350
========= ======
Non-performing loans to total loans ............ .67% 4.57%
========= ======
Non-performing assets to total assets .......... 2.66% 3.87%
========= ======
Loans modified in troubled debt restructuring... $ -- $ --
========= ======
</TABLE>
- ----------------------
(1) Non-accrual status denotes loans on which are contractually past due 90
days or more. It is management's policy to place all loans past due 90
days in non-accrual status.
(2) Real estate owned represents property acquired by the Bank through
foreclosure or repossession or loans that are accounted for as an
in-substance foreclosure. This property is carried at the lower of its
fair market value or net realizable value.
Interest income that would have been recorded on loans accounted for on a
non-accrual basis under the original terms of such loans was $97,534 for the
year ended June 30, 1997. Amounts included in the Bank's interest income for the
year ended June 30, 1997 was $0.
Classified Assets. The Bank maintains a classification system for problem
assets of insured institutions which covers all problem assets. Under this
classification system, problem assets of insured institutions are classified as
"substandard," "doubtful," or "loss." An asset is considered substandard if it
is inadequately protected by the current net worth and paying capacity of the
obligor or of the collateral pledged, if any. Substandard assets include those
characterized by the "distinct possibility" that the insured institution will
sustain "some loss" if the deficiencies are not corrected. Assets classified as
doubtful have all of the weaknesses inherent in those classified substandard,
with the added characteristic that the weaknesses present make "collection or
liquidation in full," on the basis of currently existing facts, conditions, and
values, "highly questionable and improbable." Assets classified as loss are
those
10
<PAGE>
considered "uncollectible" and of such little value that their continuance as
assets without the establishment of a specific loss reserve is not warranted.
Assets may be designated "special mention" because of potential weakness that do
not currently warrant classification in one of the aforementioned categories.
At June 30, 1997, the Bank had $0 of assets classified as doubtful or
loss, $191,000 of assets classified as substandard loans and $0 of assets
classified as special mention loans.
Foreclosed Real Estate. Real estate acquired by the Bank as a result of
foreclosure or by deed in lieu of foreclosure is classified as real estate owned
until it is sold. When property is acquired it is recorded at the fair value at
the date of foreclosure less estimated costs of disposition.
The Bank records loans as in-substance foreclosures if the borrower has
little or no equity in the property based upon its documented current fair
value, the Bank can only expect repayment of the loan to come from the sale of
the property and if the borrower has effectively abandoned control of the
collateral or has continued to retain control of the collateral but because of
the current financial status of the borrower, it is doubtful the borrower will
be able to repay the loan in the foreseeable future. In- substance foreclosures
are accounted for as real estate acquired through foreclosure, however, title to
the collateral has not been acquired by the Bank. There may be significant other
expenses incurred such as legal and other extraordinary servicing costs involved
with in substance foreclosures. The Bank had $306,736 of foreclosed real estate
and $417,750 of in-substance foreclosures at June 30, 1997.
Allowances for Loan Losses. It is management's policy to provide for
losses on unidentified loans in its loan portfolio. A provision for loan losses
is charged to operations based on management's evaluation of the potential
losses that may be incurred in the Bank's loan portfolio. Such evaluation, which
includes a review of all loans of which full collectibility of interest and
principal may not be reasonably assured, considers 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, estimated value of any underlying
collateral, and current economic conditions. During the fiscal year ended June
30, 1997, the Bank provided $16,000 for loan losses based on management's
decision to expand consumer lending. The loan loss allowance at June 30, 1997 is
equal to .62%. At June 30, 1997, 95.6% of total loans were collateralized by
one-to-four family dwellings on real estate located in the market area.
11
<PAGE>
The following tables sets forth information with respect to the Company's
allowance for loan losses at the dates indicated:
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------
1997 1996
--------- --------
(In Thousands)
<S> <C> <C>
Balance at beginning of period...................... $ 161 $ 100
Loans charged off:
Real estate -- one-to-four-family................. -- --
Real estate -- construction....................... -- --
Non-residential................................... -- --
Consumer (share loans)............................ -- --
----- ------
Total charge-offs................................... -- --
----- ------
Recoveries:
Real estate -- one-to-four-family................. -- --
Real estate -- construction....................... -- --
Non-residential................................... -- --
Consumer (share loans)............................ -- --
----- ------
Total recoveries.................................... -- --
----- ------
Net loans charged-off............................... -- --
Provision for loan losses........................... 16 61
----- ------
Balance at end of period............................ $ 177 $ 161
===== ======
Net charge-offs as a percentage of average
loans outstanding during the period............... --% --%
</TABLE>
12
<PAGE>
The following table sets forth the allocation of the Bank's allowance for
loan losses by loan category and the percent of loans in each category to total
loans receivable at the dates indicated. The portion of the loan loss allowance
allocated to each loan category does not represent the total available for
future losses that may occur within the loan category because the total loan
loss allowance is a valuation reserve applicable to the entire loan portfolio.
The distribution of the Bank's allowance on losses at the dates indicated is
summarized as follows:
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------------
1997 1996
----------------------- ----------------------
% of Loans in % of Loans in
Each Category Each Category
Amount to Total Loans Amount to Total Loans
------ -------------- ------ --------------
Real estate:
<S> <C> <C> <C> <C>
One-to-four-family............... $ 177 86.66% $ 100 88.92%
Construction..................... -- 13.58 61 11.48
Multi-family residential......... -- 1.70 -- 0.52
Non-Residential.................. -- 2.33 -- 1.09
Consumer........................... -- 0.60 -- 0.24
----- ----
Total allowance for loan losses.... $ 177 $ 161
===== ====
</TABLE>
Mortgage-Backed Securities and Investment Activities
General. The investment policy of the Bank is to manage the utilization of
excess funds and to provide for liquidity needs of the Bank as loan demands. The
Bank has generally maintained 90% of its investment portfolio in liquid assets.
At June 30, 1997, the Bank had an investment portfolio of approximately
$5,568,818, consisting primarily of interest-earning accounts.
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards ("SFAS") No. 115 "Accounting for Certain
Investments in Debt and Equity Securities. SFAS No. 115 requires the Bank to
classify all of its investments in debt and equity securities ("securities")
into three categories. Debt securities which management has the positive intent
and ability to hold until maturity are to be classified as held-to-maturity.
Securities that are bought and held principally for the purpose of selling them
in the near term are to be classified as trading securities. All other
securities are to be classified as available-for-sale securities.
Unrealized holding gains and losses for trading securities are to be
included in earnings. Unrealized gains and losses for available-for-sale
securities are to be excluded from earnings and reported net of income tax
effect as a separate component of shareholders' equity until realized.
Investments classified as held to maturity are to be accounted for at amortized
cost. The Bank adopted SFAS No. 115 effective April 1, 1994, and designated its
investment and mortgage-backed securities portfolio into the required three
categories. As a result of SFAS No. 115, the Bank reviewed and classified its
securities as held for investment.
SFAS No. 115 requires the Bank to account for a portion of its holding of
debt securities at market value (as opposed to amortized cost) and may result in
greater volatility in its earnings and capital position. It also may discourage
investment in longer term debt securities, which tend to have higher
13
<PAGE>
yields than short term debt securities, and hence reduce the earnings of the
Bank. No securities can be moved from a particular category without Board
approval.
The market value of investments and mortgage-backed securities held to
maturity at June 30, 1997, was $5,589,896. The Bank anticipates having the
ability to fund all of its investing activities from funds held on deposit at
the FHLB. The Bank will continue to seek high quality investments with short to
intermediate maturities and duration from one to five years.
The Revenue Reconciliation Act of 1993 added a Section 475 to the Internal
Revenue Code. Section 475 is a mark-to-market tax provision that is different
from SFAS No. 115. The term "securities" in the tax statute includes not just
traditional debt and equity securities, but mortgages as well. Section 475 and
the temporary regulations issued thereunder apply to "dealer" institutions that
regularly buy or sell more than a nominal amount of securities in the ordinary
course of a trade or business. Section 475 requires the Bank to identify
securities held for sale within the meaning of the tax code and include
unrealized gains or losses on related security transactions with its fiscal tax
return. The tax reporting of unrealized gains and losses on securities held for
sale as defined by Section 475 and the related regulations, if different from
SFAS No. 115, is a temporary difference as defined under SFAS No. 109 and the
recording of a related deferred tax liability or asset will not affect generally
accepted accounting principles ("GAAP") basis net income. At June 30, 1997, the
Bank did not have any investments subject to Section 475.
Interest-Earning Accounts
At June 30, 1997, the Company held $4,994,761 in interest-earning demand
deposits in other financial institutions, principally the FHLB of Cincinnati.
The Company maintains these accounts in order to maintain liquidity and improve
the interest-rate sensitivity of its assets.
Mortgage-Backed Securities
To supplement lending activities, the Bank invests in residential
mortgage-backed securities. Mortgage-backed securities can serve as collateral
for borrowings (although the Bank has not used them as such) and, through
repayments, as a source of liquidity.
At June 30, 1997, the mortgage-backed securities portfolio had a market
value of $153,435 and an amortized cost of $132,357. Because the entire
portfolio is classified as held to maturity (the Bank had no mortgage-backed
securities classified as available for sale at June 30, 1997), the portfolio is
recorded at amortized cost.
Mortgage-backed securities represent a participation interest in a pool of
single-family mortgages, the principal and interest payments on which are passed
from the mortgage originators, through intermediaries (generally
quasi-governmental agencies) that pool and repackage the participation interests
in the form of securities, to investors such as the Bank. Such
quasi-governmental agencies, which guarantee the payment of principal and
interest to investors, primarily include FHLMC, GNMA, and FNMA.
GNMA is a government agency within HUD which is intended to help finance
government assisted housing programs. GNMA guarantees the timely payment of
principal and interest, and GNMA securities are backed by the full faith and
credit of the United States Government. Because GNMA was established to provide
support for low- and middle-income housing, there are limits to the maximum size
of loans that qualify for this program. GNMA limits its maximum loan size to
$114,000 for VA loans
14
<PAGE>
and, on average, $67,500 for FHA loans. To accommodate larger-sized loans, and
loans that, for other reasons, do not conform to the agency programs, a number
of private institutions have established their own home-loan origination and
securitization 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 mortgages or
adjustable-rate mortgage loans. Mortgage-backed securities are generally
referred to as mortgage participation certificates or pass-through certificates.
As a result, the interest rate 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 is equal to the life of the underlying mortgages. Mortgage-backed
securities issued by FHLMC, FNMA, and GNMA make up a majority of the
pass-through certificates market.
Investment Portfolio. The following table sets forth the carrying value of
the Bank's short-term investments, FHLB stock, and mortgage-backed securities at
the dates indicated.
<TABLE>
<CAPTION>
At June 30,
-----------------------
1997 1996
--------- -------
(In Thousands)
<S> <C> <C>
Interest-earning deposits......... $ 4,995 $ 4,968
FHLB stock........................ 442 412
Mortgage-backed securities........ 132 143
------ ------
Total investments........... $ 5,569 $ 5,523
====== =====
</TABLE>
The following table sets forth information regarding the scheduled
maturities, amortized costs, market value and weighted average yields for the
Bank's mortgage-backed securities at June 30, 1997. The Bank's mortgage-backed
securities are all issued by GNMA and mature in the year 2013. Expected
maturities will differ from contractual maturities due to schedule repayments
and because borrowers may have the right to call or prepay obligations with or
without prepayment penalties. The stated yield on mortgage-backed securities at
June 30, 1997 was 11.5%. The following table does not take into consideration
the effects of scheduled repayments or the effects of possible prepayments.
<TABLE>
<CAPTION>
At June 30, 1997
-----------------------------------------------------
More than Ten Years Total Investment Portfolio
------------------- -----------------------------
Carrying Average Carrying Fair Average
Value Yield Value Value Yield
-------- ------- -------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
GNMA..................... $ 132 11.5% $ 132 $ 153 11.5%
===== ==== ===== ===== ====
</TABLE>
15
<PAGE>
Sources of Funds
General. Deposits are the major external source of the Bank's funds for
lending and other investment purposes. The Bank derives funds from amortization
and prepayment of loans and, to a much lesser extent, maturities of investment
securities, borrowings, mortgage-backed securities and operations. Scheduled
loan principal repayments are a relatively stable source of funds, while deposit
inflows and outflows and loan prepayments are significantly influenced by
general interest rates and market conditions. The Bank had $0 in FHLB advances
at June 30, 1997.
Deposits. Consumer and commercial deposits are attracted principally from
within the Bank's primary market area through the offering of a selection of
deposit instruments including regular savings accounts, money market accounts,
and term certificate accounts. The Bank also offers IRA accounts. Deposit
account terms vary according to the minimum balance required, the time period
the funds must remain on deposit, and the interest rate, among other factors. As
of June 30, 1997, the Bank had no brokered deposits.
Jumbo Certificates of Deposit. The following table indicates the amount of
the Bank's certificates of deposit of $100,000 or more by time remaining until
maturity as of June 30, 1997.
<TABLE>
<CAPTION>
Certificates
Maturity Period of Deposit
- --------------- --------------
(In Thousands)
<S> <C>
Within three months............. $ 408
Three through six months........ 400
Six through twelve months....... 300
Over twelve months.............. 330
------
Total........................ $ 1,438
======
</TABLE>
Borrowings
The Bank may obtain advances from the FHLB of Cincinnati to supplement its
supply of lendable funds. Advances from the FHLB of Cincinnati are typically
secured by a pledge of the Bank's stock in the FHLB of Cincinnati and a portion
of the Bank's first mortgage loans and certain other assets. Each FHLB credit
program has its own interest rate, which may be fixed or variable, and range of
maturities. The Bank, if the need arises, may also access the Federal Reserve
Bank discount window to supplement its supply of lendable funds and to meet
deposit withdrawal requirements. At June 30, 1997, the Bank had no borrowings
from the FHLB of Cincinnati.
Employees
Substantially all of the activities of the Company are conducted through
the Bank, therefore, at June 30, 1997, the Company did not have any salaried
employees.
As of June 30, 1997, the Bank had seven full-time employees. None of the
Bank's employees are represented by a collective bargaining group.
16
<PAGE>
Regulation
Set forth below is a brief description of certain laws which related to
the regulation of the Company and the Bank. The description does not purport to
be complete and is qualified in its entirety by reference to applicable laws and
regulations.
Company Regulation. As a registered bank holding company, the Company is
regulated under the Bank Holding Company Act (the "Act") and is subject to
supervision and regular inspection by the Board of Governors of the Federal
Reserve System ("Federal Reserve Board"). The Act requires, among other things,
the prior approval of the Federal Reserve Board in any case where the Company
proposes to (i) acquire all or substantially all of the assets of any bank, (ii)
acquire direct or indirect ownership or control of more than 5 percent of the
voting shares of any bank or (iii) merge or consolidate with any bank holding
company.
Under the Act, the Company is prohibited, with certain exceptions, from
acquiring direct or indirect ownership or control of more than 5% of any class
of voting shares of any non-banking corporation. Further, the Company may not
engage in any business other than managing and controlling banks or furnishing
certain specified services to subsidiaries, and may not acquire voting control
of non-banking corporations except those corporations engaged in businesses or
furnishing services which the Federal Reserve Board deems to be so closely
related to banking as "to be a proper incident thereto." The Federal Reserve
Board has determined that a number of activities meet this standard including
making and servicing loans; performing certain fiduciary functions; leasing real
and personal property; underwriting an dealing in government obligations and
certain money market instruments; underwriting and dealing, to a limited extent,
in corporate debt obligations and other securities that banks may not deal in;
providing foreign exchange advisory and transactional services; and owning,
controlling or operating a savings association, if the savings association
engages only in deposit-taking activities and lending and other activities that
are permissible for bank holding companies.
Bank holding companies and their subsidiary banks are also subject to the
provisions of the Community Reinvestment Act of 1977, as amended ("CRA"). Under
the CRA, each subsidiary bank's record in meeting the credit needs of the
community served by the bank, including low- and moderate- income neighborhoods,
is annually assessed by that bank's primary regulatory authority. When a bank
holding company applies for approval to acquire a bank or other bank holding
company, the Federal Reserve Board will review the assessment of each subsidiary
bank of the applicant bank holding company, and such records may be the basis
for denying the application.
Under the Federal Reserve Board policy, a bank holding company is expected
to act as a source of financial strength to each of its subsidiary banks and to
commit resources, including capital funds during periods of financial stress, to
support each such bank. Although this "source of strength" policy has been
challenged in litigation, the Federal Reserve Board continues to take the
position that it has the authority to enforce it. Consistent with its "source of
strength" policy for subsidiary banks, the Federal Reserve Board has stated
that, as a matter of prudent banking, a bank holding company generally should
not maintain a rate of cash dividends unless its net income available to common
shareholders has been sufficient to fund fully the dividends, and the
prospective rate of earnings retention appears to be consistent with the
company's capital needs, asset quality and overall financial condition.
Bank Regulation. The Bank is subject to supervision and examination by the
Federal Deposit Insurance Corporation (the "FDIC") and the Commonwealth of
Kentucky. The Bank is insured by, and therefore subject to regulations of, the
Federal Deposit Insurance Corporation ("FDIC"), and is also subject to
requirements and restrictions under federal and state law, including
requirements to maintain
17
<PAGE>
reserves against deposits, restrictions on the types and amounts of loans that
may be granted and the interest that may be charged thereon, and limitations on
the types of investments that may be made and the types of services that may be
offered. Numerous consumer laws and regulations also affect the operations of
the Bank including, among others, disclosure requirements, anti-discrimination
provisions, and substantive contractual limitations with respect to deposit
accounts. The banking agencies, together with the Departments of Justice and
Housing and Urban Development, also enforce compliance with community
reinvestment, anti-discrimination and other fair lending laws and regulations.
In addition to the impact of regulation, commercial banks are affected
significantly by the actions of the Federal Reserve Board as it attempts to
control money supply and credit availability in order to influence the economy.
The FDIC has the authority to prohibit the Bank, as a commercial bank,
from engaging in an unsafe or unsound practice in conducting its business. The
payment of dividends, depending upon the financial condition of the institution
in question, could be deemed to constitute such an unsafe or unsound practice,
and the regulatory agencies have indicated their view that it generally would be
an unsafe and unsound practice to pay dividends except out of current operating
earnings. The ability of the institutions to pay dividends in the future is
presently, and could be further influenced, among other things, by applicable
capital guidelines or by bank regulatory and supervisory policies.
The ability of a banking institution to make funds available to its parent
company is also subject to restrictions imposed by federal law. Generally, no
bank subsidiary may extend credit to the parent company on terms and under
circumstances which are not substantially the same as comparable extensions of
credit to non-affiliates. No extension of credit may be made to the parent
company which is in excess of 10 percent of the capital stock and surplus of
such bank subsidiary or in excess of 20 percent of the capital and surplus of
such bank subsidiary as to aggregate extensions of credit to the parent company
and its subsidiaries. In certain circumstances, federal regulatory authorities
may impose more restrictive limitations. Such extensions of credit, with limited
exceptions, must be fully secured by collateral.
The federal banking agencies possess broad powers to take corrective
action as deemed appropriate for an insured depository institution and its
holding company. The extent of these powers depends upon whether the institution
in question in considered "well capitalized", "adequately capitalized",
"undercapitalized" or "critically undercapitalized". At June 30, 1997, The Bank
exceeded the required ratios for classification as "well capitalized."
Generally, as an institution is deemed to be less well capitalized, the scope
and severity of the agencies' powers increase. The agencies' corrective powers
can include, among other things, requiring an insured financial institution to
adopt a capital restoration plan which cannot be approved unless guaranteed by
the institution's parent holding company; placing limits on asset growth and
restrictions on activities; placing restrictions on transactions with
affiliates; restricting the interest rate the institution may pay on deposits;
prohibiting the institution from accepting deposits from correspondent banks;
prohibiting the payment of principal interest on subordinated debt; prohibiting
the holding company from making capital distributions without regulatory
approval; and, ultimately, appointing a receiver for the institution. Business
activities may also be influenced by an institution's capital classification.
For instance, only a "well capitalized" depository institution may accept
brokered deposits without regulatory approval and an "adequately capitalized"
depository institution may accept brokered deposits only with prior regulatory
approval.
Prior to obtaining the charter of a commercial bank, the Bank was a
federally chartered savings association insured by the SAIF through the FDIC.
Although most commercial banks are insured by the Bank Insurance Fund ("BIF") of
the FDIC, the Bank did not elect at the time of the change in charter to change
that form of insurance due to the costs involved.
18
<PAGE>
The Bank's deposit accounts are insured by the SAIF to a maximum of
$100,000 for each insured member (as defined by law and regulation). Insurance
of deposits may be terminated by the FDIC upon a finding that the institution
has engaged in unsafe or unsound practices, is in an unsafe or unsound condition
to continue operations or has violated any applicable law, regulation, rule,
order or condition imposed by the FDIC or the institution's primary regulator.
The FDIC may also prohibit an insured depository institution from engaging in
any activity the FDIC determines to pose a serious threat to the SAIF.
The FDIC charges an annual assessment for the insurance of deposits based
on the risk a particular institution poses to its deposit insurance fund,
depending upon the institution's risk classification. This risk classification
is based on an institution's capital group and supervisory subgroup assignment.
In addition, the FDIC is authorized to increase deposit insurance rates on a
semi-annual basis if it determines that such action is necessary to cause the
balance in the SAIF to reach the designated reserve ratio of 1.25% of
SAIF-insured deposits within a reasonable period of time. The FDIC may impose
special assessments on SAIF members to repay amounts borrowed from the U.S.
Treasury or for any other reason deemed necessary by the FDIC. Prior to
September 30, 1996, the SAIF was substantially underfunded. Prior to September
30, 1996, members of the SAIF paid within a range of .23% to .31% of domestic
deposits and members of the BIF, predominantly commercial banks, were required
to pay substantially lower, or virtually no, federal deposit insurance premiums.
Effective September 30, 1996, federal law was revised to mandate a
one-time special assessment on SAIF members such as the Bank of approximately
.657% of deposits held on March 31, 1995. The Bank recorded a $153,000 pre-tax
expense for this assessment at September 30, 1996. Beginning January 1, 1997,
deposit insurance assessments for SAIF members were reduced to approximately
.064% of deposits on an annual basis; this rate may continue through the end of
1999. During this same period, BIF members are expected to be annually assessed
approximately .013% of deposits. Thereafter, assessments for BIF and SAIF
members should be the same and the SAIF and BIF may be merged. It is expected
that these continuing assessments for both SAIF and BIF members will be used to
repay outstanding Financing Corporation bond obligations. As a result of these
changes, beginning January 1, 1997, the rate of deposit insurance assessed the
Bank substantially declined.
Capital Guidelines. Under the risk-based capital guidelines applicable to
the Company and the Bank, the minimum guideline for the ratio of total capital
to risk-weighted assets (including certain off- balance-sheet activities) is 8
percent. At least half of the total capital must be "Tier 1" or core capital,
which primarily includes common shareholders' equity and qualifying preferred
stock, less goodwill and other disallowed tangibles. "Tier 2" or supplementary
capital includes, among other items, certain cumulative and limited-life
preferred stock, qualifying subordinated debt and the allowance for credit
losses, subject to certain limitations, less required deductions as prescribed
by regulation.
In addition, the federal bank regulators established leverage ratio (Tier
1 capital to total adjusted average assets) guidelines providing for a minimum
leverage ratio of 3 percent for bank holding companies and banks meeting certain
specified criteria, including that such institutions have the highest regulatory
examination rating and are not contemplating significant growth or expansion.
Institutions not meeting these criteria are expected to maintain a ratio which
exceeds the 3 percent minimum by at least 100 to 200 basis points. The federal
bank regulatory agencies may, however, set higher capital requirements when
particular circumstances warrant. Under the federal banking laws, failure to
meet the minimum regulatory capital requirements could subject a bank to a
variety of enforcement remedies available to federal bank regulatory agencies.
19
<PAGE>
At June 30, 1997, the respective total and Tier 1 risk-based capital
ratios and leverage ratios of the Bank and the Company exceeded the minimum
regulatory capital requirements.
Federal Home Loan Bank System. The Bank is a member of the FHLB of
Cincinnati, which is one of 12 regional FHLBs in the FHLB system that
administers the home financing credit function of savings associations. 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 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 or similar obligations at
the beginning of each year.
Federal Reserve System. The Federal Reserve Board requires all depository
institutions to maintain non-interest bearing reserves at specified levels
against their transaction accounts (primarily checking, NOW, and Super NOW
checking accounts) and non-personal time deposits. At June 30, 1997, the Bank
was in compliance with these Federal Reserve Board requirements.
Item 2. Description of Property
- -------------------------------
(a) Properties.
Currently, the Company does not own real property but utilizes the offices
of the Bank. The Bank operates from its new office located at 106 A W. John
Rowan Blvd., Bardstown, Kentucky. The Bank owns this office facility; however,
the land has been leased under a twenty year operating lease agreement since
February 1, 1996. The lease includes options to extend the terms of the lease
for an additional ten years. The Bank completed construction of this office at a
cost of approximately $475,000 and moved into the facility in May 1997. The
former location of 119 E. Stephen Foster Avenue, Bardstown, Kentucky is
currently being used for storage until all operations have been implemented at
the new location. The former location is intended to be sold after the move is
completed.
(b) Investment Policies.
See "Item 1. Business" above for a general description of the Bank's
investment policies and any regulatory or Board of Directors' percentage of
assets limitations regarding certain investments. The Bank's investments are
primarily acquired to produce income, and to a lesser extent, possible capital
gain.
(1) Investments in Real Estate or Interests in Real Estate. See "Item 1.
Business - Lending Activities and - Regulation of the Bank," and "Item 2.
Description of Property."
(2) Investments in Real Estate Mortgages. See "Item 1. Business -
Lending Activities and - Regulation of the Bank."
(3) Investments in Securities of or Interests in Persons Primarily
Engaged in Real Estate Activities. See "Item 1. Business - Lending Activities
and - Regulation of the Bank."
(c) Description of Real Estate and Operating Data.
Not Applicable.
20
<PAGE>
Item 3. Legal Proceedings
- -------------------------
There are various claims and lawsuits in which the Company or the Bank are
periodically involved, such as claims to enforce liens, condemnation proceedings
on properties in which the Bank holds security interests, claims involving the
making and servicing of real property loans, and other issues incident to the
Bank's business. In the opinion of management, no material loss is expected from
any of such pending claims or lawsuits.
Item 4. Submission of Matters to a Vote of Security Holders
- -------------------------------------------------------------
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
- -------------------------------------------------------------------------------
The information contained under the section captioned "Market Price of the
Registrant's Common Stock" on page 2 of the Company's Annual Report to
Stockholders for the fiscal year ended June 30, 1997 (the "Annual Report"), is
incorporated herein by reference.
Item 6. Management's Discussion and Analysis or Plan of Operation
- -------------------------------------------------------------------
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
pages 4 to 6 of the Annual Report is incorporated herein by reference.
Item 7. Financial Statements
- ------------------------------
The Registrant's financial statements listed under Item 13 are
incorporated herein by reference.
Item 8. Changes in and Disagreements with Accountants On Accounting and
----------------------------------------------------------------------
Financial Disclosure.
--------------------
The Company discontinued the engagement of Crisp Hughes & Co., LLP ("Crisp
Hughes"), its independent auditors, and notified Crisp Hughes of its action on
June 4, 1996. The Company's Board of Directors engaged Whelan, Doerr, Pike &
Pawley as the Company's auditors for the year ended June 30, 1996. The
determination to replace Crisp Hughes was approved by the full Board of
Directors of the Company.
The report of Crisp Hughes for the fiscal year ended June 30, 1995
contained no adverse opinion or disclaimer of opinion and was not qualified or
modified as to uncertainty, audit scope or accounting principles. During the
fiscal year ended June 30, 1995 and during the period from June 30, 1995 to June
4, 1996, there were no disagreements between the Company and Crisp Hughes
concerning accounting principles or practices, financial statement disclosure,
or auditing scope or procedure.
21
<PAGE>
PART III
Item 9. Directors Executive Officers, of Promoters and Control Persons:
----------------------------------------------------------------------
Compliance with Section 16(b) of the Exchange Act.
-------------------------------------------------
The information contained under the sections captioned "Section 16(a)
Beneficial Ownership Reporting Compliance" and "I - Information with Respect to
Nominees for Director, Directors Continuing in Office, and Executive Officers -
Election of Directors" and " - Biographical Information" in the "Proxy
Statement".
Item 10. Executive Compensation
- --------------------------------
The information contained in the section captioned "Director and Executive
Officer Compensation" in the Proxy Statement is incorporated herein by
reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the first chart in the section captioned "I -
Information with Respect to Nominees for Director, Directors
Continuing in Office, and Executive Officers" in the Proxy
Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by
reference to the first chart in the section captioned "I -
Information with Respect to Nominees for Director, Directors
Continuing in Office, and Executive Officers" in the Proxy
Statement.
(c) Management of the Registrant knows of no arrangements, including any
pledge by any person of securities of the Registrant, the operation
of which may at a subsequent date result in a change in control of
the Registrant.
Item 12. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information required by this item is incorporated herein by reference
to the section captioned "Certain Relationships and Related Transactions" in the
Proxy Statement.
Item 13. Exhibits, Lists, and Reports on Form 8-K
- -------------------------------------------------
(a) The following documents are filed as a part of this report:
1. The following financial statements and the report of independent
accountants of the Registrant included in the Registrant's Annual Report to
Stockholders for the fiscal year ending June 30, 1997 are incorporated herein by
reference and also in Item 8 hereof.
22
<PAGE>
Report of Independent Auditors
Consolidated Statements of Financial Condition as of June 30, 1996 and
1997.
Consolidated Statements of Operations for the Years Ended June 30, 1995,
1996 and 1997.
Consolidated Statements of Stockholders' Equity for the Years Ended June
30, 1995, 1996 and 1997.
Consolidated Statements of Cash Flows for the Years Ended June 30, 1995,
1996 and 1997.
Notes to Consolidated Financial Statements.
2. Other than as set forth below, Financial Statement Schedules for
which provision is made in the applicable accounting regulations of the
Securities and Exchange Commission ("SEC") are not required under the related
instructions or are inapplicable and therefore have been omitted.
3. The following exhibits are included in this Report or
incorporated herein by reference:
(a) List of Exhibits:
3(i) Certificate of Incorporation of NCF Financial Corporation*
3(ii) Bylaws of NCF Financial Corporation*
10.1 Employment Agreement with A.E. Bowling
10.2 1995 Stock Option Plan
10.3 Management Stock Bonus Plan and Trust Agreement
10.4 Supplemental Retirement Plan for A.E. Bowling**
10.5 Directors Consultation and Retirement Plan**
13 Annual Report to Stockholders for the fiscal year ended June
30, 1997
21 Subsidiaries of the Registrant
27 Financial Data Schedule
(b) None.
- ---------------------
* Incorporated by reference to the registration statement on Form S-1 (File
No. 33-93614) declared effective by the SEC on August 14, 1995.
** Previously filed with or incorporated by reference in the Form 10-KSB for
the fiscal year ended June 30, 1996 filed on September 30, 1996.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized as of September 26,
1997.
NCF FINANCIAL CORPORATION
By: /s/ A.E. Bowling
----------------------------------
A.E. Bowling
President, Chairman of the Board
and Director
(Duly Authorized Representative)
Pursuant to the requirement of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated as of September 26, 1997.
/s/ A.E. Bowling /s/ Danny R. Biggs
- -------------------------------------- --------------------------------------
A.E. Bowling Danny R. Biggs
President, Chairman of the Board Vice President
and Director (Principal Financial and (Principal Accounting Officer)
Executive Officer)
/s/ John S. Tharp /s/ Paul Barnes
- -------------------------------------- --------------------------------------
John S. Tharp Paul Barnes
Assistant Secretary and Director Director
/s/ Robert C. Hurst
- --------------------------------------
Robert C. Hurst
Director
/s/ Guthrie M. Wilson III
- --------------------------------------
Guthrie M. Wilson III
Director
EXHIBIT 10.1
<PAGE>
EMPLOYMENT AGREEMENT
THIS AGREEMENT entered into this 30th day of November, 1995 ("Effective
Date"), by and between Nelson County Federal Savings and Loan Association (the
"Association") and A. E. Bowling (the "Employee").
WHEREAS, the Employee has heretofore been employed by the Association as
President and is experienced in all phases of the business of the Association;
and
WHEREAS, the parties desire by this writing to set forth the continuing
employment relationship of the Association and the Employee.
NOW, THEREFORE, it is AGREED as follows:
1. Employment. The Employee is employed in the capacity as the President
of the Association. The Employee shall render such administrative and management
services to the Association and NCF Financial Corporation ("Parent") as are
currently rendered and as are customarily performed by persons situated in a
similar executive capacity. The Employee shall promote to the extent permitted
by law the business of the Association and Parent. The Employee's other duties
shall be such as the Board of Directors for the Association (the "Board of
Directors" or "Board") may from time to time reasonably direct, including normal
duties as an officer of the Association.
2. Base Compensation. The Association agrees to pay the Employee during
the term of this Agreement a salary at the rate of $80,292 per annum, payable in
cash not less frequently than monthly; provided, that the rate of such salary
shall be reviewed by the Board of Directors not less often than annually, and
Employee shall be entitled to receive annually an increase at such percentage or
in such an amount as the Board of Directors in its sole discretion may decide at
such time.
3. Discretionary Bonus. The Employee shall be entitled to participate in
an equitable manner with all other senior management employees of the
Association in discretionary bonuses that may be authorized and declared by the
Board of Directors to its senior management employees from time to time. No
other compensation provided for in this Agreement shall be deemed a substitute
for the Employee's right to participate in such discretionary bonuses when and
as declared by the Board of Directors.
<PAGE>
4. (a) Participation in Retirement and Medical Plans. The Employee shall
be entitled to participate in any plan of the Association relating to pension,
profit-sharing, or other retirement benefits and medical coverage or
reimbursement plans that the Association may adopt for the benefit of its
employees.
(b) Employee Benefits; Expenses. The Employee shall be eligible to
participate in any fringe benefits which may be or may become applicable to the
Association's senior management employees, including by example, participation
in any stock option or incentive plans adopted by the Board of Directors of
Association or Parent, club memberships, a reasonable expense account, and any
other benefits which are commensurate with the responsibilities and functions to
be performed by the Employee under this Agreement. The Association shall
reimburse Employee for all reasonable out-of-pocket expenses which Employee
shall incur in connection with his service for the Association.
5. Term. The term of employment of Employee under this Agreement shall be
for the period commencing on the Effective Date and ending thirty-six (36)
months thereafter. Additionally, on each annual anniversary date from the
Effective Date, the term of employment under this Agreement shall be extended
for an additional one year period beyond the then effective expiration date upon
a determination and resolution of the Board of Directors that the performance of
the Employee has met the requirements and standards of the Board, and that the
term of such Agreement shall be extended.
6. Loyalty; Noncompetition.
-----------------------
(a) The Employee shall devote his full time and attention to the
performance of his employment under this Agreement. During the term of
Employee's employment under this Agreement, the Employee shall not engage in any
business or activity contrary to the business affairs or interests of the
Association or Parent.
(b) Nothing contained in this Paragraph 6 shall be deemed to prevent or
limit the right of Employee to invest in the capital stock or other securities
of any business dissimilar from that of the Association or Parent, or, solely as
a passive or minority investor, in any business.
7. Standards. The Employee shall perform his duties under this Agreement
in accordance with such reasonable standards expected of employees with
comparable positions in comparable organizations and as may be established from
time to time by the Board of Directors.
2
<PAGE>
8. Vacation and Sick Leave. At such reasonable times as the Board of
Directors shall in its discretion permit, the Employee shall be entitled,
without loss of pay, to absent himself voluntarily from the performance of his
employment under this Agreement, with all such voluntary absences to count as
vacation time; provided that:
(a) The Employee shall be entitled to annual vacation leave in accordance
with the policies as are periodically established by the Board of Directors for
senior management employees of the Association.
(b) The Employee shall not be entitled to receive any additional
compensation from the Association on account of his failure to take vacation
leave and Employee shall not be entitled to accumulate unused vacation from one
fiscal year to the next, except in either case to the extent authorized by the
Board of Directors for senior management employees of the Association.
(c) In addition to the aforesaid paid vacations, the Employee shall be
entitled without loss of pay, to absent himself voluntarily from the performance
of his employment with the Association for such additional periods of time and
for such valid and legitimate reasons as the Board of Directors in its
discretion may determine. Further, the Board of Directors shall be entitled to
grant to the Employee a leave or leaves of absence with or without pay at such
time or times and upon such terms and conditions as the Board of Directors in
its discretion may determine.
(d) In addition, the Employee shall be entitled to an annual sick leave
benefit as established by the Board of Directors for senior management employees
of the Association. In the event that any sick leave benefit shall not have been
used during any year, such leave shall accrue to subsequent years only to the
extent authorized by the Board of Directors for employees of the Association.
9. Termination and Termination Pay.
-------------------------------
The Employee's employment under this Agreement shall be terminated upon
any of the following occurrences:
(a) The death of the Employee during the term of this Agreement, in which
event the Employee's estate shall be entitled to receive the compensation due
the Employee through the last day of the calendar month in which Employee's
death shall have occurred.
3
<PAGE>
(b) The Board of Directors may terminate the Employee's employment at any
time, but any termination by the Board of Directors other than termination for
Just Cause, shall not prejudice the Employee's right to compensation or other
benefits under the Agreement. The Employee shall have no right to receive
compensation or other benefits for any period after termination for Just Cause.
Termination for "Just Cause" shall include termination because of the Employee's
personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty
involving personal profit, intentional failure to perform stated duties, willful
violation of any law, rule or regulation (other than traffic violations or
similar offenses) or final cease-and-desist order, or material breach of any
provision of the Agreement.
(c) Except in the event that payments are made to the Employee as provided
pursuant to Section 12 herein, in the event Employee's employment under this
Agreement is terminated by the Board of Directors without Just Cause, the
Association shall be obligated to continue to pay the Employee the salary
provided pursuant to Section 2 herein, up to the date of termination of the term
(including any renewal term) of this Agreement and the cost of Employee
obtaining all health, life, disability, and other benefits which the Employee
would be eligible to participate in through such date based upon the benefit
levels substantially equal to those being provided Employee at the date of
termination of employment.
(d) If the Employee is removed and/or permanently prohibited from
participating in the conduct of the Association's affairs by an order issued
under Sections 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act ("FDIA")
(12 U.S.C. 1818(e)(4) and (g)(1)), all obligations of the Association under this
Agreement shall terminate, as of the effective date of the order, but the vested
rights of the parties shall not be affected.
(e) If the Association is in default (as defined in Section 3(x)(1) of
FDIA) all obligations under this Agreement shall terminate as of the date of
default, but this paragraph shall not affect any vested rights of the
contracting parties.
(f) All obligations under this Agreement shall be terminated, except to
the extent determined that continuation of this Agreement is necessary for the
continued operation of the Association: (i) by the Director of the Office of
Thrift Supervision ("Director of OTS"), or his or her designee, at the time that
the Federal Deposit Insurance Corporation ("FDIC") or the Resolution Trust
Corporation enters into an agreement to provide assistance to or on behalf of
the Association under the authority contained in Section 13(c) of FDIA; or (ii)
by the Director of the OTS, or his or her designee, at the time that the
Director of the OTS, or his or her designee approves a supervisory merger to
resolve problems related to operation of the Association or when the Association
is determined by the Director of the OTS to be in an unsafe or unsound
condition.
4
<PAGE>
Any rights of the parties that have already vested, however, shall not be
affected by such action.
(g) The voluntary termination by the Employee during the term of this
Agreement with the delivery of no less than 60 days written notice to the Board
of Directors, other than pursuant to Section 12(b), in which case the Employee
shall be entitled to receive only the compensation, vested rights, and all
employee benefits up to the date of such termination.
(h) Notwithstanding anything herein to the contrary, any payments made to
the Employee pursuant to the Agreement, or otherwise, shall be subject to and
conditioned upon compliance with 12 USC ss.1828(k) and any regulations
promulgated thereunder.
10. Suspension of Employment . If the Employee is suspended and/or
temporarily prohibited from participating in the conduct of the Association's
affairs by a notice served under Section 8(e)(3) or (g)(1) of the FDIA (12
U.S.C. 1818(e)(3) and (g)(1)), the Association's obligations under the Agreement
shall be suspended as of the date of service, unless stayed by appropriate
proceedings. If the charges in the notice are dismissed, the Association may in
its discretion, (i) pay the Employee all or part of the compensation withheld
while its contract obligations were suspended and (ii) reinstate (in whole or in
part) any of its obligations which were suspended.
11. Disability. If the Employee shall become disabled or incapacitated to
the extent that he is unable to perform his duties hereunder, by reason of
medically determinable physical or mental impairment, as determined by a doctor
engaged by the Board of Directors, Employee shall nevertheless continue to
receive the compensation and benefits provided under the terms of this Agreement
as follows: 100% of such compensation and benefits for a period of 12 months,
but not exceeding the remaining term of the Agreement, and 60% thereafter for
the remainder of the term of the Agreement. Such benefits noted herein shall be
reduced by any benefits otherwise provided to the Employee during such period
under the provisions of disability insurance coverage in effect for Association
employees. Thereafter, Employee shall be eligible to receive benefits provided
by the Association under the provisions of disability insurance coverage in
effect for Association employees. Upon returning to active full-time employment,
the Employee's full compensation as set forth in this Agreement shall be
reinstated as of the date of commencement of such activities. In the event that
the Employee returns to active employment on other than a full-time basis, then
his compensation (as set forth in Paragraph 2 of this Agreement) shall be
reduced in proportion to the time spent in said employment, or as shall
otherwise be agreed to by the parties.
5
<PAGE>
12. Change in Control.
-----------------
(a) Notwithstanding any provision herein to the contrary, in the event of
the involuntary termination of Employee's employment during the term of this
Agreement following any change in control of the Association or Parent, or
within twelve months thereafter of such change in control, absent Just Cause,
Employee shall be paid an amount equal to the product of 2.99 times the
Employee's "base amount" as defined in Section 280G(b)(3) of the Internal
Revenue Code of 1986, as amended (the "Code") and regulations promulgated
thereunder. Said sum shall be paid, at the option of Employee, either in one (1)
lump sum within thirty (30) days of such termination discounted to the present
value of such payment using as the discount rate the "prime rate" as published
in the Wall Street Journal Eastern Edition as of the date of such payment less
150 basis points, or in periodic payments over the next 36 months or the
remaining term of this Agreement whichever is less, as if Employee's employment
had not been terminated, and such payments shall be in lieu of any other future
payments which the Employee would be otherwise entitled to receive under Section
9 of this Agreement. Notwithstanding the forgoing, all sums payable hereunder
shall be reduced in such manner and to such extent so that no such payments made
hereunder when aggregated with all other payments to be made to the Employee by
the Association or the Parent shall be deemed an "excess parachute payment" in
accordance with Section 280G of the Code and be subject to the excise tax
provided at Section 4999(a) of the Code. The term "control" shall refer to the
ownership, holding or power to vote more than 25% of the Parent's or
Association's voting stock, the control of the election of a majority of the
Parent's or Association's directors, or the exercise of a controlling influence
over the management or policies of the Parent or Association by any person or by
persons acting as a group within the meaning of Section 13(d) of the Securities
Exchange Act of 1934. The term "person" means an individual other than the
Employee, or a corporation, partnership, trust, association, joint venture,
pool, syndicate, sole proprietorship, unincorporated organization or any other
form of entity not specifically listed herein.
(b) Notwithstanding any other provision of this Agreement to the contrary,
Employee may voluntarily terminate his employment during the term of this
Agreement following a change in control of the Association or Parent, or within
twelve months thereafter of such change in control, and Employee shall thereupon
be entitled to receive the payment described in Section 12(a) of this Agreement,
upon the occurrence, or within ninety (90) days thereafter, of any of the
following events, which have not been consented to in advance by the Employee in
writing: (i) if Employee would be required to move his personal residence or
perform his principal executive functions more than thirty-five (35) miles from
the Employee's primary office as of the signing of this Agreement; (ii) if the
Association or Parent should fail to maintain Employee's base compensation in
effect as of the date of the Change in Control
6
<PAGE>
and the existing employee benefits plans, including material fringe benefit,
stock option and retirement plans, except to the extent that such reduction in
benefit programs is part of an overall adjustment in benefits for all employees
of the Association or Parent and does not disproportionately adversely impact
the Employee; (iii) if Employee would be assigned duties and responsibilities
other than those normally associated with his position as referenced at Section
1, herein, for a period of more than six months; (iv) if Employee would not be
elected or reelected to the Board of Directors of the Association; or (v) if
Employee's responsibilities or authority have in any way been materially
diminished or reduced for a period of more than six months.
13. Successors and Assigns.
----------------------
(a) This Agreement shall inure to the benefit of and be binding upon any
corporate or other successor of the Association or Parent which shall acquire,
directly or indirectly, by merger, consolidation, purchase or otherwise, all or
substantially all of the assets or stock of the Association or Parent.
(b) Since the Association is contracting for the unique and personal
skills of the Employee, the Employee shall be precluded from assigning or
delegating his rights or duties hereunder without first obtaining the written
consent of the Association.
14. Amendments. No amendments or additions to this Agreement shall be
binding upon the parties hereto unless made in writing and signed by both
parties, except as herein otherwise specifically provided.
15. Applicable Law. This agreement shall be governed in all respects
whether as to validity, construction, capacity, performance or otherwise, by the
laws of the State of Kentucky, the extent that Federal law shall be deemed to
apply.
16. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
17. Arbitration. Any controversy or claim arising out of or relating to
this Agreement, or the breach thereof, shall be settled by arbitration in
accordance with the rules then in effect of the district office of the American
Arbitration Association ("AAA") nearest to the home office of the Association,
and judgment upon the award rendered may be entered in any court having
jurisdiction thereof, except to the extend that the parties may otherwise reach
a mutual settlement of such issue. The party initiating the request for
arbitration shall incur the cost of all fees and expenses associated with filing
a request for arbitration with the AAA and the costs and administrative fees
associated with employing the arbitrator and related administrative expenses
assessed by the
7
<PAGE>
AAA. The Association shall reimburse Employee for all costs and expenses,
including reasonable attorneys' fees, arising from such dispute, proceedings or
actions, following the delivery of the decision of the arbitrator finding in
favor of the Employee or in accordance with a mutual settlement of the matter.
Such settlement to be approved by the Board of the Association or the Parent may
include a provision for the reimbursement by the Association or Parent to the
Employee for all costs and expenses, including reasonable attorneys' fees,
arising from such dispute, proceedings or actions, or the Board of the
Association or the Parent may authorize such reimbursement of such costs and
expenses by separate action upon a written action and determination of the
Board. Such reimbursement shall be paid within ten (10) days of Employee
furnishing to the Association or Parent evidence, which may be in the form,
among other things, of a canceled check or receipt, of any costs or expenses
incurred by Employee.
18. Entire Agreement. This Agreement together with any understanding or
modifications thereof as agreed to in writing by the parties, shall constitute
the entire agreement between the parties hereto.
8
<PAGE>
AMENDMENT TO EMPLOYMENT AGREEMENT
WHEREAS, Nelson County Federal Savings and Loan Association (the
"Association") and A.E. Bowling (the "Employee") previously entered into an
Employment Agreement (the "Agreement") dated November 30, 1995, and
WHEREAS, Section 14 of this Agreement provides that amendments to this
Agreement may be made in writing and signed by both parties,
NOW THEREFORE, BE IT RESOLVED that this Agreement be amended by adoption
and execution of this Amendment to the Agreement as follows.
Revision to Section 5 of the Agreement by inclusion of the following
phrase at the end of Section 5 as follows:
"Notwithstanding anything herein to the contrary, the expiration date of
the term of this Agreement shall be as of December 16, 1999, except as may
be extend beyond that date by future action of the Board within its sole
discretion in accordance with this Agreement."
As Secretary to the Association, I hereby certify that the foregoing
Amendment was adopted and ratified by a majority vote of a meeting of the Board
of Directors of the Association, held on August 28, 1997, a quorum being
present.
/s/ Patricia H. Thomas
-----------------------------
Patricia H. Thomas, Secretary
SEAL
IN WITNESS WHEREOF, the parties to the Agreement dated November 30, 1995
do hereby execute this Amendment to the Agreement on this 28th day of August,
1997.
NCF Bank & Trust Company
By: /s/ A. E. Bowling
------------------------------
A.E. Bowling, President
/s/ A. E. Bowling
------------------------------
A.E. Bowling, Employee
ATTEST:
/s/ Patricia H. Thomas
- -----------------------------
Patricia H. Thomas, Secretary
SEAL
EXHIBIT 10.2
<PAGE>
Exhibit A
NCF FINANCIAL CORPORATION
1995 STOCK OPTION PLAN
1. Purpose of the Plan. The Plan shall be known as the NCF Financial
Corporation ("Corporation") 1995 Stock Option Plan (the "Plan"). The purpose of
the Plan is to attract and retain qualified personnel for positions of
substantial responsibility and to provide additional incentive to officers,
directors, key employees and other persons providing services to the
Corporation, or any present or future parent or subsidiary of the Corporation to
promote the success of the business. The Plan is intended to provide for the
grant of "Incentive Stock Options," within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code") and Non-Incentive Stock
Options, options that do not so qualify. The provisions of the Plan relating to
Incentive Stock Options shall be interpreted to conform to the requirements of
Section 422 of the Code.
2. Definitions. As used herein, the following definitions shall apply.
(a) "Award" means the grant by the Committee of an Incentive Stock
Option or a Non-Incentive Stock Option, or any combination thereof, as provided
in the Plan.
(b) "Board" shall mean the Board of Directors of the Corporation, or
any successor or parent corporation thereto.
(c) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(d) "Committee" shall mean the Stock Option Committee appointed by
the Board in accordance with paragraph 5(a) of the Plan.
(e) "Common Stock" shall mean common stock, par value $.10 per
share, of the Corporation, or any successor or parent corporation thereto.
(f) "Continuous Employment" or "Continuous Status as an Employee"
shall mean the absence of any interruption or termination of employment with the
Corporation or any present or future Parent or Subsidiary of the Corporation.
Employment shall not be considered interrupted in the case of sick leave,
military leave or any other leave of absence approved by the Corporation or in
the case of transfers between payroll locations, of the Corporation or between
the Corporation, its Parent, its Subsidiaries or a successor.
(g) "Corporation" shall mean the NCF Financial Corporation, the
parent corporation for the Savings Association, or any successor or Parent
thereof.
(h) "Director" shall mean a member of the Board of the Corporation,
or any successor or parent corporation thereto.
(i) "Director Emeritus" shall mean a person serving as a director
emeritus, advisory director, consulting director or other similar position as
may be appointed by the Board of Directors of the Savings Association or the
Corporation from time to time.
A-1
<PAGE>
(j) "Effective Date" shall mean the date specified in Section 15
hereof.
(k) "Employee" shall mean any person employed by the Corporation or
any present or future Parent or Subsidiary of the Corporation.
(l) "Fair Market Value" shall mean: If the Common Stock is traded
otherwise than on a national securities exchange, then the Fair Market Value
shall be not less than the mean between the last reported bid and ask price on
the date of valuation or, if there is no bid and ask price on said date, then on
the next prior business day on which there was a bid and ask price. If no such
bid and ask price is available, then the Fair Market Value shall be determined
by the Committee in good faith. If the Common Stock is listed on a national
securities exchange on the date of valuation, then the Fair Market Value shall
be not less than the average of the highest and lowest selling price of the
Common Stock on such exchange on the date of valuation or, if there were no
sales on said date, then the Fair Market Value shall be not less than the mean
between the bid and ask price on such date.
(m) "Incentive Stock Option" or "ISO" shall mean an option to
purchase Shares granted by the Committee pursuant to Section 8 hereof which is
subject to the limitations and restrictions of Section 8 hereof and is intended
to qualify under Section 422 of the Code.
(n) "Non-Incentive Stock Option" or "Non-ISO" shall mean an option
to purchase Shares granted pursuant to Section 9 hereof, which option is not
intended to qualify under Section 422 of the Code.
(o) "Option" shall mean an Incentive or Non-Incentive Stock Option
granted pursuant to this Plan providing the holder of such Option with the right
to purchase Common Stock.
(p) "Optioned Stock" shall mean stock subject to an Option granted
pursuant to the Plan.
(q) "Optionee" shall mean any person who receives an Option or Award
pursuant to the Plan.
(r) "Parent" shall mean any present or future corporation which
would be a "parent corporation" as defined in Subsections 424(e) and (g) of the
Code.
(s) "Participant" means any director, officer or key employee of the
Corporation or any Parent or Subsidiary of the Corporation or any other person
providing a service to the Corporation who is selected by the Committee to
receive an Award, or who by the express terms of the Plan is granted an Award.
(t) "Plan" shall mean the NCF Financial Corporation 1995 Stock
Option Plan.
(u) "Savings Association" shall mean Nelson County Federal Savings
and Loan Association, or any successor corporation thereto.
(v) "Share" shall mean one share of the Common Stock.
A-2
<PAGE>
(w) "Subsidiary" shall mean any present or future corporation which
constitutes a "subsidiary corporation" as defined in Subsections 424(f) and (g)
of the Code.
3. Shares Subject to the Plan. Except as otherwise required by the
provisions of Section 13 hereof, the aggregate number of Shares with respect to
which Awards may be made pursuant to the Plan shall not exceed 77,050. Such
Shares may either be authorized but unissued shares, treasury shares or shares
purchased in the market for Plan purposes.
An Award shall not be considered to be made under the Plan with respect to
any Option which terminates prior to its exercise, and new Awards may be granted
under the Plan with respect to the number of Shares as to which such termination
has occurred.
4. Six Month Holding Period.
------------------------
Subject to vesting requirements, if applicable, except in the event
of death or disability of the Optionee, a minimum of six months must elapse
between the date of the grant of an Option and the date of the sale of Common
Stock received through the exercise of such Option.
5. Administration of the Plan.
--------------------------
(a) (i) Composition of the Committee. Except as indicated in
paragraph 5(a)(ii) below, the Plan shall be administered by the Committee which
shall consist of at least three non-employee Directors of the Corporation
appointed by the Board and serving at the pleasure of the Board. All persons
designated as members of the Committee shall be "disinterested persons" within
the meaning of Rule 16b-3 under the Securities Exchange Act of 1934.
(ii) For the purpose of granting Awards to directors, the
selection of any Director to whom Awards may be granted, as well as the number
of Shares subject to Awards, must be determined by a "disinterested committee",
as defined in Rule 16b-3 under the Securities Exchange Act of 1934.
(b) Powers of the Committee. The Committee is authorized (but only
to the extent not contrary to the express provisions of the Plan or to
resolutions adopted by the Board) to interpret the Plan, to prescribe, amend and
rescind rules and regulations relating to the Plan, to determine the form and
content of Awards to be issued under the Plan and to make other determinations
necessary or advisable for the administration of the Plan, and shall have and
may exercise such other power and authority as may be delegated to it by the
Board from time to time. A majority of the entire Committee shall constitute a
quorum and the action of a majority of the members present at any meeting at
which a quorum is present shall be deemed the action of the Committee. In no
event may the Committee revoke outstanding Awards without the consent of the
Participant.
The President of the Corporation and such other officers as shall be
designated by the Committee are hereby authorized to execute instruments
evidencing Awards on behalf of the Corporation and to cause them to be delivered
to the Participants.
(c) Effect of Committee's Decision. All decisions, determinations
and interpretations of the Committee shall be final and conclusive on all
persons affected thereby.
A-3
<PAGE>
6. Eligibility.
-----------
(a) The Committee shall from time to time determine the
officers, Directors, key employees and other persons who shall be granted Awards
under the Plan, the number of Awards to be granted to each such officer,
Director, key employee and other persons under the Plan, and whether Awards
granted to each such Participant under the Plan shall be Incentive and/or
Non-Incentive Stock Options. In selecting Participants and in determining the
number of Shares of Common Stock to be granted to each such Participant, the
Committee may consider the nature of the services rendered by each such
Participant, each such Participant's current and potential contribution to the
Corporation and such other factors as the Committee may, in its sole discretion,
deem relevant. Participants who have been granted an Award may, if otherwise
eligible, be granted additional Awards.
(b) The aggregate Fair Market Value (determined as of the date
the Option is granted) of the Shares with respect to which Incentive Stock
Options are exercisable for the first time by each Employee during any calendar
year (under all Incentive Stock Option plans, as defined in Section 422 of the
Code, of the Corporation or any present or future Parent or Subsidiary of the
Corporation) shall not exceed $100,000. Notwithstanding the prior provisions of
this Section 6, the Committee may grant Options in excess of the foregoing
limitations, provided said Options shall be clearly and specifically designated
as not being Incentive Stock Options.
(c) In no event shall Shares subject to Options granted to
non-employee Directors in the aggregate under this Plan exceed more than 30% of
the total number of Shares authorized for delivery under this Plan pursuant to
Section 3 herein or more than 5% to any individual non-employee Director. In no
event shall Shares subject to Options granted to any Employee exceed more than
25% of the total number of Shares authorized for delivery under the Plan.
7. Term of the Plan. The Plan shall continue in effect for a term of ten
(10) years from the Effective Date, unless sooner terminated pursuant to Section
18 hereof. No Option shall be granted under the Plan after ten (10) years from
the Effective Date.
8. Terms and Conditions of Incentive Stock Options. Incentive Stock
Options may be granted only to Participants who are Employees. Each Incentive
Stock Option granted pursuant to the Plan shall be evidenced by an instrument in
such form as the Committee shall from time to time approve. Each Incentive Stock
Option granted pursuant to the Plan shall comply with, and be subject to, the
following terms and conditions:
(a) Option Price.
(i) The price per Share at which each Incentive Stock Option
granted under the Plan may be exercised shall not, as to any particular
Incentive Stock Option, be less than the Fair Market Value of the Common Stock
at the time such Incentive Stock Option is granted.
(ii) In the case of an Employee who owns Common Stock
representing more than ten percent (10%) of the outstanding Common Stock at the
time the Incentive Stock Option is granted, the Incentive Stock Option exercise
price shall not be less than one hundred and ten percent (110%) of the Fair
Market Value of the Common Stock at the time the Incentive Stock Option is
granted.
A-4
<PAGE>
(b) Payment. Full payment for each Share of Common Stock purchased
upon the exercise of any Incentive Stock Option granted under the Plan shall be
made at the time of exercise of each such Incentive Stock Option and shall be
paid in cash (in United States Dollars), Common Stock or a combination of cash
and Common Stock. Common Stock utilized in full or partial payment of the
exercise price shall be valued at its Fair Market Value at the date of exercise.
The Corporation shall accept full or partial payment in Common Stock only to the
extent permitted by applicable law. No Shares of Common Stock shall be issued
until full payment therefor has been received by the Corporation, and no
Optionee shall have any of the rights of a stockholder of the Corporation until
Shares of Common Stock are issued to him.
(c) Term of Incentive Stock Option. The term of exercisability of
each Incentive Stock Option granted pursuant to the Plan shall be not more than
ten (10) years from the date each such Incentive Stock Option is granted,
provided that in the case of an Employee who owns stock representing more than
ten percent (10%) of the Common Stock outstanding at the time the Incentive
Stock Option is granted, the term of the Incentive Stock Option shall not exceed
five (5) years.
(d) Exercise Generally. Except as otherwise provided in Section 10
hereof, no Incentive Stock Option may be exercised unless the Optionee shall
have been in the employ of the Corporation at all times during the period
beginning with the date of grant of any such Incentive Stock Option and ending
on the date three (3) months prior to the date of exercise of any such Incentive
Stock Option. The Committee may impose additional conditions upon the right of
an Optionee to exercise any Incentive Stock Option granted hereunder which are
not inconsistent with the terms of the Plan or the requirements for
qualification as an Incentive Stock Option. Except as otherwise provided by the
terms of the Plan or by action of the Committee at the time of the grant of the
Options, the Options will be first exercisable at the rate of 20% on the one
year anniversary of the date of grant and 20% annually thereafter during such
periods of service as an Employee, Director or Director Emeritus.
(e) Cashless Exercise. Subject to vesting requirements, if
applicable, an Optionee who has held an Incentive Stock Option for at least six
months may engage in the "cashless exercise" of the Option. Upon a cashless
exercise, an Optionee gives the Corporation written notice of the exercise of
the Option together with an order to a registered broker-dealer or equivalent
third party, to sell part or all of the Optioned Stock and to deliver enough of
the proceeds to the Corporation to pay the Option exercise price and any
applicable withholding taxes. If the Optionee does not sell the Optioned Stock
through a registered broker-dealer or equivalent third party, the Optionee can
give the Corporation written notice of the exercise of the Option and the third
party purchaser of the Optioned Stock shall pay the Option exercise price plus
any applicable withholding taxes to the Corporation.
(f) Transferability. Any Incentive Stock Option granted pursuant to
the Plan shall be exercised during an Optionee's lifetime only by the Optionee
to whom it was granted and shall not be assignable or transferable otherwise
than by will or by the laws of descent and distribution.
9. Terms and Conditions of Non-Incentive Stock Options. Each
Non-Incentive Stock Option granted pursuant to the Plan shall be evidenced by an
instrument in such form as the Committee shall from time to time approve. Each
Non-Incentive Stock Option granted pursuant to the Plan shall comply with and be
subject to the following terms and conditions.
(a) Options Granted to Directors. Subject to the limitations of
Section 6(c), Non- Incentive Stock Options to purchase 3,852 shares of Common
Stock will be granted to each Director who
A-5
<PAGE>
is not an Employee as of the Effective Date, at an exercise price equal to the
Fair Market Value of the Common Stock on such date of grant. Options may be
granted to newly appointed or elected non-employee Directors within the sole
discretion of the Committee. The Options will be exercisable at the rate of 20%
on the one year anniversary of the Effective Date of the Plan and 20% annually
thereafter during such periods of service as director or director emeritus. Upon
the death or disability of the director or director emeritus, or upon a change
or control of the Savings Association or the Corporation as provided at Section
13(b) herein, such Option shall be deemed immediately 100% exercisable. The
exercise price per Share of such Options granted shall be equal to the Fair
Market Value of the Common Stock at the time such Options are granted. Such
Options shall continue to be exercisable for a period of ten years following the
date of grant during periods of continued services of such Directors as a
Director or Director Emeritus; provided however that such Options shall cease to
be exerciseable following the date that is two years after the date of
Disability or death, or one year after the date of termination of service as a
Director or Director Emeritus, if earlier. In the event of the Optionee's death,
such Options may be exercised by the personal representative of his estate or
person or persons to whom his rights under such Option shall have passed by will
or by laws of descent and distribution. Unless otherwise inapplicable, or
inconsistent with the provisions of this paragraph, the Options to be granted to
Directors hereunder shall be subject to all other provisions of this Plan.
(b) Option Price. The exercise price per Share of Common Stock for
each Non-Incentive Stock Option granted pursuant to the Plan, other than Options
granted pursuant to Section 9(a) herein, shall be at such price as the Committee
may determine in its sole discretion, but in no event less than the Fair Market
Value of such Common Stock on the date of grant as determined by the Committee
in good faith.
(c) Payment. Full payment for each Share of Common Stock purchased
upon the exercise of any Non-Incentive Stock Option granted under the Plan shall
be made at the time of exercise of each such Non-Incentive Stock Option and
shall be paid in cash (in United States Dollars), Common Stock or a combination
of cash and Common Stock. Common Stock utilized in full or partial payment of
the exercise price shall be valued at its Fair Market Value at the date of
exercise. The Corporation shall accept full or partial payment in Common Stock
only to the extent permitted by applicable law. No Shares of Common Stock shall
be issued until full payment therefor has been received by the Corporation and
no Optionee shall have any of the rights of a stockholder of the Corporation
until the Shares of Common Stock are issued to him.
(d) Term. The term of exercisability of each Non-Incentive Stock
Option granted pursuant to the Plan shall be not more than ten (10) years from
the date each such Non-Incentive Stock Option is granted.
(e) Exercise Generally. The Committee may impose additional
conditions upon the right of any Participant to exercise any Non-Incentive Stock
Option granted hereunder which is not inconsistent with the terms of the Plan.
(f) Cashless Exercise. Subject to vesting requirements, if
applicable, an Optionee who has held a Non-Incentive Stock Option for at least
six months may engage in the "cashless exercise" of the Option. Upon a cashless
exercise, an Optionee gives the Corporation written notice of the exercise of
the Option together with an order to a registered broker-dealer or equivalent
third party, to sell part or all of the Optioned Stock and to deliver enough of
the proceeds to the Corporation to pay the Option exercise price and any
applicable withholding taxes. If the Optionee does not sell the Optioned Stock
A-6
<PAGE>
through a registered broker-dealer or equivalent third party, the Optionee can
give the Corporation written notice of the exercise of the Option and the third
party purchaser of the Optioned Stock shall pay the Option exercise price plus
any applicable withholding taxes to the Corporation.
(g) Transferability. Any Non-Incentive Stock Option granted pursuant
to the Plan shall be exercised during an Optionee's lifetime only by the
Optionee to whom it was granted and shall not be assignable or transferable
otherwise than by will or by the laws of descent and distribution.
10. Effect of Termination of Employment, Disability or Death on Incentive
---------------------------------------------------------------------
Stock Options.
- -------------
(a) Termination of Employment. In the event that any Optionee's
employment with the Corporation shall terminate for any reason, other than
Permanent and Total Disability (as such term is defined in Section 22(e)(3) of
the Code) or death, all of any such Optionee's Incentive Stock Options, and all
of any such Optionee's rights to purchase or receive Shares of Common Stock
pursuant thereto, shall automatically terminate on the earlier of (i) the
respective expiration dates of any such Incentive Stock Options, or (ii) the
expiration of not more than three (3) months after the date of such termination
of employment, or (iii) at such later date as determined by the Committee at the
time of the grant of such Award, based upon the Optionee's continuing status as
a Director or Director Emeritus of the Savings Association or the Corporation,
but only if, and to the extent that, the Optionee was entitled to exercise any
such Incentive Stock Options at the date of such termination of employment, and
further that such Award shall thereafter be deemed a Non-Incentive Stock Option.
In the event that a Subsidiary ceases to be a Subsidiary of the Corporation, the
employment of all of its employees who are not immediately thereafter employees
of the Corporation shall be deemed to terminate upon the date such Subsidiary so
ceases to be a Subsidiary of the Corporation.
(b) Disability. In the event that any Optionee's employment with the
Corporation shall terminate as the result of the Permanent and Total Disability
of such Optionee, such Optionee may exercise any Incentive Stock Options granted
to him pursuant to the Plan at any time prior to the earlier of (i) the
respective expiration dates of any such Incentive Stock Options or (ii) the date
which is one (1) year after the date of such termination of employment, but only
if, and to the extent that, the Optionee was entitled to exercise any such
Incentive Stock Options at the date of such termination of employment.
(c) Death. In the event of the death of an Optionee, any Incentive
Stock Options granted to such Optionee may be exercised by the person or persons
to whom the Optionee's rights under any such Incentive Stock Options pass by
will or by the laws of descent and distribution (including the Optionee's estate
during the period of administration) at any time prior to the earlier of (i) the
respective expiration dates of any such Incentive Stock Options or (ii) the date
which is two (2) years after the date of death of such Optionee but only if, and
to the extent that, the Optionee was entitled to exercise any such Incentive
Stock Options at the date of death. For purposes of this Section 10(c), any
Incentive Stock Option held by an Optionee shall be considered exercisable at
the date of his death if the only unsatisfied condition precedent to the
exercisability of such Incentive Stock Option at the date of death is the
passage of a specified period of time. At the discretion of the Committee, upon
exercise of such Options the Optionee may receive Shares or cash or combination
thereof. If cash shall be paid in lieu of Shares, such cash shall be equal to
the difference between the Fair Market Value of such Shares and the exercise
price of such Options on the exercise date.
A-7
<PAGE>
(d) Incentive Stock Options Deemed Exercisable. For purposes of
Sections 10(a), 10(b) and 10(c) above, any Incentive Stock Option held by any
Optionee shall be considered exercisable at the date of termination of his
employment if any such Incentive Stock Option would have been exercisable at
such date of termination of employment without regard to the Permanent and Total
Disability or death of the Participant.
(e) Termination of Incentive Stock Options. Except as may be
specified by the Committee at the time of grant of an Option, to the extent that
any Incentive Stock Option granted under the Plan to any Optionee whose
employment with the Corporation terminates shall not have been exercised within
the applicable period set forth in this Section 10, any such Incentive Stock
Option, and all rights to purchase or receive Shares of Common Stock pursuant
thereto, as the case may be, shall terminate on the last day of the applicable
period.
11. Effect of Termination of Employment, Disability or Death on
Non-Incentive Stock Options. The terms and conditions of Non-Incentive Stock
Options relating to the effect of the termination of an Optionee's employment or
service, disability of an Optionee or his death shall be such terms and
conditions as the Committee shall, in its sole discretion, determine at the time
of termination of service, unless specifically provided for by the terms of the
Agreement at the time of grant of the Award; provided however that such Options
shall cease to be exerciseable not later than the date that is two years after
the date of Disability or death, or one year after the date of termination of
service as an Employee, Director or Director Emeritus.
12. Allocation of Plan Expenses. The Corporation shall reimburse the
Savings Association for all expenses associated with Awards under the Plan with
respect to: a) the vesting of Awards made in accordance with Section 9(a) to the
extent that such vesting occurs after the date that such Participant is no
longer serving as a director of the Savings Association, and b) the vesting of
Awards held by former Employees that continue to serve as a Director or Director
Emeritus to the extent that such vesting shall occur after the last date of
service as an Employee of the Savings Association and the level of Awards that
vest shall exceed the amount that such Participant would have received had he or
she been solely a director of the Savings Association and not an Employee as of
the Effective Date.
13. Recapitalization, Merger, Consolidation, Change in Control and Other
----------------------------------------------------------------------
Transactions.
- ------------
(a) Adjustment. Subject to any required action by the stockholders
of the Corporation, within the sole discretion of the Committee, the aggregate
number of Shares of Common Stock for which Options may be granted hereunder, the
number of Shares of Common Stock covered by each outstanding Option, and the
exercise price per Share of Common Stock of each such Option, shall all be
proportionately adjusted for any increase or decrease in the number of issued
and outstanding Shares of Common Stock resulting from a subdivision or
consolidation of Shares (whether by reason of merger, consolidation,
recapitalization, reclassification, split-up, combination of shares, or
otherwise) or the payment of a stock dividend (but only on the Common Stock) or
any other increase or decrease in the number of such Shares of Common Stock
effected without the receipt of consideration by the Corporation (other than
Shares held by dissenting stockholders).
(b) Change in Control. All outstanding Awards shall become
immediately exercisable in the event of a change in control of the Corporation,
as determined by the Committee, provided that such accelerated vesting is not
inconsistent with applicable regulations of the Office of
A-8
<PAGE>
Thrift Supervision at the time of such change in control. In the event of such a
change in control, the Optionee shall, at the discretion of the Committee, be
entitled to receive cash in an amount equal to the Fair Market Value of the
Common Stock subject to any Incentive or Non-Incentive Stock Option over the
Option Price of such Shares, in exchange for the surrender of such Options by
the Optionee on that date in the event of a change in control of the
Corporation. For purposes of this Section 13, "change in control" shall mean:
(i) the execution of an agreement for the sale of all, or a material portion, of
the assets of the Corporation; (ii) the execution of an agreement for a merger
or recapitalization of the Corporation or any merger or recapitalization whereby
the Corporation is not the surviving entity; (iii) a change of control of the
Corporation, as otherwise defined or determined by the Office of Thrift
Supervision or regulations promulgated by it; or (iv) the acquisition, directly
or indirectly, of the beneficial ownership (within the meaning of that term as
it is used in Section 13(d) of the Securities Exchange Act of 1934 and the rules
and regulations promulgated thereunder) of twenty-five percent (25%) or more of
the outstanding voting securities of the Corporation by any person, trust,
entity or group. This limitation shall not apply to the purchase of shares by
underwriters in connection with a public offering of Corporation stock, or the
purchase of shares of up to 25% of any class of securities of the Corporation by
a tax-qualified employee stock benefit plan which is exempt from the approval
requirements, set forth under 12 C.F.R. ss.574.3(c)(1)(vi) as now in effect or
as may hereafter be amended. The term "person" refers to an individual or a
corporation, partnership, trust, association, joint venture, pool, syndicate,
sole proprietorship, unincorporated organization or any other form of entity not
specifically listed herein. The decision of the Committee as to whether a change
in control has occurred shall be conclusive and binding.
(c) Extraordinary Corporate Action. Notwithstanding any provisions
of the Plan to the contrary, subject to any required action by the stockholders
of the Corporation, in the event of any change in control, recapitalization,
merger, consolidation, exchange of Shares, spin-off, reorganization, tender
offer, partial or complete liquidation or other extraordinary corporate action
or event, the Committee, in its sole discretion, shall have the power, prior or
subsequent to such action or event to:
(i) appropriately adjust the number of Shares of Common Stock
subject to each Option, the exercise price per Share of Common Stock, and the
consideration to be given or received by the Corporation upon the exercise of
any outstanding Option;
(ii) cancel any or all previously granted Options, provided
that appropriate consideration is paid to the Optionee in connection therewith;
and/or
(iii) make such other adjustments in connection with the Plan
as the Committee, in its sole discretion, deems necessary, desirable,
appropriate or advisable; provided, however, that no action shall be taken by
the Committee which would cause Incentive Stock Options granted pursuant to the
Plan to fail to meet the requirements of Section 422 of the Code without the
consent of the Optionee.
Except as expressly provided in Sections 13(a) and 13(b) hereof, no
Optionee shall have any rights by reason of the occurrence of any of the events
described in this Section 13. Notwithstanding anything herein at Section 13(c)
to the contrary, no action of the Board or the Committee with respect to
administration of the Plan or Awards thereunder shall be taken which shall be in
violation of applicable law, or applicable regulations or policies of the OTS in
effect at the time of such action.
A-9
<PAGE>
(d) Acceleration. The Committee shall at all times have the power to
accelerate the exercise date of Options previously granted under the Plan;
provided that such action is not contrary to regulations of the OTS then in
effect.
14. Time of Granting Options. The date of grant of an Option under the
Plan shall, for all purposes, be the date on which the Committee makes the
determination of granting such Option, but in no event prior to the Effective
Date. Notice of the grant of an Option shall be given to each individual to whom
an Option is so granted within a reasonable time after the date of such grant in
a form determined by the Committee.
15. Effective Date. The Plan shall become effective upon the date of
approval of the Plan by the stockholders of the Corporation, subject to approval
or non-objection by the Office of Thrift Supervision, if applicable.
16. Approval by Stockholders. The Plan shall be approved by stockholders
of the Corporation within twelve (12) months before or after the date the Plan
is approved by the Board.
17. Modification of Options. At any time and from time to time, the Board
may authorize the Committee to direct the execution of an instrument providing
for the modification of any outstanding Option, provided no such modification,
extension or renewal shall confer on the holder of said Option any right or
benefit which could not be conferred on him by the grant of a new Option at such
time, or shall not materially decrease the Optionee's benefits under the Option
without the consent of the holder of the Option, except as otherwise permitted
under Section 18 hereof. Notwithstanding the foregoing, in no event shall the
exercise price per Share of an Option be reduced except in such instances where
the product of the exercise price per Share times the number of Shares subject
to Options shall remain the same.
18. Amendment and Termination of the Plan.
-------------------------------------
(a) Action by the Board. The Board may alter, suspend or discontinue
the Plan, except that no action of the Board may increase (other than as
provided in Section 13 hereof) the maximum number of Shares permitted to be
optioned under the Plan, materially increase the benefits accruing to
Participants under the Plan or materially modify the requirements for
eligibility for participation in the Plan unless such action of the Board shall
be subject to approval or ratification by the stockholders of the Corporation.
(b) Change in Applicable Law. Notwithstanding any other provision
contained in the Plan, in the event of a change in any federal or state law,
rule or regulation which would make the exercise of all or part of any
previously granted Option unlawful or subject the Corporation to any penalty,
the Committee may restrict any such exercise without the consent of the Optionee
or other holder thereof in order to comply with any such law, rule or regulation
or to avoid any such penalty.
19. Conditions Upon Issuance of Shares. Shares shall not be issued with
respect to any Option granted under the Plan unless the issuance and delivery of
such Shares shall comply with all relevant provisions of law, including, without
limitation, the Securities Act of 1933, as amended, the rules and regulations
promulgated thereunder, any applicable state securities laws and the
requirements of any stock exchange upon which the Shares may then be listed.
A-10
<PAGE>
The inability of the Corporation to obtain any necessary authorizations,
approvals or letters of non-objection from any regulatory body or authority
deemed by the Corporation's counsel to be necessary to the lawful issuance and
sale of any Shares hereunder shall relieve the Corporation of any liability in
respect of the non-issuance or sale of such Shares.
As a condition to the exercise of an Option, the Corporation may require
the person exercising the Option to make such representations and warranties as
may be necessary to assure the availability of an exemption from the
registration requirements of federal or state securities law.
Notwithstanding anything herein to the contrary, upon the termination of
service of an Optionee by the Corporation or its Subsidiaries for "cause" as
defined at 12 C.F.R. 563.39(b)(1) as determined by the Board of Directors, all
Options held by such Participant shall cease to be exercisable as of the date of
such termination of service.
20. Reservation of Shares. During the term of the Plan, the Corporation
will reserve and keep available a number of Shares sufficient to satisfy the
requirements of the Plan.
21. Unsecured Obligation. No Participant under the Plan shall have any
interest in any fund or special asset of the Corporation by reason of the Plan
or the grant of any Option under the Plan. No trust fund shall be created in
connection with the Plan or any grant of any Option hereunder and there shall be
no required funding of amounts which may become payable to any Participant.
22. Withholding Tax. The Corporation shall have the right to deduct from
all amounts paid in cash with respect to the cashless exercise of Options under
the Plan any taxes required by law to be withheld with respect to such cash
payments. Where a Participant or other person is entitled to receive Shares
pursuant to the exercise of an Option pursuant to the Plan, the Corporation
shall have the right to require the Participant or such other person to pay the
Corporation the amount of any taxes which the Corporation is required to
withhold with respect to such Shares, or, in lieu thereof, to retain, or sell
without notice, a number of such Shares sufficient to cover the amount required
to be withheld.
23. Governing Law. The Plan shall be governed by and construed in
accordance with the laws of the Commonwealth of Kentucky, except to the extent
that federal law shall be deemed to apply.
A-11
EXHIBIT 10.3
<PAGE>
Exhibit B
Nelson County Federal Savings and Loan Association
Management Stock Bonus Plan
and Trust Agreement
Article I
---------
ESTABLISHMENT OF THE PLAN AND TRUST
1.01 Nelson County Federal Savings and Loan Association ("Savings
Association") hereby establishes the Management Stock Bonus Plan (the "Plan")
and Trust (the "Trust") upon the terms and conditions hereinafter stated in this
Management Stock Bonus Plan and Trust Agreement (the "Agreement").
1.02 The Trustee hereby accepts this Trust and agrees to hold the Trust
assets existing on the date of this Agreement and all additions and accretions
thereto upon the terms and conditions hereinafter stated.
Article II
----------
PURPOSE OF THE PLAN
2.01 The purpose of the Plan is to reward and retain personnel of
experience and ability in key positions of responsibility with the Savings
Association and its subsidiaries, by providing such key employees of the Savings
Association and its subsidiaries with an equity interest in the parent
corporation of the Savings Association, NCF Financial Corporation ("Parent"), as
compensation for their future professional contributions and service to the
Savings Association and its subsidiaries.
Article III
-----------
DEFINITIONS
The following words and phrases when used in this Plan with an initial
capital letter, unless the context clearly indicates otherwise, shall have the
meaning as set forth below. Wherever appropriate, the masculine pronoun shall
include the feminine pronoun and the singular shall include the plural.
3.01 "Beneficiary" means the person or persons designated by the Recipient
to receive any benefits payable under the Plan in the event of such Recipient's
death. Such person or persons shall be designated in writing on forms provided
for this purpose by the Committee and may be changed from time to time by
similar written notice to the Committee. In the absence of a written
designation, the Beneficiary shall be the Recipient's surviving spouse, if any,
or if none, the Recipient's estate.
3.02 "Board" means the Board of Directors of the Savings Association, or
any successor corporation or Parent thereto.
3.03 "Cause" is defined as personal dishonesty, incompetence, willful
misconduct, breach of fiduciary duty involving personal profits, intentional
failure to perform stated duties, willful violation of a material provision of
any law, rule or regulation (other than traffic violations and similar offense),
or
B-1
<PAGE>
a material violation of a final cease-and-desist order or any other action which
results in a substantial financial loss to the Parent, Savings Association or
its Subsidiaries.
3.04 "Committee" means the Management Stock Bonus Plan Committee appointed
by the Board pursuant to Article IV hereof.
3.05 "Common Stock" means shares of the common stock, $.10 par value per
share, of the Savings Association or any successor corporation or Parent
thereto.
3.05.1 "Director Emeritus" means a person serving as a director emeritus,
advisory director, consulting director, or other similar position as may be
appointed by the Board of Directors of the Savings Bank or the Corporation from
time to time.
3.06 "Employee" means any person who is employed by the Savings
Association or a Subsidiary.
3.07 "Effective Date" shall mean the date of stockholder approval of the
Plan by the Parent's stockholders.
3.08 "Parent" shall mean NCF Financial Corporation, the parent corporation
of the Savings Association.
3.09 "Plan Shares" means shares of Common Stock held in the Trust which
are awarded or issuable to a Recipient pursuant to the Plan.
3.10 "Plan Share Award" means a right granted to a Recipient under this
Plan to receive Plan Shares.
3.11 "Plan Share Reserve" means the shares of Common Stock held by the
Trustee pursuant to Sections 5.03 and 5.04.
3.12 "Recipient" means a person who receives a Plan Share Award under the
Plan.
3.13 "Savings Association" means Nelson County Federal Savings and Loan
Association, and any successor corporation thereto.
3.14 "Subsidiary" means those subsidiaries of the Savings Association
which, with the consent of the Board, agree to participate in this Plan.
3.15 "Trustee" or "Trustee Committee" means that person(s) or entity
nominated by the Committee and approved by the Board pursuant to Sections 4.01
and 4.02 to hold legal title to the Plan assets for the purposes set forth
herein.
B-2
<PAGE>
Article IV
----------
ADMINISTRATION OF THE PLAN
4.01 Role of the Committee. The Plan shall be administered and interpreted
by the Committee, which shall consist of not less than three non-employee
members of the Board, which shall have all of the powers allocated to it in this
and other sections of the Plan. All persons designated as members of the
Committee shall be "disinterested persons" within the meaning of Rule 16b-3
under the Securities Exchange Act of 1934, as amended ("1934 Act"). The
interpretation and construction by the Committee of any provisions of the Plan
or of any Plan Share Award granted hereunder shall be final and binding. The
Committee shall act by vote or written consent of a majority of its members.
Subject to the express provisions and limitations of the Plan, the Committee may
adopt such rules, regulations and procedures as it deems appropriate for the
conduct of its affairs. The Committee shall report its actions and decisions
with respect to the Plan to the Board at appropriate times, but in no event less
than one time per calendar year. The Committee shall recommend to the Board one
or more persons or entity to act as Trustee(s) in accordance with the provision
of this Plan and Trust and the terms of Article VIII hereof.
4.02 Role of the Board. The members of the Committee and the Trustee or
Trustees shall be appointed or approved by, and will serve at the pleasure of
the Board. The Board may in its discretion from time to time remove members
from, or add members to, the Committee, and may remove, replace or add Trustees.
The Board shall have all of the powers allocated to it in this and other
sections of the Plan, may take any action under or with respect to the Plan
which the Committee is authorized to take, and may reverse or override any
action taken or decision made by the Committee under or with respect to the
Plan, provided, however, that the Board may not revoke any Plan Share Award
already made except as provided in Section 7.01(b) herein. Members of the Board
who are eligible for or who have been granted Plan Share Awards may not vote on
any matters affecting the administration of the Plan or the grant of Plan Shares
or Plan Share Awards (although such members may be counted in determining the
existence of a quorum at any meeting of the Board during which actions taken).
Further, with respect to all actions taken by the Board in regard to the Plan,
such action shall be taken by a majority of the Board where such a majority of
the directors acting in the matter are "disinterested persons" within the
meaning of Rule 16b-3 promulgated under the 1934 Act.
4.03 Limitation on Liability. No member of the Board or the Committee or
the Trustee(s) shall be liable for any determination made in good faith with
respect to the Plan or any Plan Share Awards granted. If a member of the Board
or Committee or any Trustee is a party or is threatened to be made a party to
any threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by any reason of anything done or not
done by him in such capacity under or with respect to the Plan, the Parent shall
indemnify such member against expenses (including attorney's fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by him or
her in connection with such action, suit or proceeding if he or she acted in
good faith and in a manner he or she reasonably believed to be in the best
interests of the Parent, the Savings Association and its Subsidiaries and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
his conduct was unlawful.
B-3
<PAGE>
Article V
---------
CONTRIBUTIONS; PLAN SHARE RESERVE
5.01 Amount and Timing of Contributions. The Board of Directors of the
Savings Association shall determine the amounts (or the method of computing the
amounts) to be contributed by the Savings Association to the Trust established
under this Plan. Such amounts shall be paid to the Trustee at the time of
contribution. No contributions to the Trust by Employees shall be permitted.
5.02 Initial Investment. Any funds held by the Trust prior to investment
in the Common Stock shall be invested by the Trustee in such interest-bearing
account or accounts at the Savings Association as the Trustee shall determine to
be appropriate.
5.03 Investment of Trust Assets. Following approval of the Plan by
stockholders of the Parent and receipt of any other necessary regulatory
approvals, the Trust shall purchase Common Stock of the Parent in an amount
equal to up to 100% of the Trust's assets, after providing for any required
withholding as needed for tax purposes, provided, however, that the Trust shall
not purchase more than 30,820 shares of Common Stock representing 4% of the
aggregate shares of Common Stock issued by the Parent in the mutual-to-stock
conversion of the Savings Association ("Conversion"). The Trustee may purchase
shares of Common Stock in the open market or, in the alternative, may purchase
authorized but unissued shares of the Common Stock from the Parent sufficient to
fund the Plan Share Reserve.
5.04 Effect of Allocations, Returns and Forfeitures Upon Plan Share
Reserves. Upon the allocation of Plan Share Awards under Section 6.02, or the
decision of the Committee to return Plan Shares to the Parent, the Plan Share
Reserve shall be reduced by the number of Shares subject to the Awards so
allocated or returned. Any Shares subject to an Award which may not be earned
because of forfeiture by the Recipient pursuant to Section 7.01 shall be added
to the Plan Share Reserve.
Article VI
----------
ELIGIBILITY; ALLOCATIONS
6.01 Eligibility. Employees are eligible to receive Plan Share Awards
within the sole discretion of the Committee. Directors shall receive Plan Share
Awards pursuant to Section 6.05.
6.02 Allocations. The Committee will determine which of the Employees will
be granted Plan Share Awards and the number of Shares covered by each Award,
provided, however, that in no event shall any Awards be made which will violate
the Charter or Bylaws of the Savings Association or its Parent or Subsidiaries
or any applicable federal or state law or regulation. In the event Shares are
forfeited for any reason or additional Shares are purchased by the Trustee, the
Committee may, from time to time, determine which of the Employees will be
granted Plan Share Awards to be awarded from forfeited Shares. In selecting
those Employees to whom Plan Share Awards will be granted and the number of
shares covered by such Awards, the Committee shall consider the position, duties
and responsibilities of the Employees, the value of their services to the
Savings Association and its Subsidiaries, and any other factors the Committee
may deem relevant. All actions by the Committee shall be deemed final, except to
the extent that such actions are revoked by the Board. Notwithstanding anything
herein to the contrary, in no event shall any Employee receive Plan Share Awards
in excess of 25% of the aggregate Plan Shares authorized under the Plan.
B-4
<PAGE>
6.03 Form of Allocation. As promptly as practicable after a determination
is made pursuant to Section 6.02 or Section 6.05 that a Plan Share Award is to
be made, the Committee shall notify the Recipient in writing of the grant of the
Award, the number of Plan Shares covered by the Award, and the terms upon which
the Plan Shares subject to the award may be earned. The date on which the
Committee so notifies the Recipient shall be considered the date of grant of the
Plan Share Awards. The Committee shall maintain records as to all grants of Plan
Share Awards under the Plan.
6.04 Allocations Not Required. Notwithstanding anything to the contrary in
Sections 6.01 and 6.02 or Section 6.05, no Employee shall have any right or
entitlement to receive a Plan Share Award hereunder, such Awards being at the
total discretion of the Committee and the Board, nor shall the Employees as a
group have such a right. The Committee may, with the approval of the Board (or,
if so directed by the Board) return all Common Stock in the Plan Share Reserve
to the Savings Association at any time, and cease issuing Plan Share Awards.
6.05 Awards to Directors. Notwithstanding anything herein to the contrary,
upon the Effective Date, a Plan Share Award consisting of 1,541 Plan Shares
shall be awarded to each director of the Savings Association that is not
otherwise an Employee. Such Plan Share Award shall be earned and non-forfeitable
at the rate of one-fifth as of the one-year anniversary of the Effective Date
and an additional one-fifth following each of the next four successive years
during such periods of service as a director or director emeritus. Further, such
Plan Share Award shall be immediately 100% earned and non-forfeitable in the
event of the death or disability of such director, or upon a change in control
of the Savings Association or Parent as provided in Section 7.01(d) provided
that such accelerated vesting is not inconsistent with applicable regulations of
the Office of Thrift Supervision ("OTS") at the time of such change in control.
Subsequent to the Effective Date, Plan Share Awards may be awarded to newly
elected or appointed directors of the Savings Association by the Committee,
provided that total Plan Share Awards granted to non-employee directors of the
Savings Association shall not exceed 30% of total Plan Shares in the aggregate
under the Plan or 5% of total Plan Shares to any individual non-employee
director.
Article VII
-----------
EARNINGS AND DISTRIBUTION OF PLAN SHARES; VOTING RIGHTS
7.01 Earnings Plan Shares; Forfeitures.
(a) General Rules. Unless the Committee shall specifically state to the
contrary at the time a Plan Share Award is granted, Plan Shares subject to an
Award shall be earned and non-forfeitable by a Recipient at the rate of
one-fifth of such Award following one year after granting of such Award, and an
additional one-fifth following each of the next four successive years; provided
that such Recipient remains an Employee during such period. Notwithstanding
anything herein to the contrary, in no event shall a Plan Share Award granted
hereunder be earned and non-forfeitable by a Recipient more rapidly than at the
rate of one-fifth of such Award as of the one year anniversary of the date of
grant and an additional one-fifth following each of the next four successive
years.
(b) Revocation for Misconduct. Notwithstanding anything herein to the
contrary, the Board may, by resolution, immediately revoke, rescind and
terminate any Plan Share Award, or portion thereof, previously awarded under
this Plan, to the extent Plan Shares have not been delivered thereunder to the
Recipient, whether or not yet earned, in the case of an Employee who is
discharged from the employ of
B-5
<PAGE>
the Parent, Savings Association or a Subsidiary for Cause, or who is discovered
after termination of employment to have engaged in conduct that would have
justified termination for cause. A determination of Cause shall be made by the
Board within its sole discretion.
(c) Exception for Terminations Due to Death or Disability. Notwithstanding
the general rule contained in Section 7.01(a) above, all Plan Shares subject to
a Plan Share Award held by a Recipient whose employment or service with the
Parent, Savings Association or a Subsidiary terminates due to death or
disability (as determined by the Committee), shall be deemed earned and
nonforfeitable as of the Recipient's last day of employment with the Parent,
Savings Association or Subsidiary and shall be distributed as soon as
practicable thereafter.
(d) Exception for Termination after a Change in Control. Notwithstanding
the general rule contained in Section 7.01 above, all Plan Shares subject to a
Plan Share Award held by a Recipient shall be deemed to be immediately 100%
earned and non-forfeitable in the event of a "change in control" of the Parent
or Savings Association and shall be distributed as soon as practicable
thereafter; provided that such accelerated vesting is not inconsistent with
applicable regulations of the OTS at the time of such change in control. For
purposes of this Plan, "change in control" shall mean: (i) the execution of an
agreement for the sale of all, or a material portion, of the assets of the
Parent or Savings Association; (ii) the execution of an agreement for a merger
or recapitalization of the Parent or Savings Association or any merger or
recapitalization whereby the Parent or Savings Association is not the surviving
entity; (iii) a change of control of the Parent or Savings Association, as
otherwise defined or determined by the Office of Thrift Supervision or
regulations promulgated by it; or (iv) the acquisition, directly or indirectly,
of the beneficial ownership (within the meaning of that term as it is used in
Section 13(d) of the 1934 Act and the rules and regulations promulgated
thereunder) of twenty-five percent (25%) or more of the outstanding voting
securities of the Parent or Savings Association by any person, trust, entity or
group. This limitation shall not apply to the purchase of shares of up to 25% of
any class of securities of the Parent or Savings Association by a tax-qualified
employee stock benefit plan which is exempt from the approval requirements, set
forth under 12 C.F.R. ss.574.3(c)(1)(vi) as now in effect or as may hereafter be
amended. The term "person" refers to an individual or a corporation,
partnership, trust, association, joint venture, pool, syndicate, sole
proprietorship, unincorporated organization or any other form of entity not
specifically listed herein. The decision of the Committee as to whether a change
in control has occurred shall be conclusive and binding.
7.02 Payment of Dividends. A holder of a Plan Share Award, whether or not
non-forfeitable, shall also be entitled to receive an amount equal to any cash
dividends declared and paid with respect to shares of Common Stock represented
by such Plan Share Award between the date the relevant Plan Share Award was
initially granted to such Recipient and the date the Plan Shares are
distributed. Such dividend amounts shall be held in arrears under the Trust and
distributed upon the earning of the applicable Plan Share Award.
7.03 Distribution of Plan Shares.
(a) Timing of Distributions: General Rule. Except as provided in
Subsections (d) and (e) below, Plan Shares shall be distributed to the Recipient
or his Beneficiary, as the case may be, as soon as practicable after they have
been earned. No fractional shares shall be distributed.
(b) Form of Distribution. All Plan Shares, together with any shares
representing stock dividends, shall be distributed in the form of Common Stock.
One share of Common Stock shall be
B-6
<PAGE>
given for each Plan Share earned. Payments representing cash dividends (and
earnings thereon) shall be made in cash. Notwithstanding anything within the
Plan to the contrary, upon a Change in Control whereby substantially all of the
Common Stock of the Company shall be acquired for cash, all Plan Shares
associated with Plan Share Awards which are earned and non-forfeitable, together
with any shares representing stock dividends associated with Plan Share Awards,
shall be, at the sole discretion of the Committee, distributed as of the
effective date of such Change in Control, or as soon as administratively
feasible thereafter, in the form of cash equal to the consideration received in
exchange for such Common Stock represented by such Plan Shares.
(c) Withholding. The Trustee may withhold from any payment or distribution
made under this Plan sufficient amounts to cover any applicable withholding and
employment taxes, and if the amount of such payment is not sufficient, the
Trustee may require the Recipient or Beneficiary to have the Trustee withhold
from delivery a number of Plan Shares having a fair market value, at the time
withheld, sufficient to satisfy such withholding and employment taxes, or to pay
to the Trustee the amount required to be withheld as a condition of delivering
the Plan Shares. The Trustee shall pay over to the Parent, Savings Association
or Subsidiary which employs or employed such Recipient any such amount withheld
from or paid by the Recipient or Beneficiary.
(d) Timing: Exception for 10% Shareholders. Notwithstanding Subsection (a)
above, no Plan Shares may be distributed prior to the date which is five years
from the effective date of the Savings Association's conversion to stock form to
the extent the Recipient or Beneficiary, as the case may be, would after receipt
of such Shares own in excess of ten percent (10%) of the issued and outstanding
shares of Common Stock held by parties other than Parent, unless such action is
approved in advance by a majority vote of disinterested directors of the Board.
Any Plan Shares remaining undistributed solely by reason of the operation of
this Subsection (d) shall be distributed to the Recipient or his Beneficiary on
the date which is five years from the effective date of the Savings
Association's conversion to stock form.
(e) Regulatory Exceptions. No Plan Shares shall be distributed, however,
unless and until all of the requirements of all applicable law and regulation
shall have been fully complied with, including the receipt of approval of the
Plan by the stockholders of the Parent by such vote, if any, as may be required
by applicable law and regulations as determined by the Board.
7.04 Voting of Plan Shares. After a Plan Share Award has become earned
and non- forfeitable, the Recipient shall be entitled to direct the Trustee as
to the voting of the Plan Shares which are covered by the Plan Share Award and
which have not yet been distributed pursuant to Section 7.03, subject to rules
and procedures adopted by the Committee for this purpose. All shares of Common
Stock held by the Trust as to which Recipients are not entitled to direct, or
have not directed, the voting of such Shares, shall be voted by the Trustee as
directed by the Committee.
Article VIII
------------
TRUST
8.01 Trust. The Trustee shall receive, hold, administer, invest and make
distributions and disbursements from the Trust in accordance with the provisions
of the Plan and Trust and the applicable directions, rules, regulations,
procedures and policies established by the Committee pursuant to the Plan.
B-7
<PAGE>
8.02 Management of Trust. It is the intention of this Plan and Trust that
the Trustee shall have complete authority and discretion with respect to the
management, control and investment of the Trust, and that the Trustee shall
invest all assets of the Trust, except those attributable to cash dividends paid
with respect to Plan Shares not held in the Plan Share Reserve, in Common Stock
to the fullest extent practicable, and except to the extent that the Trustee
determines that the holding of monies in cash or cash equivalents is necessary
to meet the obligations of the Trust. In performing their duties, the Trustees
shall have the power to do all things and execute such instruments as may be
deemed necessary or proper, including the following powers:
(a) To invest up to one hundred percent (100%) of all Trust assets in the
Common Stock without regard to any law now or hereafter in force limiting
investments for Trustees or other fiduciaries. The investment authorized
herein may constitute the only investment of the Trust, and in making such
investment, the Trustees are authorized to purchase Common Stock from the
Parent or from any other source, and such Common Stock so purchased may be
outstanding, newly issued, or Treasury shares.
(b) To invest in any Trust assets not otherwise invested in accordance
with (a) above in such deposit accounts, and certificates of deposit
(including those issued by the Savings Association), obligations of the
United States government or its agencies or such other investments as
shall be considered the equivalent of cash.
(c) To sell, exchange or otherwise dispose of any property at any time
held or acquired by the Trust.
(d) To cause stocks, bonds or other securities to be registered in the
name of a nominee, without the addition of words indicating that such
security is an asset of the Trust (but accurate records shall be
maintained showing that such security is an asset of the Trust).
(e) To hold cash without interest in such amounts as may be in the opinion
of the Trustee reasonable for the proper operation of the Plan and Trust.
(f) To employ brokers, agents, custodians, consultants and accountants.
(g) To hire counsel to render advice with respect to their rights, duties
and obligations hereunder, and such other legal services or representation
as they may deem desirable.
(h) To hold funds and securities representing the amounts to be
distributed to a Recipient or his Beneficiary as a consequence of a
dispute as to the disposition thereof, whether in a segregated account or
held in common with other assets.
Notwithstanding anything herein contained to the contrary, the Trustee
shall not be required to make any inventory, appraisal or settlement or report
to any court, or to secure any order of court for the exercise of any power
herein contained, or to maintain bond.
8.03 Records and Accounts. The Trustee shall maintain accurate and
detailed records and accounts of all transactions of the Trust, which shall be
available at all reasonable times for inspection by any legally entitled person
or entity to the extent required by applicable law, or any other person
determined by the Committee.
B-8
<PAGE>
8.04 Earnings. All earnings, gains and losses with respect to Trust assets
shall be allocated in accordance with a reasonable procedure adopted by the
Committee, to bookkeeping accounts for Recipients or to the general account of
the Trust, depending on the nature and allocation of the assets generating such
earnings, gains and losses. In particular, any earnings on cash dividends
received with respect to shares of Common Stock shall be allocated to accounts
for Recipients, except to the extent that such cash dividends are distributed to
Recipients, if such shares are the subject of outstanding Plan Share Awards, or,
otherwise to the Plan Share Reserve.
8.05 Expenses. All costs and expenses incurred in the operation and
administration of this Plan shall be paid by the Savings Association.
8.06 Indemnification. The Parent shall indemnify, defend and hold the
Trustee harmless against all claims, expenses and liabilities arising out of or
related to the exercise of the Trustee's powers and the discharge of their
duties hereunder, unless the same shall be due to their gross negligence or
willful misconduct.
Article IX
----------
MISCELLANEOUS
9.01 Adjustments for Capital Changes. The aggregate number of Plan Shares
available for issuance pursuant to the Plan Share Awards and the number of
Shares to which any Plan Share Award relates shall be proportionately adjusted
for any increase or decrease in the total number of outstanding shares of Common
Stock issued subsequent to the effective date of the Plan resulting from any
split, subdivision or consolidation of shares or other capital adjustment, or
other increase or decrease in such shares effected without receipt or payment of
consideration by the Parent.
9.02 Amendment and Termination of the Plan. The Board may, by resolution,
at any time, amend or terminate the Plan. The power to amend or terminate the
Plan shall include the power to direct the Trustee to return to the Parent all
or any part of the assets of the Trust, including shares of Common Stock held in
the Plan Share Reserve, as well as shares of Common Stock and other assets
subject to Plan Share Awards which have not yet been earned by the Employees to
whom they have been granted. However, the termination of the Trust shall not
affect a Recipient's right to earn Plan Share Awards and to the distribution of
Common Stock relating thereto, including earnings thereon, in accordance with
the terms of this Plan and the grant by the Committee or the Board.
9.03 Nontransferable. Plan Share Awards and rights to Plan Shares shall
not be transferable by a Recipient, and during the lifetime of the Recipient,
Plan Shares may only be earned by and paid to the Recipient who was notified in
writing of the Award by the Committee pursuant to Section 6.03. No Recipient or
Beneficiary shall have any right in or claim to any assets of the Plan or Trust,
nor shall the Parent, Savings Association, or any Subsidiary be subject to any
claim for benefits hereunder.
9.04 No Employment Rights. Neither the Plan nor any grant of a Plan Share
Award or Plan Shares hereunder nor any action taken by the Trustee, the
Committee or the Board in connection with the Plan shall create any right,
either express or implied, on the part of any Employee to continue in the employ
of the Parent, Savings Association, or a Subsidiary thereof.
B-9
<PAGE>
9.05 Voting and Dividend Rights. No Recipient shall have any voting or
dividend rights of a stockholder with respect to any Plan Shares covered by a
Plan Share Award, except as expressly provided in Sections 7.02 and 7.04 above,
prior to the time said Plan Shares are actually distributed to such Recipient.
9.06 Governing Law. The Plan and Trust shall be governed by and construed
under the laws of the Commonwealth of Kentucky, except to the extent that
Federal Law shall be deemed applicable.
9.07 Effective Date. The Plan shall be effective as of the date of
approval of the Plan by stockholders of the Parent.
9.08 Term of Plan. This Plan shall remain in effect until the earlier of
(i) termination by the Board, (ii) the distribution of all assets of the Trust,
or (iii) 21 years from the Effective Date. Termination of the Plan shall not
effect any Plan Share Awards previously granted, and such Plan Share Awards
shall remain valid and in effect until they have been earned and paid, or by
their terms expire or are forfeited.
9.09 Tax Status of Trust. It is intended that the trust established hereby
be treated as a grantor trust of the Savings Association under the provisions of
Section 671 et seq. of the Internal Revenue Code of 1986, as amended, as the
same may be amended from time to time.
9.10 Allocation of Plan Expenses. The Parent shall reimburse the Savings
Association for all expenses associated with Awards under the Plan with respect
to: a) the vesting of Awards made in accordance with Section 6.05 to the extent
that such vesting occurs after the date that such Recipient is no longer serving
as a director of the Savings Association, and b) the vesting of Awards held by
former Employees that continue to serve as a director or director emeritus to
the extent that such vesting shall occur after the last date of service as an
Employee of the Savings Association and the level of Awards that vest shall
exceed the amount that such Recipient would have received had he or she been
solely a director of the Savings Association and not an Employee as of the
Effective Date.
B-10
EXHIBIT 13
<PAGE>
Letter to Stockholders
NCF Financial Corporation
Bardstown, Kentucky
Dear Fellow Shareholders:
More than two years have now passed since NCF Financial Corporation was
formed, and this second year has resulted in many positive changes. Our wholly
owned subsidiary, Nelson County Federal Savings and Loan, became a full service
commercial bank on April 2, 1997, as we completed a charter conversion process
that formally began in October of 1996. We are now NCF Bank and Trust Co.,
offering a full array of banking services from our new building on John Rowan
Boulevard. This new facility will allow us to better serve our customers as we
expand services to meet all of their banking needs. We have received many
complements on the design of the new building, and have found the new location
to be a very positive move.
This annual report details the financial performance of NCF Financial
and its banking affiliate, NCF Bank and Trust Co., and compares the 1997
performance to that of prior years. As you know, Nelson County Federal Savings
and Loan was required, along with all the 1,900 plus savings institutions who
are members of the S.A.I.F. portion of the Federal Deposit Insurance Corporation
(F.D.I.C.), to pay into the deposit fund, a one time special premium assessment.
Our assessment, charged directly to the bank's first quarter 1997 earnings, was
$151,771. The impact of this non-reoccurring charge on 1997 consolidated income
was over $100,000 after tax. Without this one time assessment, our income would
have been at a record level of $427,661.
We now move into our third year with great enthusiasm as we create the
new image for NCF Bank and Trust Co. Your ongoing support is always appreciated,
and your comments and suggestions are most welcome. Please remember, banking
with NCF Bank - "your bank" - pays you dividends. Tell your friends to visit
your new bank at 106 A. West John Rowan Blvd., Bardstown, KY 40004, or call us
at (502)348-9278.
Sincerely,
/s/A.E. Bowling
NCF Financial Corporation
A.E. Bowling, Chairman & President
1
<PAGE>
NCF FINANCIAL CORPORATION AND SUBSIDIARIES
------------------------------------------
BUSINESS OF THE COMPANY
- -----------------------
NCF Financial Corporation (the Corporation) is a Delaware corporation
organized in June of 1995 for the purpose of becoming the holding company of NCF
Bank and Trust Co. (the Bank), formerly Nelson County Federal Savings Bank in
connection with the conversion from the mutual to stock form of ownership (the
Conversion). On October 12, 1995, the Bank completed the Conversion and became a
wholly owned subsidiary of the Corporation. The Corporation is a bank holding
company regulated by the Board of Governors of the Federal Reserve System and
the primary business of the Company is the business of the Bank.
BUSINESS OF THE BANK
- --------------------
The Bank is a state chartered commercial bank headquartered in
Bardstown, Kentucky and was originally founded as a mutual institution in 1925
under the name of "Nelson County Building and Loan Association." In 1995, the
Bank became a federal stock savings and loan association and in July 1996
changed its name to "Nelson County Federal Savings Bank." Effective April 2,
1997, the Bank was approved as a commercial state bank and changed its name to
"NCF Bank and Trust Co." The Bank's deposits have been federally insured by the
Savings Association Insurance Fund (SAIF) and its predecessor, the Federal
Savings and Loan Insurance Corporation, since 1973, and the Bank is a member of
the Federal Home Loan Bank (the FHLB) System. The Bank has one subsidiary,
Nelson Service Corporation (NSC), which has no operating activity other than to
own stock in a third party service bureau.
The Bank is primarily engaged in attracting deposits from the general
public and using those funds to originate real estate loans on
one-to-four-family residences and to a lesser extent, residential construction,
multi-family real estate and consumer loans. In addition, the Bank holds
interest earning deposits in other financial institutions and invests in
mortgage-backed securities and investment securities. The Bank does not
typically originate fixed-rate loans of any kind, relying instead on
adjustable-rate loans that annually reprice. For its mortgage loan portfolio,
the Bank originates and retains adjustable-rate loans and does not purchase or
sell mortgage loans.
The Bank is subject to examination and comprehensive regulation by the
Commonwealth of Kentucky and its deposits are insured by the Federal Deposit
Insurance Corporation (FDIC) under the SAIF. The Bank is a member of and owns
capital stock in the FHLB of Cincinnati, which is one of the 12 regional banks
in the FHLB System.
The principal sources of funds for the Bank's lending activities are
deposits and the amortization, repayment and maturity of loans, and FHLB
advances. Principal sources of income are interest on loans and principal
expense is interest paid on deposits.
MARKET PRICE OF THE REGISTRANT'S COMMON STOCK
- ---------------------------------------------
The Corporation's stock is traded under the symbol "NCFD" on the
over-the-counter market and trades may be quoted on the "Pink Sheets". The most
recent trade of which management of the Corporation is aware occurred at $14.375
per share in July, 1997. The stock was first issued on October 12, 1995 at
$10.00 per share. Regular semi-annual dividends of .15 per share have been paid
to shareholders since May 15, 1996. The Corporation intends to continue to pay a
regular semi-annual dividend. Payment of dividends is subject to the
restrictions described in Note 8 of the Notes to Consolidated Financial
Statements. The following chart shows the range of high and low bid information
during each quarter for the past two fiscal years. These quotations reflect
inter-dealer prices without retail mark-up or mark-down or commission, and may
not represent actual trades.
Quarterly Stock Prices
- ----------------------
<TABLE>
<CAPTION>
September 30 December 31 March 31 June 30
------------ ----------- -------- -------
<S> <C> <C> <C> <C>
Year Ended June 30, 1997:
High $14.50 $13.375 $14.50 $14.50
Low $13.375 $13.375 $13.50 $14.00
Dividends $ - $ .15 $ - $ .15
Year Ended June 30, 1996:
High n/a $14.50 $13.50 $13.75
Low n/a $11.25 $12.00 $13.00
Dividends n/a $ - $ - $ .15
</TABLE>
2
<PAGE>
NCF FINANCIAL CORPORATION AND SUBSIDIARIES
------------------------------------------
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
----------------------------------------------
Financial Condition Data:
The following table sets forth certain information concerning the financial
position of the Corporation at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Total amount of: (Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Assets .......................................... $34,403 $34,905 $28,722 $27,555 $26,638
Loans receivable, net ........................... 27,046 28,861 26,574 22,582 23,241
Cash and interest-bearing deposits .............. 5,195 5,163 1,201 4,160 2,457
Mortgage-backed securities ...................... 132 143 182 274 434
Savings deposits ................................ 21,969 22,741 23,172 23,080 22,475
FHLB advances ................................... - - 700 - -
Net worth - substantially restricted ............ 12,050 11,803 (1) 4,636 4,320 3,996
Number of:
Real estate loans outstanding ................... 830 849 846 824 861
Savings deposit accounts ........................ 2,286 2,352 2,473 2,341 2,429
Full service offices ............................ 1 1 1 1 1
</TABLE>
(1) Includes net proceeds from stock issuance on October 12, 1995 of $6,835,737.
Operating Data:
The following table summarizes the Corporation's results of operations for each
of the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Interest income ................................... $ 2,573 $ 2,523 $ 2,030 $ 1,891 $ 1,981
Interest expense .................................. 1,043 1,122 1,007 848 985
Net interest income before provision
for loan losses .................................. 1,530 1,401 1,023 1,043 996
Provision for loan losses ......................... 16 61 20 50 19
Net interest income after provision
for loan losses .................................. 1,514 1,340 1,003 993 977
Other income ...................................... 20 23 18 24 21
Other expense ..................................... 1,028 (3) 762 533 482 464
Income before federal income tax and
cumulative effect adjustment ..................... 506 601 488 535 534
Federal income tax expense ........................ 178 203 171 184 181
Net income before cumulative effect adjustment .... 328 398 317 351 353
Cumulative effect of accounting change ............ - - - 27 (2) -
------- ------- ------- ------- -------
Net income ........................................ $ 328 $ 398 $ 317 $ 324 $ 353
======= ======= ======= ======= =======
</TABLE>
(2) lAccounting change under Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes."
(3) Includes one-time FDIC insurance premium assessment of $153,000.
<TABLE>
<CAPTION>
Other Data:
<S> <C> <C> <C> <C> <C>
Dividends per share ............................... $ .30 .15 n/a n/a n/a
Dividend payout ratio ............................. 68.18% 41.67% n/a n/a n/a
Return on assets (net income divided by
average total assets) ............................ .93% 1.16% 1.08% 1.18% 1.29%
Return on equity (net income divided by
average equity) .................................. 2.74% 4.20% 6.97% 7.71% 9.23%
Equity to assets (average equity divided
by average total assets) ......................... 33.77% 27.55% 15.50% 15.37% 14.03%
Book value per share .............................. $ 15.20 15.32 n/a n/a n/a
</TABLE>
3
<PAGE>
NCF FINANCIAL CORPORATION AND SUBSIDIARIES
------------------------------------------
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL INFORMATION
- -----------------------------------------------------
The management of NCF Financial Corporation is responsible for the
preparation of the financial statements and all other information in the Annual
Report. The financial statements were prepared in accordance with generally
accepted accounting principles appropriate in our circumstances.
The accounting system and internal accounting controls in use are
designed to provide reasonable assurance that the financial records are reliable
for preparing financial statements and maintaining accounting for assets, and
that assets are safeguarded against loss from unauthorized use or disposition.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
Comparisons of operating results for the years ended June 30, 1997 and
1996.
General - NCF Financial Corporation (the Corporation) is the parent to
its wholly-owned subsidiary, NCF Bank and Trust Co. (the Bank). The Corporation
generates interest income from interest-earning deposits, however, it's primary
source of net income is that which is generated by the Bank.
Stock Issuance - On October 12, 1995, the Bank successfully completed a
conversion from a mutual to stock form of ownership. In this process, the
Corporation issued 770,500 shares of common stock in exchange for net proceeds
of $7,335,737 after conversion costs of $369,263.
Results of Operations - Net income for the year ended June 30, 1997 was
$327,661 as compared to $397,790 for the year ended June 30, 1996. This decrease
of $70,129 or 17.6% is largely attributable to the charge to earnings for the
one-time FDIC assessment of $101,000, net of tax, however, the following
discussion outlines the factors contributing to the change in net income for
1997.
Net Interest Income - Net interest income increased by $129,434 during
fiscal 1997 to $1,529,958 as compared to $1,400,524 in fiscal 1996. This
increase was due to both the increase in volume of interest-earning assets and
the decline in interest-bearing liabilities. The Corporation experienced a full
year of investing the net proceeds of the prior year stock issuance, therefore,
average interest-earning assets increased by approximately $715,000 during
fiscal 1997 when compared to fiscal 1996. Also, the Bank experienced a decline
in average interest-bearing liabilities of approximately $1,019,000 during the
same period.
Provision for loan losses - Management periodically evaluates the
adequacy of the allowance for loan losses based on the Bank's past loan loss
experience, known and inherent risks in the portfolio, adverse situations that
may effect the borrower's ability to repay and other factors. The Bank has not
experienced any loan losses in the last several years, however, during the year
ended June 30, 1997, the Bank provided $16,000 for loan losses based on
management's decision to expand consumer lending. The Bank experienced an
increase in real estate acquired through foreclosure during the year ended June
30, 1997 of $724,486. These properties were considered non-performing loans
throughout most of the fiscal year, resulting in approximately $97,500 of
interest income that would have been recorded if they had been performing in
accordance with their contractual terms. Management does not believe additional
loan loss provisions are required for the real estate owned and these properties
have been recorded at the lower of cost or fair value less estimated selling
costs. The allowance for loan loss at June 30, 1997 is equal to .62% of loans
which the Bank feels is comparable to the coverage ratio of other Banks in its
region. At June 30, 1997, 95.6% of total loans were collateralized by
one-to-four-family dwellings on real estate located in the market area.
Other Income - Other income decreased from $23,341 to $19,645 during
the year primarily due to a decrease in customer charges for late payments on
loans.
4
<PAGE>
NCF FINANCIAL CORPORATION AND SUBSIDIARIES
------------------------------------------
Other Expenses - Other expenses increased $265,780 or 34.9% during
fiscal 1997 from $762,317 to $1,028,097. Included in this increase was a
$107,728 increase in compensation and employee benefits primarily due to
accruals for the Management Stock Bonus Plan. Also, the Bank incurred a one-time
charge to earnings for FDIC premiums of approximately $153,000 (see "Impact of
New Legislation" for further discussion).
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Bank's primary source of funds for meeting its liquidity needs are
customer deposits, principal and interest payments from loans and
mortgage-backed securities and earnings from operations retained by the
Corporation. The Bank uses its capital resources principally to fund loan
origination and to meet short and long-term liquidity needs. The Bank expects to
be able to fund its commitments on a timely basis. Bank management believes that
any excess liquidity is necessary in order to meet the additional personnel
needs of customers as the Bank begins to implement new products and services.
The Bank had leverage, Tier I and risk-based capital ratios of 26.7%,
52.5% and 53.5%, respectively at June 30, 1997, which exceeded the FDIC's
respective minimum requirements of 4%, 4% and 8%, respectively.
IMPACT OF INFLATION AND CHANGING PRICES
- ----------------------------------------
The financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in
historical dollars without considering changes in the relative purchasing power
of money over time due to inflation.
The Bank has an asset and liability structure that is essentially
monetary in nature. As a result, interest rates have a more significant impact
on the Bank's performance than the effects of general levels of inflation.
Periods of high inflation are often accompanied by relatively higher interest
rates and periods of low inflation are accompanied by relatively lower interest
rates. As market interest rates rise or fall in relation to the rates earned on
the Bank's loans and investments, the value of these assets decreases or
increases respectively.
IMPACT OF NEW LEGISLATION
- -------------------------
The Small Business Job Protection Act passed by Congress in August,
1996 included a provision that repealed the percentage of taxable income bad
debt deduction for federal income tax purposes. The Bank used this method to
determine its bad debt deduction when computing federal taxes in applicable
years. This legislation also requires recapture of the excess of bad debt
reserves over the base year reserves (December 31, 1987). For years subsequent
to the base year, deferred taxes have been recorded by the Bank for an amount
equal to the excess of the bad debt reserves over the base year reserves; thus
no additional tax provision is required as a result of this legislation. Under
the legislation, the Bank may use the experience method to calculate the bad
debt deduction for federal income tax purposes. The legislation is effective for
tax years beginning after December 31, 1995.
The Deposit Insurance Funds Act of 1996 was passed by Congress and
signed into law by the President on September 30, 1996. This legislation
includes provisions designed to recapitalize SAIF and required all insured
savings institutions to pay a special assessment of 65.7 cents for every $100
(0.657%) of applicable deposits held as of March 31, 1995. The Bank took a
charge in the year ended June 30, 1997 in the first quarter of $101,000 net of
taxes, or $.13 per share, as required by this legislation. As a result of the
recapitalization, the FDIC lowered SAIF premiums for most institutions from
$0.23 per $100 of insured deposits to $0.064 per $100 of insured deposits,
thereby lowering the Bank's federal deposit insurance rates by 72%, effective
January 1, 1997, which will enhance earnings in future periods.
5
<PAGE>
NCF FINANCIAL CORPORATION AND SUBSIDIARIES
------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
Comparisons of Operating Results for the years ended June 30, 1996 and
1995.
Results of Operations - Net income for the year ended June 30, 1996 was
$397,790 as compared to $316,553 for the year ended June 30, 1995. This increase
of $81,237 or 25.7% is largely attributable to the interest earnings on the
funds received from the stock issuance, however, the following discussion
outlines the factors contributing to the increase in net income for 1996.
Net Interest Income - Net interest income increased by $377,943 during
fiscal 1996 to $1,400,524 as compared to $1,022,581 in fiscal 1995. This
increase was primarily due to the increase in volume of interest-earning assets
resulting from the stock issuance. Interest-earning deposits increased by $3.97
million and net loans increased by $2.29 million.
Provision for loan losses - Management periodically evaluates the
adequacy of the allowance for loan losses based on the Bank's past loan loss
experience, known and inherent risks in the portfolio, adverse situations that
may effect the borrower's ability to repay and other factors. The Bank has not
experienced any loan losses in the last several years, however, during the year
ended June 30, 1996, the Bank provided $61,000 for loan losses following the
regulatory examination process. The allowance for loan loss at June 30, 1996 is
equal to .55% of loans which the Bank feels is closer to the coverage ratio of
other Banks in its region. At June 30, 1996, 94% of total loans were
collateralized by one-to-four-family dwellings on real estate located in the
market area.
Other Income - Other income increased from $18,311 to $23,341 during
the year primarily due to an increase in customer charges for late payments on
loans.
Other Expenses - Other expenses increased $228,976 or 42.9% during
fiscal 1996 from $533,341 to $762,317. Included in this increase was a $145,308
increase in compensation and employee benefits due to accruals for the newly
adopted Supplemental Executive Retirement Plan, Directors Consultation and
Retirement Plan and the Employee Stock Ownership Plan. The Bank experienced a
decline of $13,528 in annual salaries and benefits that were also in place in
1995. (See Note 9 of the Notes to Consolidated Financial Statements). An
additional reason for the change in other expenses was the result of an increase
in legal and accounting fees of $65,068 due to additional regulatory filings
after the stock issuance.
6
<PAGE>
WHELAN, DOERR, PIKE & PAWLEY, PSC R. Donald Whelan, CPA
[LOGO] William M. Doerr, CPA
CERTIFIED PUBLIC ACCOUNTANTS J. Alton Pike, CPA
J. Gregory Pawley, CPA
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
----------------------------
Board of Directors
NCF Financial Corporation and Subsidiaries
Bardstown, Kentucky
We have audited the accompanying consolidated balance sheets of NCF Financial
Corporation and Subsidiaries as of June 30, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the years in the two-year period ended June 30, 1997. These consolidated
financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. The financial statements of the Corporation for
the year ended June 30, 1995 were audited by other auditors whose report dated
August 17, 1995, expressed an unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall consolidated financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of NCF Financial
Corporation and Subsidiaries as of June 30, 1997 and 1996, and the results of
their operations and their cash flows for each of the years in the two-year
period ended June 30, 1997, in conformity with generally accepted accounting
principles.
/s/Whelan, Doerr, Pike & Pawley, PSC
Certified Public Accountants
Elizabethtown, Kentucky
July 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
P.O. Box 668 - 1002 N. Mulberry - Elizabethtown, KY 42702-0668 - (502) 765-4188 - FAX (502) 737-0988
</TABLE>
- --------------------------------------------------------------------------------
4602 Southern Parkway - Louisville, KY 40214 - (502) 361-4630
<PAGE>
NCF FINANCIAL CORPORATION AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
<TABLE>
<CAPTION>
June 30,
----------------------------
1997 1996
------------ -----------
ASSETS
------
<S> <C> <C>
Cash and due from banks $ 200,370 $ 195,210
Interest-earning deposits 4,994,761 4,967,748
Loans receivable, net (Notes 1 and 2) 27,046,450 28,861,111
Mortgage-backed securities (market value - 1997 -
$153,435, and 1996 - $164,993 (Notes 1 and 3) 132,357 143,347
Real estate owned (Note 1) 724,486 -
Premises and equipment, net (Notes 1 and 4) 518,898 50,823
Investment in Federal Home Loan Bank stock 441,700 412,100
Interest receivable 245,089 219,856
Deferred tax asset 57,602 3,922
Other assets 40,893 50,628
----------- -----------
TOTAL ASSETS $34,402,606 $34,904,745
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES:
- ------------
Savings deposits (Notes 1 and 5) $21,969,434 $22,741,108
Accrued expenses and other liabilities 379,555 246,856
Income taxes payable (Notes 1 and 6) 3,342 113,680
----------- -----------
TOTAL LIABILITIES 22,352,331 23,101,644
COMMITMENTS (Note 2) - -
STOCKHOLDERS' EQUITY (Note 7):
- ------------------------------
Serial preferred stock, $.01 par value per
share; 100,000 shares authorized and unissued - -
Common stock, $.10 par value per share;
authorized 1,400,000 shares; issued and
outstanding, 792,609 shares in 1997 and
770,500 shares in 1996 79,261 77,050
Additional paid-in capital 7,580,976 7,269,787
Retained earnings-substantially restricted 5,017,571 4,918,436
Unearned employee stock ownership plan (412,500) (462,172)
Unearned stock compensation plan (215,033) -
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 12,050,275 11,803,101
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $34,402,606 $34,904,745
=========== ===========
</TABLE>
See notes to consolidated financial statements.
8
<PAGE>
NCF FINANCIAL CORPORATION AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
<TABLE>
<CAPTION>
Years Ended June 30,
---------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
INTEREST INCOME:
- ----------------
Loans $2,249,202 $2,245,497 $1,895,727
Mortgage-backed securities 19,725 20,115 28,056
Interest-earning deposits 303,799 257,541 106,416
---------- ---------- ----------
TOTAL INTEREST INCOME 2,572,726 2,523,153 2,030,199
INTEREST EXPENSE:
- -----------------
Deposit accounts 1,042,768 1,105,006 980,945
Federal Home Loan Bank advances - 17,623 26,673
---------- ---------- ----------
TOTAL INTEREST EXPENSE 1,042,768 1,122,629 1,007,618
---------- ---------- ----------
NET INTEREST INCOME 1,529,958 1,400,524 1,022,581
Provision for loan losses (Notes 1 and 2) 16,000 61,000 20,000
---------- ---------- ----------
Net interest income after provision for loan losses 1,513,958 1,339,524 1,002,581
OTHER INCOME:
- -------------
Loan fees and service charges 19,645 23,341 15,975
Other - - 2,336
---------- ---------- ----------
TOTAL OTHER INCOME 19,645 23,341 18,311
OTHER EXPENSES:
- ---------------
Compensation and employee benefits 579,190 471,462 326,154
Net occupancy expense 34,333 26,388 23,617
Deposit insurance premiums 190,154 57,374 52,540
Data processing 37,557 34,203 34,029
State franchise and other taxes 46,498 27,565 26,256
Professional fees 57,832 77,543 12,475
Other operating expenses 82,533 67,782 58,270
---------- ---------- ----------
TOTAL OTHER EXPENSES 1,028,097 762,317 533,341
---------- ---------- ----------
Income before income taxes 505,506 600,548 487,551
Income taxes (Notes 1 and 6) 177,845 202,758 170,998
---------- ---------- ----------
NET INCOME $ 327,661 $ 397,790 $ 316,553
========== ========== ==========
NET INCOME PER SHARE OF COMMON STOCK (Note 7) $ .44 $ .34
========== ==========
PROFORMA NET INCOME PER SHARE OF COMMON STOCK (Note 7) $ .66
==========
</TABLE>
See notes to consolidated financial statements.
9
<PAGE>
NCF FINANCIAL CORPORATION AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
<TABLE>
<CAPTION>
Unearned
Employee Unearned
Common Additional Stock Stock
Stock Common Paid-in Retained Ownership Compensation
Shares Stock Capital Earnings Plan Plan Total
------- ------- ---------- ---------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, July 1, 1994 - $ - $ - $4,319,668 $ - $ - $ 4,319,668
Net income - - - 316,553 - - 316,553
------- ------- ---------- ---------- --------- --------- -----------
BALANCE, June 30, 1995 - - - 4,636,221 - - 4,636,221
Net income - - - 397,790 - - 397,790
Net proceeds from sale
of common stock 770,500 77,050 7,258,687 - (500,000) - 6,835,737
Fair value of shares committed
to be released from ESOP plan - - 11,100 - 37,828 - 48,928
Cash dividend paid - - - (115,575) - - (115,575)
------- ------- ---------- ---------- --------- --------- -----------
BALANCE, June 30, 1996 770,500 77,050 7,269,787 4,918,436 (462,172) - 11,803,101
Net income - - - 327,661 - - 327,661
Issuance of shares for stock
compensation plan 23,115 2,312 298,183 - - (300,495) -
Compensation expense under
stock compensation plan (1,006) (101) (7,409) - - 85,462 77,952
Fair value of shares committed
to be released from ESOP plan - - 20,415 - 49,672 - 70,087
Cash dividends paid - - - (228,526) - - (228,526)
------- ------- ---------- ---------- --------- --------- -----------
BALANCE, June 30, 1997 792,609 $79,261 $7,580,976 $5,017,571 $(412,500) $(215,033) $12,050,275
======= ======= ========== ========== ========= ========= ===========
</TABLE>
See notes to consolidated financial statements.
10
<PAGE>
NCF FINANCIAL CORPORATION AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
Years Ended June 30,
-------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
- ---------------------
Net income $ 327,661 $ 397,790 $ 316,553
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 15,868 16,808 14,378
Provision for loan losses 16,000 61,000 20,000
Deferred income taxes (benefit) (53,680) (53,922) -
FHLB dividends received in stock (29,600) (27,500) (23,400)
Amortization of deferred loan origination fees, net (545) (1,815) (1,255)
Accretion of discounts on mortgage-backed securities (248) (884) (1,868)
Increase (decrease) in allowance for uncollectible
interest 97,534 15,735 (586)
Increase in interest receivable (122,767) (116,785) (28,754)
Decrease (increase) in other assets 9,735 11,913 (14,918)
Increase in accrued expenses and other liabilities 132,699 86,196 55,358
(Decrease) increase in current income taxes payable (110,338) 110,680 3,000
ESOP and stock compensation plan expense 148,039 48,928 -
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 430,358 548,144 338,508
INVESTING ACTIVITIES:
- ---------------------
Principal payments on mortgage-backed securities 11,238 39,486 94,250
Net decrease (increase) in loans originated 1,074,720 (2,346,092) (4,011,667)
Acquisition of premises and equipment (483,943) (3,000) (38,163)
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 602,015 (2,309,606) (3,955,580)
FINANCING ACTIVITIES:
- ---------------------
Net (decrease) increase in deposits (771,674) (431,320) 92,775
Advances (repayments) from FHLB - (700,000) 700,000
Stock conversion cost - (234,187) (135,076)
Initial stock offering - 7,705,000 -
Dividends paid (228,526) (115,575) -
ESOP loan - (500,000) -
----------- ----------- -----------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (1,000,200) 5,723,918 657,699
----------- ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 32,173 3,962,456 (2,959,373)
CASH AND CASH EQUIVALENTS, beginning of year 5,162,958 1,200,502 4,159,875
CASH AND CASH EQUIVALENTS, end of year $ 5,195,131 $ 5,162,958 $ 1,200,502
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
11
<PAGE>
NCF FINANCIAL CORPORATION AND SUBSIDIARIES
------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
The following is a description of the more significant accounting policies
which NCF Financial Corporation follows in preparing and presenting its
consolidated financial statements:
1. Principles of Consolidation - The consolidated financial statements
include the accounts of NCF "Financial Corporation (the Corporation)
and its wholly-owned subsidiary, NCF Bank and Trust Co. (the "Bank)
and its wholly-owned subsidiary, Nelson Service Corporation.
Intercompany balances and "transactions have been eliminated. The
impact of Nelson Service Corporation (NSC) on the "consolidated
financial statements is insignificant. NSC has no operating activity
other than to own "stock in a third-party service bureau.
2. Loans Receivable - Loans receivable are carried at their unpaid
principal balance less net deferred "loan fees and allowances for
losses.
The Bank maintains allowances for losses on loans when a significant
and probable decline in value "occurs and for losses on real estate
acquired in settlement of loans. Loan loss provisions are "charged to
income when, in the opinion of management, such losses for which no
provision has been "made are expected to be incurred. Interest on
loans that are contractually past due more than 90 "days is charged to
an allowance and recognized as a reduction in interest income.
The allowance for loan losses is based upon an evaluation of the loan
portfolio. The evaluation "considers such factors as the delinquency
status of loans, current economic conditions, the net "realizable
value of the underlying security and prior loan loss experience.
Recovery of the carrying value of loans is dependent to some extent on
future economic, operating "and other conditions that may be beyond
the Bank's control. Unanticipated future adverse changes in "such
conditions could result in material adjustments to allowances and
therefore, the future results "of operations.
The Financial Accounting Standards Board (FASB) issued Statement No.
114, "Accounting by Creditors "for Impairment of a Loan". It requires
that impaired loans be measured based on the present value of
"expected future cash flows discounted at the loan's effective
interest rate or, as a practical "matter, at the loan's observable
market value or fair value of the collateral if the loan is
"collateral dependent. The Statement applies to financial statements
for fiscal years beginning "after December 15, 1994. The adoption of
this statement did not affect the level of the overall "allowance or
the operating results. The Bank defines the population of impaired
loans to be all "non-accrual loans.
Loan fees resulted from the origination of certain mortgage loans.
Such fees are deferred "("deferred loan fees") and reflected as a
reduction of the carrying value of mortgage loans. The "deferred fees
are amortized using the interest method over the contractual lives of
the loans.
The Bank does not charge any loan fees in connection with the
origination of current mortgage loan "production. Also, loan
origination costs such as attorney and appraisal fees are paid
directly by "the borrower. The only cost incurred by the Bank is the
time required to process the loan "application and minimal supplies.
Management has determined that capitalization of these costs is
"immaterial with respect to the Bank's yield on mortg loans. The Bank
continues to have deferred "loan origination fees for loans prior to
July 1, 1988 and some loans originated in 1992 which are "being
amortized to income on the interest level yield method.
12
<PAGE>
NCF FINANCIAL CORPORATION AND SUBSIDIARIES
------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
--------------------------------------------------------
The Bank's primary lending area is Nelson County, Kentucky. The
economy within this market area is "economically diverse, including a
variety of manufacturing industries. The Bank's primary lending
"activity is the origination of residential real estate loans secured
by first mortgage for the "purpose of acquisition or construction of
one-to-four family residential properties.
3. Securities - The Corporation records securities under Statement of
Financial Accounting Standards "No. 115 (SFAS No. 115) "Accounting for
Certain Investments in Debt and Equity Securities", which "requires
the classification of securities into three categories:
held-to-maturity, "available-for-sale, or trading. Based upon a
periodic review of the investment portfolio, debt "securities in which
the Corporation has a positive intent and ability to hold are
classified as "held-to-maturity and are carried at cost adjusted for
the amortization of premiums and discounts "using the interest method
over the terms of the securities. Gains and losses on the sale of
"investment securities are determined using the specific
identification method.
Debt and equity securities which do not fall into this category, nor
held for the purpose of selling "in the near term are classified as
available-for-sale. Unrealized holding gains and losses, net of
"income tax, on available-for-sale securities are reported as a net
amount in a separate component of "stockholders' equity until
realized. No securities have been classified as trading securities or
"available-for-sale.
4. Real Estate Owned - Real estate properties acquired through
foreclosure and in settlement of loans "are stated at the lower of
cost or fair value less estimated selling costs at the date of
"foreclosure. The excess of cost over fair value less the estimated
costs to sell at the time of "foreclosure is charged to the allowance
for loan losses. Costs relating to development and "improvement of
property are capitalized, whereas costs relating to holding property
are not "capitalized and are charged against operations in the current
period.
5. Premises and Equipment - Premises and equipment are carried at cost
less accumulated depreciation. "Depreciation is computed by the
straight-line method over the estimated useful lives of the assets.
6. Federal Home Loan Bank Stock - Investment in stock of a Federal Home
Loan Bank is required by law of "every federally insured savings and
loan or savings bank. The investment is carried at cost. No "ready
market exists for the stock, and it has no quoted market value.
7. Income Taxes - Deferred income taxes have been provided on income and
expenses reported for "financial statement purposes in periods which
differ from those in which they are reported for "income tax purposes.
8. Estimates and Assumptions - The preparation of consolidated financial
statements in conformity with "generally accepted accounting
principles requires management to make estimates and assumptions that
"affect the reported amounts of assets and liabilities and disclosure
of contingent assets and "liabilities at the date of the consolidated
financial statements and the reported amounts of "revenues and
expenses during the reporting period. Actual results could differ from
those "estimates.
9. Cash Flows - For purposes of the statement of cash flows, the
Corporation considers all highly "liquid debt instruments purchased
with a maturity of three months or less to be cash equivalents. "Cash
and cash equivalents include cash on hand and amounts due from banks.
10. Advertising Costs - The Corporation expenses all advertising costs
when they are incurred.
11. Reclassifications - Certain amounts for 1996 and 1995 have been
reclassified to conform to the presentation "for 1997.
13
<PAGE>
NCF FINANCIAL CORPORATION AND SUBSIDIARIES
------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
2. LOANS RECEIVABLE
----------------
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
June 30,
---------------------------
1997 1996
----------- -----------
<S> <C> <C>
Real estate first mortgage loans:
One-to-four family $23,438,389 $25,661,820
Construction 3,672,475 3,314,295
Multi-family residential 460,436 150,982
Non-residential 629,057 314,843
----------- -----------
Total real estate loans 28,200,357 29,441,940
Consumer loans:
Loans secured by deposit accounts 102,857 69,466
Other 59,929 -
----------- -----------
Total consumer loans 162,786 69,466
----------- -----------
Total loans 28,363,143 29,511,406
Less:
Undisbursed portion of loans in process 1,132,277 481,334
Net deferred loan origination fees 7,208 7,753
Allowance for loan losses 177,208 161,208
1,316,693 650,295
----------- -----------
$27,046,450 $28,861,111
=========== ===========
</TABLE>
Management of the Bank believes that its allowance for losses on its
loan portfolio are adequate. However, the estimates used by management in
determining the adequacy of such allowances are susceptible to significant
changes due primarily to changes in economic and market conditions. In addition,
various regulatory agencies periodically review the Bank's allowance for losses
as an integral part of their examination processes. Such agencies may require
the Bank to recognize additions to the allowances based on their judgments of
information available to them at the time of their examinations.
The changes in the allowance for loan losses are summarized as follows:
<TABLE>
<CAPTION>
Years Ended June 30,
------------------------
1997 1996
-------- --------
<S> <C> <C>
Beginning balance $161,208 $100,208
Provision for loan losses 16,000 61,000
Net charge-offs - -
-------- --------
Ending balance $177,208 $161,208
======== ========
</TABLE>
The Bank had outstanding commitments for mortgage loans of
approximately $450,000 and $300,000 at June 30, 1997 and 1996, respectively. The
commitments to originate loans at June 30, 1997 and 1996, were entirely composed
of variable rate loans.
The Bank did not participate in the servicing of loans for others on
any of the dates presented in these financial statements.
14
<PAGE>
NCF FINANCIAL CORPORATION AND SUBSIDIARIES
------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
2. LOANS RECEIVABLE - (Continued)
------------------------------
Information about the Bank's investment in impaired loans is as follows:
<TABLE>
<CAPTION>
June 30,
---------------------
1997 1996
-------- --------
<S> <C> <C>
Impaired loans with no related allowances $191,000 $755,000
======== ========
</TABLE>
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Average impaired loans outstanding $903,000 $828,000 $73,000
======== ======== =======
Interest income recognized $ - $ 704 $ -
======== ======== =======
Interest income received $ - $ 704 $ -
======== ======== =======
</TABLE>
Non-performing loans were $191,000 and $755,000 at June 30, 1997 and
1996, respectively. Interest income in the amount of $97,534, $16,439 and $704
for the year ended June 30, 1997, 1996 and 1995, respectively, would have been
recorded on non-performing loans if they had been performing in accordance with
their contractual terms.
3. MORTGAGE-BACKED SECURITIES
--------------------------
The amortized cost basis and fair valuesof mortgage-backed securities
are summarized as follows:
<TABLE>
<CAPTION>
Amortized Gross Gross
Cost Unrealized Unrealized Fair
Basis Gains Losses Value
-------- ------- --- --------
<S> <C> <C> <C> <C>
Securities held-to-maturity:
June 30, 1997:
GNMA Certificates $132,357 $21,078 $ - $153,435
======== ======= === ========
June 30, 1996:
GNMA Certificates $143,347 $21,646 $ - $164,993
======== ======= === ========
</TABLE>
There were no sales during the years ended June 30, 1997, 1996 and
1995.
4. PREMISES AND EQUIPMENT
----------------------
Premises and equipment consist of the following:
<TABLE>
<CAPTION>
June 30,
---------------------
1997 1996
-------- --------
<S> <C> <C>
Land and improvements $ 9,750 $ 9,750
Office buildings and improvements 559,026 85,770
Furniture, fixtures and equipment 133,147 122,460
Automobiles 28,864 28,864
730,787 246,844
Less accumulated depreciation 211,889 196,021
-------- --------
$518,898 $ 50,823
======== ========
</TABLE>
15
<PAGE>
NCF FINANCIAL CORPORATION AND SUBSIDIARIES
------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
4. PREMISES AND EQUIPMENT - (Continued)
------------------------------------
On February 1, 1996, the Bank leased land under a twenty year operating
lease agreement. The lease includes options to extend the terms of the lease for
an additional ten years. Rental expense was $9,600 and $4,000 for the year ended
June 30, 1997 and 1996, respectively. Future minimum commitments under this
non-cancelable lease are:
Year Ended
June 30,
--------
1998 $ 9,600
1999 9,600
2000 9,600
2001 10,600
2002 12,000
Thereafter 211,720
-------
Total $263,120
========
5. SAVINGS DEPOSITS
----------------
<TABLE>
<CAPTION>
Deposits at June 30 are summarized as follows:
Weighted
Average Rate 1997 1996
------------ ----------------------- -----------------------
1997 1996 Amount Percent Amount Percent
---- ---- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Demand & NOW Accounts 2.63% 2.90% $ 1,370,818 6.24% $ 1,123,564 4.94%
Money Market 2.90 2.90 1,495,144 6.80 1,466,484 6.45
Passbook Savings 3.08 3.06 2,870,799 13.07 2,960,115 13.02
----------- ------ ----------- ------
5,736,761 26.11 5,550,163 24.41
Certificates of Deposit
3.01% - 4.00% 85,252 .39 58,695 .26
4.01% - 5.00% 9,402,342 42.80 6,200,845 27.27
5.01% - 6.00% 6,031,037 27.45 9,563,514 42.05
6.01% - 7.00% 714,042 3.25 1,367,891 6.01
----------- ------ ----------- ------
16,232,673 73.89 17,190,945 75.59
----------- ------ ----------- ------
$21,969,434 100.00% $22,741,108 100.00%
=========== ====== =========== ======
</TABLE>
<TABLE>
<CAPTION>
At June 30, 1997, scheduled maturities of certificates of deposit are as
follows:
Amount Average Rate Percent
------ ------------ -------
<S> <C> <C> <C>
1998 $12,400,240 5.23% 76.39%
1999 3,494,382 5.67 21.53
2000 222,575 5.70 1.37
2001 106,476 5.52 .66
2002 - - -
Thereafter 9,000 5.14 .05
$16,232,673 100.00%
</TABLE>
16
<PAGE>
NCF FINANCIAL CORPORATION AND SUBSIDIARIES
------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
5. SAVINGS DEPOSITS - (Continued)
------------------------------
The average interest rate on the savings deposit portfolio, computed
without effect of compounding daily interest, at June 30, 1997 and 1996 is 4.70%
and 4.83%, respectively.
The Bank had certificates of deposit with balances of $100,000 or more
of $1,437,802 and $1,485,562 at June 30, 1997 and 1996, respectively.
<TABLE>
<CAPTION>
A summary of interest expense on deposits is as follows:
Years Ended June 30,
--------------------------------------
1997 1996 1995
---------- ---------- --------
<S> <C> <C> <C>
Passbook Savings $ 85,372 $ 85,817 $105,576
Money Market & NOW Accounts 75,127 75,748 91,917
Certificates of Deposit 882,269 943,441 783,452
---------- ---------- --------
$1,042,768 $1,105,006 $980,945
========== ========== ========
</TABLE>
6. INCOME TAXES
The Corporation and its subsidiaries file a consolidated federal income
tax return and income tax is apportioned among all companies based on their
taxable income or loss. Income tax expense is summarized as follows:
<TABLE>
<CAPTION>
Years Ended June 30,
------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Current $231,525 $256,680 $170,998
Deferred benefit (53,680) (53,922) -
-------- -------- --------
Total $177,845 $202,758 $170,998
======== ======== ========
</TABLE>
The effective tax rate differs from the federal statutory rate of 34%
due to the following:
<TABLE>
<CAPTION>
Years Ended June 30,
------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Statutory tax rate 34.0% 34.0% 34.00%
Increase (decrease) resulting from:
Other - net 1.2 (.2) 1.07
---- ---- -----
Effective tax rate 35.2% 33.8% 35.07%
==== ==== =====
</TABLE>
17
<PAGE>
NCF FINANCIAL CORPORATION AND SUBSIDIARIES
------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
6. INCOME TAXES - (Continued)
--------------------------
Temporary differences between the financial statements carrying amounts
and tax bases of assets and liabilities that give rise to significant portions
of deferred income taxes, relate to the following:
<TABLE>
<CAPTION>
June 30,
--------------------
1997 1996
-------- -------
<S> <C> <C>
Deferred tax assets:
Deferred loan origination fees $ 2,450 $ 2,636
-------- -------
Bad debt reserves 34,079 28,327
Reserve for uncollectible interest 38,751 5,589
Post-retirement benefits 73,559 39,919
-------- -------
148,839 76,471
Deferred tax liabilities:
Basis difference in FHLB stock 79,288 69,224
Depreciation differences 11,949 3,325
-------- -------
91,237 72,549
-------- -------
Net deferred tax asset $ 57,602 $ 3,922
======== =======
</TABLE>
The Bank's annual addition to its reserve for bad debts allowed under
the Internal Revenue Code may differ significantly from the bad debt
experience used for financial statement purposes. Such bad debt
deductions for income tax purposes are included in taxable income of
later years only if the bad debt reserves are used for purposes other
than to absorb bad debt losses. Since the Bank does not intend to use
the reserve for purposes other than to absorb losses, no deferred
income taxes have been provided on the amount of bad debt reserves for
tax purposes that arose in tax years beginning before December 31,
1987, in accordance with SFAS No. 109. Therefore, retained earnings at
June 30, 1997 and 1996 includes approximately $1,174,000, representing
such bad debt deductions for which no deferred income taxes have been
provided. In August, 1996, legislation was passed by Congress that
repealed the percentage of taxable income bad debt deduction and
requires recapture of the excess of bad debt reserves over the base
year reserve as of December 31, 1987. For years subsequent to the base
year, deferred taxes have been recorded; thus, no additional tax
provision is required as a result of this legislation.
7. STOCKHOLDERS' EQUITY
--------------------
1. Stock Conversion - Effective October 12, 1995, the Bank converted from
a federally-chartered mutual "savings and loan association to a
federally-chartered capital stock savings and loan association. In
"connection with the conversion, 770,500 shares of common stock were
sold at $10.00 per share. Net "proceeds from the sale of stock were
$7,335,737 after conversion costs of $369,263.
2. Net Worth/Dividend Restrictions - For the purpose of granting to
eligible savings account holders a "priority in the event of future
liquidation, the Savings Bank established a special account in an
"amount equal to its total retained income of $4,636,221 at June 30,
1995. In the event of future "liquidation (and only in such an event),
an eligible account holder who continues to maintain a "savings
account will be entitled to receive a distribution from the special
account. The total "amount of the special account decreases in an
amount proportionately corresponding to decreases in "the savings
account balances of eligible account holders on each subsequent annual
determination "date.
18
<PAGE>
NCF FINANCIAL CORPORATION AND SUBSIDIARIES
------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
7. STOCKHOLDERS' EQUITY - (Continued)
----------------------------------
The Savings Bank may not declare or pay a cash dividend on any of its
capital stock if the effect "thereof would cause the net worth of the
Savings Bank to be reduced below the amount required for "the
liquidation account.
Additionally, federal regulations limit dividend and capital
distributions during a calendar year to "the greater of: 100 percent
of the Bank's current net income plus the amount that would reduce by
"one-half its surplus capital ratio at the beginning of the calendar
year; or 75 percent of its net "income over the most recent
four-quarter period.
3. Earnings Per Share - Net income per share of common stock from the
date of conversion, October 12, "1995 to June 30, 1996 and for June
30, 1997, is computed by dividing net income for the period by the
"weighted average number of shares of common stock issued and
outstanding for the period. Common "stock equivalents have not been
used in computing net income per share because their effect is not
"material.
A proforma net income of $.66 per share of common stock for the year
ended June 30, 1996 has been "calculated as if the 770,500 common
shares were issued on July 1, 1995. Adjustments were made to net
"income by assuming that the net proceeds were available for
investment by the Savings Bank at the "weighted average interest rate
on all interest-earning assets from July 1, 1995 through October 12,
"1995.
4. Regulatory Capital Requirements - The Bank is subject to various
regulatory capital requirements "administered by the state banking
agencies. Failure to meet minimum capital requirements can "initiate
certain mandatory, and possibly additional discretionary, actions by
the state banking "agencies that, if undertaken, could have a direct
material effect on the Corporation's financial "statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective "action, a bank must meet specific capital guidelines that
involve quantitative measures of a bank's "assets, liabilities, and
certain off-balance sheet items as calculated under regulatory
accounting "practices. The amounts and classification of a bank's
capital are also subject to qualitative "judgments by the state
banking agencies about components, risk weightings, and other factors.
"Qualitative measures established by regulation to ensure capital
adequacy and to be classified as ""well capitalized" require the Bank
to maintain minimum amounts and ratios of risk-based, Tier I and
"leverage capital as set forth in the following table. In their
evaluation of capital adequacy, the "regulators assess exposure to
declines in the economic value of the Bank's capital adequacy, as well
"as exposure to declines in the economic value of capital due to
changes in interest rates. As of "June 30, 1997, the most recent
notification from state banking agencies categorized the Bank as "well
"capitalized" under the regulatory framework for prompt corrective
action. There are no conditions or "events since that notification
that management believes have changed the Bank's category.
<TABLE>
<CAPTION>
To Be Considered
Well Capitalized
Under Prompt
For Capital Correction
Actual Adequacy Purposes Action Provisions
------------------ ----------------- -----------------
As of June 30, 1997: Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Total risk-based capital (to risk-
weighted assets) $8,785,000 53.5% $1,312,800 8.0% $1,641,000 10.0%
Tier I capital (to risk-weighted
assets) $8,608,000 52.5% $ 656,400 4.0% $ 984,600 6.0%
Tier I leverage (to average assets) $8,608,000 26.7% $1,292,000 4.0% $1,615,000 5.0%
As of June 30, 1996:
Total risk-based capital (to risk-
weighted assets) $8,376,000 40.7% $1,647,600 8.0% $2,059,500 10.0%
Tier I capital (to risk-weighted
assets) $8,215,000 39.9% $ 823,800 4.0% $1,235,700 6.0%
Tier I leverage (to average assets) $8,215,000 23.9% $1,373,720 4.0% $1,717,150 5.0%
</TABLE>
19
<PAGE>
NCF FINANCIAL CORPORATION AND SUBSIDIARIES
------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
8. EMPLOYEE BENEFIT PLANS AND POST-RETIREMENT BENEFITS
---------------------------------------------------
1. Pension Plan - The Savings Bank is a participant in the Financial
Institutions Retirement Fund "(FIRF), a multi-employer defined benefit
pension plan covering substantially all employees. "Employees are 100%
vested at the completion of five years of participation in the plan.
The Savings "Bank's policy is to contribute annually the minimum
funding amounts. Employer contributions charged "to operations for
1996 were $3,264. The plan was fully funded for 1997 and 1995, thus
requiring no "contributions.
2. Employee Stock Ownership Plan - Savings Bank - Effective October,
1995, the Board of Directors of the "Bank formally adopted the Nelson
County Federal Employee Stock Ownership Plan (ESOP). Employees are
"eligible to participate in the ESOP upon completion of one year of
service. Employees are vested in "accordance with a schedule which
provides for 100% vesting upon completion of five years of service.
In October, 1995, the plan borrowed $500,000 from the Corporation to
purchase 50,000 shares of the "Corporation's common stock. The loan
matures in October, 2005 and interest is payable annually at a "rate
of 6.0%. The obligation of the ESOP to repay the debt is guaranteed by
the Savings Bank; "therefore, the unpaid balance of the borrowings has
been eliminated under principles of "consolidation in the accompanying
consolidated balan sheets.
The Bank makes annual contributions to the ESOP equal to the ESOP's
debt service. In addition, all "dividends received by the ESOP are
used to pay debt service. The ESOP shares initially were pledged "as
collateral for its debt. As the debt is repaid, shares are released
from collateral and allocated "to active employees, based on a
principal plus interest formula. The Bank accounts for its ESOP in
"accordance with Statement of Position 93-6. Accordingly, the shares
pledged as collateral are "reported as unearned ESOP shares in the
statement of financial position as a deduction from "stockholders'
equity. As shares are released from collateral, the Bank reports
compensation expense "equal to the current market price of the shares.
Only shares released for allocation are treated as "outstanding for
earnings-per-share computations. Only dividends that are paid on
shares released for "allocation are recorded as a reduction to
retained earnings. The dividends on unreleased shares used "to pay
debt service are reported as a reduction to debt service expense. ESOP
compensation expense "was $67,962 and $41,428 for the year ended June
30, 1997 and 1996, respectively. The ESOP shares as "of June 30, 1997
were as follows:
Allocated shares 8,737
Shares released for allocation 13
Unreleased shares 41,250
--------
Total ESOP shares 50,000
========
Fair value of unreleased shares $577,500
========
20
<PAGE>
NCF FINANCIAL CORPORATION AND SUBSIDIARIES
------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
8. EMPLOYEE BENEFIT PLANS AND POST-RETIREMENT BENEFITS - (Continued)
-----------------------------------------------------------------
3. Stock Option Plan - Under the 1995 Stock Option Plan, the Corporation
may grant either incentive or "non-incentive stock options to
officers, directors and key employees for an aggregate of 77,050
"shares of the Corporation's common stock at not less than fair market
value at the date such options "are granted. The option to purchase
shares expires ten years after the date of grant. The "Corporation
applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees". Accordingly, no "compensation cost has been recognized for
its plan. Had compensation cost for the Corporation's "Stock Option
Plan been determined based on the fair value at the grant dates for
awards under the "plan consistent with the method of SFAS No. 123,
"Accounting for Stock-Based Compensation", the "Corporation's net
income and earnings per share would have been restated to the
pro-forma amounts "indicated below:
<TABLE>
<CAPTION>
Years Ended
June 30,
---------------------
1997 1996
-------- --------
<S> <C> <C>
Net income: As reported $327,661 $397,790
Pro-forma $264,114 $386,730
Earnings per share: As reported $ .44 $ .34
Pro-forma $ .35 $ .33
</TABLE>
A summary of the Corporation's Stock Option Plan is presented below:
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1996
--------------------- ---------------------
Number of Exercise Number of Exercise
Options Price Options Price
------ ------ ------ ------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 57,784 $13.92 - $ -
Granted - - 57,784 13.92
Exercised - - - -
------ ------ ------ ------
Outstanding at end of year 57,784 $13.92 57,784 $13.92
====== ====== ====== ======
Options exercisable at year end 14,636 -
====== ======
Fair value of options granted
during the year $ n/a $ 6.96
======= =======
</TABLE>
All options were granted with an exercise price of $13.92 and have a
remaining contractual maturity "of 8.8 years at June 30, 1997.
The fair value of each stock option granted is estimated on the date
of grant using the Black-Scholes "option-pricing model with the
following assumptions for grants in 1996: 1) expected dividend yields
"at 2.16%, 2) risk-free interest rates at 7.5%, 3) expected volatility
at 11%, and 4) expected life of "options at 10 years.
4. Management Stock Bonus Plan - The Management Stock Bonus Plan (MSBP)
will be issued up to 30,820 "shares of the Corporation to be awarded
to directors, officers and key employees as an encouragement "to
remain in the employment or service of the Bank. Upon granting of a
MSBP award, 20% shall be "earned on the one-year anniversary of the
award and an additional 20% annually thereafter. Since the "stock is
issued in the plan before some or all of the services are performed,
part of the "consideration for stock issued is unearned compensation
and is shown as a separate reduction of "stockholders' equity.
Compensation expense will be recognized pro rata over the period
during which "the shares are earned. As of June 30, 1997, 23,115
shares have been granted. Compensation expense "during the year ended
June 30, 1997 and 1996 was $92,036 and $-0-, respectively.
21
<PAGE>
NCF FINANCIAL CORPORATION AND SUBSIDIARIES
------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
8. EMPLOYEE BENEFIT PLANS AND POST-RETIREMENT BENEFITS - (Continued)
-----------------------------------------------------------------
5. Post-Retirement Benefits -
1. Supplemental Executive Retirement Plan (SERP) - Effective January 1,
1996, the Bank approved the SERP for the President and Chief Executive
Officer. Upon retirement, the Bank will pay a monthly retirement
benefit in excess of the FIRF plan, not exceeding 2% times such
participant's average monthly compensation multiplied by total years
of service. Under Statement of Financial Accounting Standards No. 106
(FASB 106), "Employers Accounting for Post-Retirement Benefits Other
Than Pensions", the Bank has recorded plan expense of $95,895 during
the year ended June 30, 1996 as the present value of the expected
post-retirement benefit obligation. The plan is currently not funded.
During the year ended June 30, 1997, the Bank recorded a reduction of
$25,099 to the present value of the expected post-retirement benefit
obligation.
2. Directors Consultation and Retirement Plan (Directors Plan) -
Effective March 1, 1996, the Bank approved the Directors Plan to
provide each director with 15 years of service and a retirement age of
65, a monthly benefit equal to the directors fees in effect prior to
retirement. Benefits do not vest fully until three years following
plan implementation. Under FASB 106, the Bank has recorded plan
expense of $126,842 and $21,513 during the year ended June 30, 1997
and 1996, respectively, as the present value of the expected
post-retirement benefit obligation. The plan is currently not funded,
however, $2,800 in benefits were paid during the year ended June 30,
1997.
9. CASH FLOW ACTIVITIES
--------------------
The following information is presented as supplemental disclosures to the
statement of cash flows, as required by Statement of Financial Accounting
Standards No. 95.
Cash paid during the year ended June 30 for:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- --------
<S> <C> <C> <C>
Interest expense $1,057,530 $1,145,780 $958,072
========== ========== ========
Income taxes $ 341,863 $ 131,600 $170,388
========== ========== ========
</TABLE>
Supplemental disclosure of non-cash activities:
<TABLE>
<CAPTION>
Transfer from loans to real estate
acquired through foreclosure
<S> <C> <C> <C>
or in-substance foreclosure $ 724,486 $ - $ -
========== ===== ====
</TABLE>
22
<PAGE>
NCF FINANCIAL CORPORATION AND SUBSIDIARIES
------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
10. CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)
-----------------------------------------------------
The following condensed statements summarize the financial position,
operating results and cash flows of NCF Financial Corporation (Parent
Company only).
Condensed Statements of Financial Condition
<TABLE>
<CAPTION>
June 30,
----------------------------
1997 1996
----------- -----------
Assets
<S> <C> <C>
Cash and interest earning deposits $ 3,077,172 $ 3,077,144
Investment in subsidiary 9,235,797 8,677,019
Other assets 392,750 526,368
----------- -----------
$12,705,719 $12,280,531
=========== ===========
Liabilities and Stockholders' Equity
Other liabilities $ 27,910 $ 15,258
Stockholders' equity 12,677,809 12,265,273
----------- -----------
$12,705,719 $12,280,531
=========== ===========
</TABLE>
Condensed Statements of Income
<TABLE>
<CAPTION>
Years Ended
June 30,
----------------------------
1997 1996
----------- -----------
<S> <C> <C>
Cash dividends from subsidiary $ - $ -
----------- -----------
Interest income 181,250 121,425
181,250 121,425
Other expenses (66,226) (72,577)
----------- -----------
Net income before income tax expense 115,024 48,848
Income tax expense (32,741) (15,258)
----------- -----------
Income before equity in undistributed net
income of subsidiaries 82,283 33,590
Equity in undistributed net income of subsidiaries 245,378 229,205
----------- -----------
Net income $ 327,661 $ 262,795
=========== ===========
</TABLE>
23
<PAGE>
NCF FINANCIAL CORPORATION AND SUBSIDIARIES
------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
10. CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY) - (Continued)
-------------------------------------------------------------------
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended
June 30,
---------------------------
1997 1996
---------- -----------
<S> <C> <C>
Operating Activities:
Net income $ 327,661 $ 262,795
Adjustments to reconcile net income to
cash provided by operating activities:
Earnings from investment in subsidiary (245,378) (229,205)
Decrease (increase) in other assets 23,619 (26,368)
Increase in other liabilities 12,652 15,258
---------- -----------
Net cash provided by operating activities 118,554 22,480
Investing Activities:
Investment in subsidiary - (3,665,498)
ESOP loan 110,000 (500,000)
---------- -----------
Net cash provided by (used in) investing activities 110,000 (4,165,498)
Financing Activities:
Proceeds from stock issuance, net - 7,335,737
Dividends paid (228,526) (115,575)
---------- -----------
Net cash (used in) provided by financing activities (228,526) 7,220,162
Net increase in cash 28 3,077,144
Cash, beginning of year 3,077,144 -
---------- -----------
Cash, end of year $3,077,172 $ 3,077,144
========== ===========
</TABLE>
24
<PAGE>
NCF FINANCIAL CORPORATION AND SUBSIDIARIES
------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
11. 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
balance sheet, for which it is practicable to estimate that value. 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 instrument. Accordingly, the aggregate fair value amounts
presented are not intended to represent the underlying value of the
Corporation.
The methods and assumptions used by the Corporation in estimating its fair
value disclosures for financial instruments are presented below:
1. Cash and Interest Earning Deposits - The carrying amounts for cash and
interest earning deposits approximates their fair values.
2. Mortgage-Backed Securities - Fair values for investment securities are
based upon quoted market prices, where available. If quoted market
prices are not available, fair values are based on quoted market
prices of comparable instruments.
3. Loans, net - 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 of other types of loans are
estimated by discounting the future cash flows using current interest
rates at which similar loans would be made to borrowers with similar
credit quality and for the same remaining maturities.
4. Deposits - The fair values for demand deposits, savings accounts and
certain money market deposits are the amounts payable on demand at the
reporting date. The carrying amounts for variable-rate, money market
accounts and certificates of deposit approximate their fair values at
the reporting date. Fair values for fixed-rate certificates of deposit
are estimated using a discounted cash flow calculation that applies
interest rates currently being offered on certificates to a schedule
of aggregated expected monthly maturities on time deposits.
5. Advances from Federal Home Loan Bank - The fair values for long-term
debt are estimated using discounted cash flow analyses, based on the
Corporation's current incremental borrowing rates for similar types of
borrowing arrangements.
6. Commitments to Extend Credit and Standby Letters of Credit - The fair
values of commitments to extend credit is estimated using fees
currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the present
creditworthiness of the customer. For fixed-rate loan commitments,
fair value also considers the difference between current levels of
interest rates and the committed rates. The fair values of standby
letters of credit are based on fees currently charged for similar
agreements or on the estimated cost to terminate them or otherwise
settle the obligations with the counter parties at the reporting date.
The value of these financial instruments was not material at June 30,
1997 and 1996.
25
<PAGE>
NCF FINANCIAL CORPORATION AND SUBSIDIARIES
------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
11. FAIR VALUES OF FINANCIAL INSTRUMENTS - (Continued)
--------------------------------------------------
The estimated fair values of the Corporation's financial instruments are as
follows:
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1996
-------------------------- --------------------------
Carrying Fair Carrying Fair
Value Value Value Value
----------- ----------- ----------- -----------
Financial assets:
<S> <C> <C> <C> <C>
Cash and interest bearing deposits $ 5,195,131 $ 5,195,131 $ 5,162,958 $ 5,162,958
Mortgage-backed securities $ 132,357 $ 153,435 $ 143,347 $ 164,993
Loans, net $27,046,450 $27,632,602 $28,861,111 $29,237,496
Financial liabilities:
Deposits $21,969,434 $21,973,758 $22,741,108 $22,737,575
</TABLE>
12. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
-------------------------------------------------
The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit. Those
instruments involve, to varying degrees, elements of credit and
interest-rate risk in excess of the amount recognized in the balance sheet.
The contract or notional amounts of those instruments reflect the extent of
the Bank's involvement in particular classes of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual notional amount of those instruments. The
Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts
do not necessarily represent future cash requirements. The Bank evaluates
each customer's credit worthiness. The amount of collateral obtained, if it
is deemed necessary by the Bank upon extension of credit, is based on
management's credit evaluation of the counterpart.
The Bank's only financial instruments with off-balance-sheet risk at June
30, 1997 and 1996 are outlined in Note 2.
26
<PAGE>
[CRISP HUGHES & CO., L.L.P LETTERHEAD]
Independent Auditors' Report
Board of Directors
Nelson County Federal Savings and Loan Association
Bardstown, Kentucky
We have audited the accompanying consolidated balance sheet of Nelson County
Federal Savings and Loan Association (Association) and Subsidiary as of June 30,
1995, and the related consolidated statements of income, retained earnings, and
cash flows for the year ending June 30, 1995. These financial statements are the
responsibility of the Association's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall consolidated financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Association and
Subsidiary as of June 30, 1995, and the results of their operations and their
cash flows for the year ending June 30, 1995, in conformity with generally
accepted accounting principles.
/s/ Crisp Hughes & Co., L.L.P.
Asheville, North Carolina
September 15, 1997
32 Orange Street . P.O. Box 3049 . Asheville, North Carolina 28802 .
(704) 254-2254 . FAX (704) 254-6859
Other Offices: Boone, Burnsville, Sylva, NC and Greenville, SC
Member of: The American Institute of Certified Public Accountants, The
Continental Association of CPA Firms, Inc., The Intercontinental Accounting
Associates and The North Carolina and South Carolina Associates of CPAs
27
<PAGE>
NCF FINANCIAL CORPORATION AND SUBSIDIARIES
------------------------------------------
CORPORATE INFORMATION
---------------------
SUBSIDIARIES: NCF Bank and Trust Co.
Nelson Service Corporation
MAIN OFFICE: 106A W. John Rowan Blvd.
Bardstown, KY 40004
DIRECTORS: A.E. Bowling
President, Chairman of the Board
Dan Biggs
Vice-President
John S. Tharp
Assistant Secretary
Retired; Insurance and Real Estate
Paul Barnes, DMD
Dentist
Robert C. Hurst
Pharmacist, Hurst Discount Drug, Inc.
Guthrie M. Wilson, III
Auto Dealer, Wilson Brothers, Inc.
DIRECTOR
EMERITUS: Ben T. Guthrie
Retired
OFFICERS: A.E. Bowling
President
Dan Biggs
Vice-President
Patricia Thomas
Secretary and Treasurer
AUDITORS: Whelan, Doerr, Pike & Pawley, PSC
Elizabethtown, KY
LEGAL COUNSEL: Malizia, Spidi, Sloane & Fisch, P.C.
Washington, DC
ANNUAL MEETING: The annual meeting of stockholders will be held at 10:00 a.m.
on October 30, 1997, at Hampton Inn, 985 Chambers Blvd.,
Bardstown, Kentucky.
28
EXHIBIT 21
<PAGE>
EXHIBIT 21
Subsidiaries of the Company
Percentage Jurisdiction of
Subsidiaries Owned Incorporation
- ------------ ----------- ---------------
NCF Bank & Trust Co. 100% Kentucky
Nelson Service Corporation* 100% Kentucky
- ---------------------
* Nelson Service Corporation is a wholly owned subsidiary, of NCF Bank &
Trust Co.
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 200
<INT-BEARING-DEPOSITS> 4,995
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 132
<INVESTMENTS-MARKET> 153
<LOANS> 27,225
<ALLOWANCE> 177
<TOTAL-ASSETS> 34,403
<DEPOSITS> 21,969
<SHORT-TERM> 0
<LIABILITIES-OTHER> 383
<LONG-TERM> 0
0
0
<COMMON> 79
<OTHER-SE> 11,971
<TOTAL-LIABILITIES-AND-EQUITY> 34,403
<INTEREST-LOAN> 2,249
<INTEREST-INVEST> 20
<INTEREST-OTHER> 304
<INTEREST-TOTAL> 2,573
<INTEREST-DEPOSIT> 1,043
<INTEREST-EXPENSE> 1,043
<INTEREST-INCOME-NET> 1,530
<LOAN-LOSSES> 16
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,028
<INCOME-PRETAX> 506
<INCOME-PRE-EXTRAORDINARY> 328
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 328
<EPS-PRIMARY> .44
<EPS-DILUTED> .44
<YIELD-ACTUAL> 2.93
<LOANS-NON> 191
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 191
<ALLOWANCE-OPEN> 161
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 177
<ALLOWANCE-DOMESTIC> 177
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
