<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 March 31, 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 May 5, 1997, the latest practicable date, 583,489 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
FINANCIAL INFORMATION PAGE
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
<PAGE> 3
THE BANK OF KENTUCKY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
1997 1996
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 11,527 $ 10,762
Interest bearing deposits with banks 685 685
Available-for-sale securities 10,889 11,530
Held-to-maturity securities 16,660 16,815
Total loans 158,528 154,048
Less: Allowances for loan losses 1,809 1,752
----------- -----------
Net loans 156,719 152,296
Premises and equipment, net 2,671 2,655
FHLB stock, at cost 1,239 629
Accrued interest receivable 1,356 1,216
Other assets 255 532
----------- -----------
Total assets $ 202,001 $ 197,120
=========== ===========
LIABILITIES & SHAREHOLDERS' EQUITY
LIABILITIES
Deposits $ 166,896 $ 171,663
Short-term borrowings 15,801 6,618
Notes payable 212 216
Accrued interest payable & other liabilities 1,280 1,238
----------- -----------
Total liabilities 184,189 179,735
SHAREHOLDERS' EQUITY
Common stock 2,917 2,917
Additional paid-in capital 7,478 7,478
Retained earnings 7,470 7,012
Unrealized loss on available-for sale
securities, net of tax (53) (22)
----------- -----------
Total shareholders' equity 17,812 17,385
----------- -----------
Total liabilities and shareholders' equity $ 202,001 $ 197,120
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> 4
THE BANK OF KENTUCKY FINACNIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
INTEREST INCOME
Loans, including related fees $ 3,471 $ 2,783
Securities and other 459 493
--------- ---------
Total interest income 3,930 3,276
--------- ---------
INTEREST EXPENSE
Deposits 1,742 1,529
Borrowings 137 104
--------- ---------
Total interest expense 1,879 1,633
--------- ---------
Net interest income 2,051 1,643
Provision for loan losses 68 55
--------- ---------
Net interest income after
provision for loan losses 1,983 1,588
--------- ---------
NON-INTEREST INCOME
Service charges and fees 140 98
Gain/(loss) on securities 0 0
Other 108 49
--------- ---------
Total non-interest income 248 147
NON-INTEREST EXPENSE
Salaries and benefits 677 523
Occupancy and equipment 240 214
Deposit insurance 0 7
Data processing 90 46
Other operating expenses 313 242
--------- ---------
Total non-interest income 1,320 1,032
--------- ---------
INCOME BEFORE INCOME TAXES 911 703
Less: income taxes 307 244
--------- ---------
Net income $ 604 $ 459
========= =========
Earnings per share (Note 4) $ 1.04 $ 0.79
Average shares outstanding 583,489 583,489
</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 604 459
Cash Dividends Paid (146) 0
Change in net unrealized
gain/(loss) on available-for-sale securities (31) 12
-------- --------
Balance March 31 $ 17,812 $ 15,863
======== ========
</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 THREE MONTHS ENDED MARCH 31 1997 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 604 $ 459
Adjustments to reconcile net income to net cash
from operating activities 343 424
-------- --------
Net cash from operating activities 947 883
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from paydowns and maturities of
held-to-maturity securities 3,600 1,500
Proceeds from paydowns and maturities of
available-for-sale securities 2,590 3,086
Purchases of held-to-maturity securities (3,445) (300)
Purchases of available-for-sale securities (1,995) (1,493)
Net change in loans (4,488) (8,773)
Purchase stock in FHLB (610) 0
Property and equipment expenditures (100) (37)
Net cash from investing activities (4,448) (6,017)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits (4,767) 4,875
Net change in short-term borrowings 9183 775
Proceeds from FHLB advances 0 0
Payments on FHLB advances 0 0
Cash dividends paid (146) 0
Payments on note payable (4) (3)
-------- --------
Net cash from financing activities 4,266 5,647
-------- --------
Net change in cash and cash equivalents 765 513
Cash and cash equivalents at beginning of period 10,762 11,132
-------- --------
Cash and cash equivalents at end of period $ 11,527 $ 11,645
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> 7
THE BANK OF KENTUCKY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 business
combination.
<PAGE> 8
THE BANK OF KENTUCKY FINANCIAL CORPORATION
Management's Discussion and Analysis of Financial Condition
and the Results of Operations
March 31, 1997
FINANCIAL CONDITION
Total assets at March 31,1997 were $202,001,000 compared to $197,120,000 at
December 31, 1996, an increase of $4,881,000 (2.48%). Short Term borrowings
increased $9,183,000 in the first quarter of 1997 from $6,618,000 at December
31, 1996. The company utilized $9,000,000 of short term FHLB borrowings to
offset a cyclical decrease in deposits of $4,767,000 (2.78%) to $166,896,000 at
March 31, 1997 compared to $171,663,000 at December 31, 1996 and to fund a
$4,480,000 (2.91%) increase in loans to $158,528,000 compared to $154,048,000
at December 31, 1996.
RESULTS OF OPERATIONS
GENERAL
Net income was $604,000 ($1.04 per share) for the first quarter of 1997
compared to $459,000 ($.79 per share) for the same period in 1996. This
increase was driven by a $408,000 increase in net interest income and a
$101,000 increase in non-interest income, partially offset by higher
non-interest expenses.
NET INTEREST INCOME
The increase in loan volume was primarily responsible for the large increase in
net interest income of $408,000(24.83%) in the first quarter of 1997 to
$2,051,000, compared to $1,643,000 for the same period in 1996.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $68,000 for the three months ending March 31,
1997, an increase of $13,000 compared to the $55,000 provision recorded during
the same period in 1996. At March 31, 1997 the Bank had $106,000 in
non-performing loans or .07% of total loans outstanding. Management believes
the reserve was adequate at March 31, 1997.
NON-INTEREST INCOME
Total non-interest income increased during the first quarter of 1997. It rose
from $147,000 in 1996 to $248,000 in 1997, an increase of $101,000 (68.70%).
Service charges on deposit accounts totaled $140,000 for the first quarter of
1997, compared to $98,000 for the same period in 1996, an increase of $42,000
(42.85%), driven by
<PAGE> 9
increased volume, but also by a fee increase that took place. Other fee income
also increased during the first quarter of 1997. It rose to $108,000 for 1997
from $49,000 in 1996, an increase of $59,000 (120.40%). All types of fees
showed increases but increased fees related to the sale of mortgage and SBA
loans accounted for $26,000 of the increase.
NON-INTEREST EXPENSE
Non-interest expense increased from $1,032,000 in the first quarter in 1996 to
$1,320,000 in 1997, an increase of $288,000 (27.90%) more than half of which
was due to an increase in salaries and employee benefits. Salary and benefit
expenses were $677,000 for the quarter ending March 31, 1997 compared to
$523,000 for the same period in 1996, an increase of $154,000 (29.44%). This
large increase was due to annual officer merit increases in the first quarter
and salary and benefit expenses associated with the staffing of two new
branches which opened in April 1996 and November 1996. Introduction of new
image technology and an increase in volume contributed to a large increase in
data processing expense of $44,000 (95.65%) in the first quarter of 1997 to
$90,000, from $46,000 for the same period in 1996. Other operating expenses
increased to $313,000 in the first quarter of 1997, from $242,000 for the same
period in 1996, an increase of $71,000 (29.99%).
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 corporation 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 March 31, 1997.
The corporations's total shareholders' equity increased $427,000, from
$17,385,000 at December 31, 1996 to $17,812,000 at March 31, 1997. In the first
quarter of 1997 BKFC paid a cash dividend of $.25 per share totaling $146,000.
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 March 31,
1997, the Bank's leverage and total risk-based ratios were 9.09% and 12.63%
respectively, which exceeds the well capitalized threshold.
<PAGE> 10
THE BANK OF KENTUCK Y 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
(a) 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.
Date: May 9, 1997 /s/ Robert W. Zapp
----------------- -----------------------------
Robert W. Zapp
President
Date: May 9, 1997 /s/ Robert D. Fulkerson
----------------- -----------------------------
Robert D. Fulkerson
Treasurer (Chief Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 8,298
<INT-BEARING-DEPOSITS> 685
<FED-FUNDS-SOLD> 3,229
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 10,889
<INVESTMENTS-CARRYING> 16,660
<INVESTMENTS-MARKET> 16,701
<LOANS> 158,528
<ALLOWANCE> 1,809
<TOTAL-ASSETS> 202,001
<DEPOSITS> 166,896
<SHORT-TERM> 15,801
<LIABILITIES-OTHER> 1,280
<LONG-TERM> 212
0
0
<COMMON> 2,917
<OTHER-SE> 14,895
<TOTAL-LIABILITIES-AND-EQUITY> 202,001
<INTEREST-LOAN> 3,471
<INTEREST-INVEST> 459
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 3,930
<INTEREST-DEPOSIT> 1,742
<INTEREST-EXPENSE> 1,879
<INTEREST-INCOME-NET> 2,051
<LOAN-LOSSES> 68
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,320
<INCOME-PRETAX> 911
<INCOME-PRE-EXTRAORDINARY> 911
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 604
<EPS-PRIMARY> 1.04
<EPS-DILUTED> 1.04
<YIELD-ACTUAL> 8.37
<LOANS-NON> 0
<LOANS-PAST> 106
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,752
<CHARGE-OFFS> 14
<RECOVERIES> 3
<ALLOWANCE-CLOSE> 1,809
<ALLOWANCE-DOMESTIC> 1,809
<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.
