<PAGE> 1
FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For Quarterly Period ended September 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-------------- ---------------
Commission File Number: 0-25960
-------
THE BANK OF KENTUCKY FINANCIAL CORPORATION
------------------------------------------------
(Name of small business issuer in its charter)
Kentucky 61-1256535
------------------------------ ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1065 Burlington Pike, Florence, Kentucky 41042
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (606) 371-2340
--------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the issuer was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
--- ---
As of October 15, 1997, the latest practicable date, 1,750,467 shares of the
Registrant's Common Stock, $5.00 per value per share, were issued and
outstanding.
Transitional Small Business Disclosure Format Yes No X
----- -----
<PAGE> 2
THE BANK OF KENTUCKY FINANCIAL CORPORATION
INDEX
<TABLE>
<CAPTION>
FINANCIAL INFORMATION PAGE
----
<S> <C>
The Bank of Kentucky Financial Corporation
Consolidated Statements of Financial Condition 1
The Bank of Kentucky Financial Corporation
Consolidated Statements of Income 2
The Bank of Kentucky Financial Corporation
Consolidated Statements of Changes
in Shareholders' Equity 3
The Bank of Kentucky Financial Corporation
Consolidated Statements of Cash Flows 4
The Bank of Kentucky Financial Corporation
Notes to Consolidated Financial Statements 5
The Bank of Kentucky Financial Corporation
Management's Discussion and Analysis of
Financial Condition and Results of Operations 6
The Bank of Kentucky Financial Corporation
Part II 8
The Bank of Kentucky Financial Corporation
Signatures 9
</TABLE>
<PAGE> 3
THE BANK OF KENTUCKY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1997 1996
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 9,311 $ 10,762
Interest bearing deposits with banks 560 685
Available-for-sale securities 8,341 11,530
Held-to-maturity securities 21,752 16,815
Total loans 178,871 154,048
Less: Allowances for loan losses 2,060 1,752
--------- ---------
Net loans 176,811 152,296
Premises and equipment, net 3,014 2,655
FHLB stock, at cost 1,853 629
Accrued interest receivable 1,478 1,216
Other assets 529 532
--------- ---------
Total assets $ 223,649 $ 197,120
========= =========
LIABILITIES & SHAREHOLDERS' EQUITY
LIABILITIES
Deposits $ 184,162 $ 171,663
Short-term borrowings 18,338 6,618
Notes payable 205 216
Accrued interest payable & other liabilities 1,623 1,238
--------- ---------
Total liabilities 204,328 179,735
SHAREHOLDERS' EQUITY
Common stock 2,917 2,917
Additional paid-in capital 7,478 7,478
Retained earnings 8,926 7,012
Net unrealized holding loss on available-for sale
securities 0 (22)
--------- ---------
Total shareholders' equity 19,321 17,385
--------- ---------
Total liabilities and shareholders' equity $ 223,649 $ 197,120
========= =========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> 4
THE BANK OF KENTUCKY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30 September 30
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including related fees $ 3,988 $ 3,249 $ 11,165 $ 9,047
Securities and other 494 441 1,401 1,333
----------- ----------- ----------- -----------
Total interest income 4,482 3,690 12,566 10,380
----------- ----------- ----------- -----------
INTEREST EXPENSE
Deposits 1,962 1,652 5,513 4,688
Borrowings 193 137 509 374
----------- ----------- ----------- -----------
Total interest expense 2,155 1,789 6,022 5,062
----------- ----------- ----------- -----------
Net interest income 2,327 1,901 6,544 5,318
Provision for loan losses (150) (135) (317) (309)
----------- ----------- ----------- -----------
Net interest income after
provision for loan losses 2,177 1,766 6,227 5,009
----------- ----------- ----------- -----------
NON-INTEREST INCOME
Service charges and fees 186 116 489 327
Gain/(loss) on securities 0 0 0 0
Other 172 66 419 233
----------- ----------- ----------- -----------
Total non-interest income 358 182 908 560
NON-INTEREST EXPENSE
Salaries and benefits 699 561 2,061 1,649
Occupancy and equipment 260 213 748 649
Deposit insurance 7 60 14 72
Data processing 96 59 281 151
Other 312 274 936 783
----------- ----------- ----------- -----------
Total non-interest expense 1,374 1,167 4,040 3,304
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 1,161 781 3,095 2,265
Less: income taxes (382) (268) (1,035) (785)
----------- ----------- ----------- -----------
NET INCOME $ 779 $ 513 $ 2,060 $ 1,480
=========== =========== =========== ===========
Earnings per share (Note 4) $ .44 $ .29 $ 1.18 $ .84
Dividends per share 0.085 0.085
Average shares outstanding 1,750,467 1,750,467 1,750,467 1,750,467
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> 5
THE BANK OF KENTUCKY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Balance January 1 $ 17,385 $ 15,392
Net income 2,060 1,480
Cash dividends paid (146) (145)
Change in net unrealized
gain/(loss) on available-for-sale securities 22 (49)
-------- --------
Balance September 30 $ 19,321 $ 16,678
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> 6
THE BANK OF KENTUCKY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30 1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 1,281 $ 1,480
Adjustments to reconcile net income to net cash
from operating activities 455 1,121
-------- --------
Net cash from operating activities 1,736 2,601
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from paydowns and maturities of
held-to-maturity securities 6,970 4,065
Proceeds from paydowns and maturities of
available-for-sale securities 5,180 4,581
Purchases of held-to-maturity securities (9,545) (1,555)
Purchases of available-for-sale securities (1,995) (7,496)
Net change in loans (10,633) (27,572)
Purchase stock in FHLB (675) (123)
Property and equipment expenditures (269) (535)
-------- --------
Net cash from investing activities (10,967) (28,635)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 144 20,956
Net change in short-term borrowings 9,572 3,743
Proceeds from exercise of stock options 0 0
Cash dividends paid (146) (145)
Payments on note payable (7) (10)
-------- --------
Net cash from financing activities 9,563 24,544
-------- --------
Net change in cash and cash equivalents 332 (1,490)
Cash and cash equivalents at beginning of period 10,762 11,132
-------- --------
Cash and cash equivalents at end of period $ 11,094 $ 9,642
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> 7
THE BANK OF KENTUCKY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
NOTE 1 - BASIS OF PRESENTATION:
- -------------------------------
The consolidated financial statements include the accounts of The Bank of
Kentucky Financial Corporation (the company) and its wholly owned subsidiary,
The Bank of Kentucky (the Bank). All significant intercompany accounts and
transactions have been eliminated.
NOTE 2 - GENERAL:
- -----------------
These financial statements were prepared in accordance with the instructions for
Form 10Q-SB and, therefore, do not include all of the disclosures necessary for
a complete presentation of financial position, results of operations and cash
flows in conformity with generally accepted accounting principles. Except for
the adoption of the required accounting changes described in Note 3, these
financial statements have been prepared on a basis consistent with the annual
financial statements and include, in the opinion of management, all adjustments,
consisting of only normal recurring adjustments, necessary for a fair
presentation of the results of operations and financial position at the end of
and for the periods presented.
NOTE 3 - ACCOUNTING CHANGES:
- ----------------------------
Effective January 1, 1997, the company adopted Financial Accounting Standard No.
125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities, was issued by the Financial Accounting Standards
Board in 1996. It revised the accounting for future transfers of financial
assets, such as loans and securities, and for distinguishing between sales and
secured borrowings. It is effective for some transactions in 1997 and others in
1998. Adoption of the Standard did not significantly impact the Company's
financial position or results of operations.
NOTE 4 - EARNINGS PER SHARE:
- ----------------------------
Earnings per share have been computed based upon the weighted average number of
shares outstanding during the periods presented, adjusted for the effect of
common stock equivalents, if significant. The stock option plan described below
did not have a significantly dilutive effect at September 30, 1997.
In the second quarter the company declared a three for one stock dividend
resulting in 1,750,467 shares outstanding. Earnings per share for the current
and prior periods have been restated to reflect the stock dividend.
NOTE 5 - STOCK OPTION PLAN:
- ---------------------------
In 1997 the Company's shareholders approved a Stock Option Plan which reserved
360,000 shares of common stock for granting options to directors and officers.
Under the terms of the plan, options will be granted at prices equal to or
higher than the fair value of shares at the grant date and will have a term of
ten years. During 1997 the Company granted 500 options, a total of 6,000
options, to each non-employee director at a price of $18.25 per share.
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND THE RESULTS OF OPERATIONS
SEPTEMBER 30, 1997
FINANCIAL CONDITION
Total assets at September 30, 1997 were $223,649,000 compared to $197,120,000 at
December 31, 1996, an increase of $26,529,000 (13.46%). This increase was
primarily due to a 16.11% increase in loans ($24,823,000) from $154,048,000 at
December 31, 1996 to $178,871,000 at September 30,1997, with $14,198,000 of this
growth occurring in the third quarter. The loan growth was funded by an increase
in deposits of $12,355,000 in the third quarter, from $171,807,000 at June
30,1997 to $184,162,000 at September 30, 1997 and an increase of $2,148,000 in
short term borrowings from $16,190,000 at June 30, 1997 to $18,338,000 at
September 30, 1997. For the year, short term borrowings, which consist of
customer repurchase agreements and overnight borrowings from the Federal Home
Loan Bank (FHLB), have increased from $6,618,000 to $18,338,000. Almost all of
that increase results from increased FHLB borrowings.
RESULTS OF OPERATIONS
GENERAL
Net income year to date increased significantly, from $1,480,000 in 1996 to
$2,060,000 in 1997, an increase of $580,000 (39.2%). Net income for the quarter
ended September 30, 1997 was $779,000 ($.44 per share) compared to $513,000
($.29 per share) during the same period in 1996, an increase of $266,000 (51%).
The increase in earnings was driven by improvements in net interest income and
non interest income.
NET INTEREST INCOME
Net interest income increased $426,000 (22.4%) in the third quarter of 1997 over
the same period in 1996, while the year to date total increased $1,226,000
(23.1%) from $5,318,000 in 1996 to $6,544,000 in 1997. The increase in net
interest income was driven by the continued growth in the loan portfolio.
PROVISION FOR LOAN LOSSES
The loan loss provision was $317,000 for the nine months ended September 30,1997
compared to $309,000 recorded in the same period in 1996. The ratio of
non-performing loans to total loans outstanding was at .06% at September
30,1997. The Bank has incurred net charge-offs of $9,000 through September 30,
1997 and the allowance for loan losses as a percent of total loans
<PAGE> 9
is 1.15% at September 30, 1997. Based upon their quarterly analysis of the loan
portfolio, management is satisfied that the allowance for loan losses is
adequate at September 30, 1997.
NON INTEREST INCOME
Total non interest income increased $348,000 (62.1%) to $908,000 through
September 30,1997, compared to $560,000 for the same period in 1996. Service
charges on deposits increased $70,000 (60.3%) in the third quarter over the same
period in 1996, while the year to date total increased $162,000 (49.5%) from
$327,000 in 1996 to $489,000 in 1997. This increase is driven primarily by
higher deposit volumes. Other fees increased $186,000 (79.8%) to $419,000
through September 30,1997, compared to $233,000 for the same period in 1996.
Increased income from the sale of mortgage loans into the secondary market and
from credit life insurance commissions accounted for approximately $90,000 of
the increase in other fees.
NON INTEREST EXPENSE
Non interest expense increased $736,000 (22.3%) to $4,040,000 through September
30, 1997, compared to $3,304,000 for the same period in 1996. The growth of non
interest expense slowed in the third quarter to $207,000 (17.7%) compared to
$241,000 (21.8%) in the second quarter of 1997 over the same periods in 1996.
Salary and benefit expenses continued to account for approximately half of the
increase with a year to date total of $2,061,000, compared to $1,649,000 for the
same period in 1996, an increase of $412,000 (25.0%). This large increase was
due to salary and benefit expense associated with the staffing of two new
branches in 1996 along with annual merit increases. Data processing expense
increased $130,000 (86.1%) through the first nine months of 1997 to $281,000
from $151,000 for the same period last year. Introduction of image technology in
the third quarter of 1996 and an increase in volume contributed to the increase
in data processing expense. Other operating expenses increased $153,000 (19.5%)
through September 30, 1997 to $936,000 from $783,000 for the same period in
1996.
LIQUIDITY AND CAPITAL RESOURCES
The company achieves liquidity by maintaining an appropriate balance between its
sources and uses of funds to assure that sufficient funds are available to meet
loan demands and deposit fluctuations. The Bank has established a network of
community banks to participate out loans to fund large loan request. In
addition, the Bank has the ability to draw funds from the Federal Home Loan Bank
and two of its correspondent banks to meet liquidity demands. Management is
satisfied that BKFC's liquidity is sufficient at September 30, 1997. For
purposes of determining a bank's deposit insurance assessment, the FDIC has
issued regulations that define a "well capitalized " bank as one with a leverage
ratio of 5% or more and a total risk-based ratio of 10% or more. At September
30, 1997, the Bank's leverage and total risk-based ratios were 8.6 % and 12.1 %
respectively, which exceed the well capitalized threshold.
<PAGE> 10
THE BANK OF KENTUCKY FINANCIAL CORPORATION
PART II
ITEM 1. Legal Proceedings
-----------------
Not applicable
ITEM 2. Changes in Securities
---------------------
Not applicable
ITEM 3. Defaults Upon Senior Securities
-------------------------------
Not applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Not applicable
ITEM 5. Other Information
-----------------
Not applicable
ITEM 6. Exhibits an Reports on Form 8 - K
---------------------------------
Exhibit 3.1 Articles of Incorporation of The Bank of Kentucky Financial
Corporation, as amended (Incorporated by reference to the Form 8-A
filed by Registrant on April 28, 1995 the "8-A", Exhibits 2(a), 2(b),
and 2(c).
Exhibit 3.2 By-Laws of The Bank of Kentucky Financial Corporation
(Incorporated by reference to the 8-A, Exhibit 2(d).
Exhibit 27 Financial Data Schedule.
Exhibit 99 Safe Harbor under the Private Securities Litigation Reform
Act of 1995.
<PAGE> 11
SIGNATURES
----------
Pursuant to the requirement of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
<TABLE>
<CAPTION>
<S> <C>
Date: November 8, 1997 /s/ Robert W. Zapp
----------------------------------- -----------------
Robert W. Zapp
President
Date: November 8, 1997 /s/ Robert D. Fulkerson
----------------------------------- -----------------------
Robert D. Fulkerson
Treasurer (Chief Financial Officer)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 9,165
<INT-BEARING-DEPOSITS> 560
<FED-FUNDS-SOLD> 146
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 8,341
<INVESTMENTS-CARRYING> 21,752
<INVESTMENTS-MARKET> 21,763
<LOANS> 178,871
<ALLOWANCE> 2,060
<TOTAL-ASSETS> 223,649
<DEPOSITS> 184,162
<SHORT-TERM> 18,338
<LIABILITIES-OTHER> 1,623
<LONG-TERM> 205
0
0
<COMMON> 2,917
<OTHER-SE> 14,344
<TOTAL-LIABILITIES-AND-EQUITY> 223,649
<INTEREST-LOAN> 11,165
<INTEREST-INVEST> 1,401
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 12,566
<INTEREST-DEPOSIT> 5,513
<INTEREST-EXPENSE> 6,022
<INTEREST-INCOME-NET> 6,544
<LOAN-LOSSES> 317
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,040
<INCOME-PRETAX> 3,095
<INCOME-PRE-EXTRAORDINARY> 3,095
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,060
<EPS-PRIMARY> 1.18
<EPS-DILUTED> 1.18
<YIELD-ACTUAL> 8.50
<LOANS-NON> 82
<LOANS-PAST> 25
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,752
<CHARGE-OFFS> 18
<RECOVERIES> 9
<ALLOWANCE-CLOSE> 2,060
<ALLOWANCE-DOMESTIC> 2,060
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<PAGE> 1
EXHIBIT 99
----------
SAFE HARBOR UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
----------------------------------------------------------------------
The Private Securities Litigation Reform Act of 1995 (the "Act")
provides a "safe harbor" for forward-looking statements to encourage companies
to provide prospective information about their companies, so long as those
statements are identified as forward-looking and are accompanied by meaningful
cautionary statements identifying important factors that could cause actual
results to differ materially from those discussed in the statement. The Bank of
Kentucky Financial Corporation ("BKFC") desires to take advantage of the "safe
harbor" provisions of the Act. Certain information, particularly information
regarding future economic performance and finances and plans and objectives of
management, contained or incorporated by reference in BKFC's Annual Report on
Form 10-KSB for fiscal year 1996 is forward-looking. In some cases, information
regarding certain important factors that could cause actual results of
operations or outcomes of other events to differ materially from any such
forward-looking statement appear together with such statement. In addition,
forward-looking statements are subject to other risks and uncertainties
affecting the financial institutions industry, including, but not limited to,
the following:
Interest Rate Risk
- ------------------
BKFC's operating results are dependent to a significant degree on its
net interest income, which is the difference between interest income from loans,
investments and other interest-earning assets and interest expense on deposits,
borrowings and other interest-bearing liabilities. The interest income and
interest expense of BKFC change as the interest rates on interest-earning assets
and interest-bearing liabilities change. Interest rates may change because of
general economic conditions, the policies of various regulatory authorities and
other factors beyond BKFC's control. In a rising interest rate environment,
loans tend to prepay slowly and new loans at higher rates increase slowly, while
interest paid on deposits increases rapidly because the terms to maturity of
deposits tend to be shorter than the terms to maturity or prepayment of loans.
Such differences in the adjustment of interest rates on assets and liabilities
may negatively affect BKFC's income.
Possible Inadequacy of the Allowance for Loan Losses
- ----------------------------------------------------
BKFC maintains an allowance for loan losses based upon a number of
relevant factors, including, but not limited to, trends in the level of
nonperforming assets and classified loans, current and anticipated economic
conditions in the primary lending area, past loss experience, possible losses
arising from specific problem loans and changes in the composition of the loan
portfolio. While the Board of Directors of BKFC believes that it uses the best
information available to determine the allowance for loan losses, unforeseen
market conditions could result in material adjustments, and net earnings could
be significantly adversely affected if circumstances differ substantially from
the assumptions used in making the final determination.
Loans not secured by one- to four-family residential real estate are
generally considered to involve greater risk of loss than loans secured by one-
to four-family residential real estate due, in part, to the effects of general
economic conditions. The repayment of commercial loans and multifamily
residential and nonresidential real estate loans generally depends upon the cash
flow from the operation of the business or property, which may be negatively
affected by national and local economic conditions. Construction loans may also
be negatively affected by such economic conditions, particularly loans made to
developers who do not have a buyer for a property before the loan is made. The
risk of default on consumer loans increases during periods of recession, high
unemployment and other adverse economic conditions. When consumers have trouble
paying their bills, they are more likely to pay mortgage loans than consumer
loans. In addition, the collateral securing such loans, if any, may decrease in
value more rapidly than the outstanding balance of the loan.
<PAGE> 2
Competition
- -----------
The Bank of Kentucky, Inc. (the "Bank") competes for deposits with
other savings associations, commercial banks and credit unions and issuers of
commercial paper and other securities, such as shares in money market mutual
funds. The primary factors in competing for deposits are interest rates and
convenience of office location. In making loans, the Bank competes with other
commercial banks, savings and loan associations, savings banks, consumer finance
companies, credit unions, leasing companies, mortgage companies and other
lenders. Competition is affected by, among other things, the general
availability of lendable funds, general and local economic conditions, current
interest rate levels and other factors which are not readily predictable. The
size of financial institutions competing with the Bank is likely to increase as
a result of changes in statutes and regulations eliminating various restrictions
on interstate and inter-industry branching and acquisitions. Such increased
competition may have an adverse effect upon the Bank.
Legislation and Regulation that may Adversely Affect BKFC's Earnings
- --------------------------------------------------------------------
The Bank is subject to regulation by the Department of Financial
Institutions of the Commonwealth of Kentucky and the Federal Deposit Insurance
Corporation (the "FDIC") and is periodically examined by such regulatory
agencies to test compliance with various regulatory requirements. As a savings
and loan holding company, BKFC is also subject to regulation and examination by
the Board of Governors of the Federal Reserve System. Such supervision and
regulation of the Bank and BKFC are intended primarily for the protection of
depositors and not for the maximization of shareholder value and may affect the
ability of the company to engage in various business activities. The
assessments, filing fees and other costs associated with reports, examinations
and other regulatory matters are significant and may have an adverse effect on
BKFC's net earnings.
The FDIC is authorized to establish separate annual assessment rates
for deposit insurance of members of the Bank Insurance fund (the "BIF") and the
Savings Association Insurance Fund (the "SAIF"). The FDIC has established a
risk-based assessment system for both SAIF and BIF members. Under such system,
assessments may vary depending on the risk the institution poses to its deposit
insurance fund. Such risk level is determined by reference to the institution's
capital level and the FDIC's level of supervisory concern about the institution.
Because the reserves of the BIF exceeded the statutorily set minimum,
assessments for healthy BIF institutions were significantly decreased in the
last half of 1995 and were reduced to $2,000 per year for well-capitalized,
well-managed banks, like the Bank, in 1996. Assessments paid by healthy
institutions on deposits in the SAIF exceed that paid by healthy banks by
approximately $.23 per $100 in deposits in 1996.
Federal legislation that was effective September 30, 1996, provided for
the recapitalization of the SAIF by means of a special assessment of $.657 per
$100 in deposits held at March 31, 1995, in order to increase SAIF reserves to
the level required by law. Certain banks were required to pay the special
assessment on only 80% of SAIF deposits held at that date. That legislation also
required that BIF members begin to share the cost of prior thrift failures. As a
result of the recapitalization of the SAIF and this cost sharing between BIF and
SAIF members, FDIC assessments for healthy institutions during 1997 have been
set at $.013 per $100 in BIF deposits and $.064 per $100 in SAIF deposits. The
recapitalization plan also provides of the merger of the BIF and the SAIF
effective January 1, 1999, assuming there are no savings associations under
federal law. Under separate proposed legislation, Congress is considering the
elimination of the federal thrift charter. BKFC cannot predict the impact of
such legislation and the merger of the BIF and the SAIF on BKFC or the Bank
until the legislation is enacted and the funds are merged.
