<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, 1998
[ ] 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 November 8, 1998, the latest practicable date, 3,512,934 shares of the
Registrant's Common Stock, $5.00 par 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 7
The Bank of Kentucky Financial Corporation
Part II 9
The Bank of Kentucky Financial Corporation
Signatures 10
<PAGE> 3
THE BANK OF KENTUCKY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1998 1997
------------ -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 17,077 $ 10,125
Interest bearing deposits with banks 422 560
Available-for-sale securities 13,161 8,315
Held-to-maturity securities 22,857 24,259
Total loans 201,393 181,494
Less: Allowances for loan losses 2,082 2,078
----------- -----------
Net loans 199,311 179,416
Premises and equipment, net 3,343 3,519
FHLB stock, at cost 1,991 1,887
Accrued interest receivable and other assets 2,708 2,768
----------- -----------
Total assets $ 260,870 $ 230,849
=========== ===========
LIABILITIES & SHAREHOLDERS' EQUITY
LIABILITIES
Deposits $ 224,409 $ 199,207
Short-term borrowings 10,854 9,256
Notes payable 533 550
Accrued interest payable & other liabilities 1,732 1,509
----------- -----------
Total liabilities 237,528 210,522
SHAREHOLDERS' EQUITY
Common stock 2,957 2,932
Additional paid-in capital 7,618 7,523
Retained earnings 12,665 9,883
Net unrealized holding gain/(loss) on available-for sale
securities 102 (11)
----------- -----------
Total shareholders' equity 23,342 20,327
----------- -----------
Total liabilities and shareholders' equity $ 260,870 $ 230,849
=========== ===========
</TABLE>
See accompanying notes
<PAGE> 4
THE BANK OF KENTUCKY FINACNIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30 September 30
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including related fees $4,629 $3,988 $13,329 $11,165
Securities and other 584 494 1,608 1,401
------ ------ ------- -------
Total interest income 5,212 4,482 14,937 12,566
------ ------ ------- -------
INTEREST EXPENSE
Deposits 2,401 1,962 6,811 5,513
Borrowings 114 193 468 509
------ ------ ------- -------
Total interest expense 2,515 2,155 7,279 6,022
------ ------ ------- -------
Net interest income 2,697 2,327 7,658 6,544
Provision for loan losses (137) (150) (417) (317)
------ ------ ------- -------
Net interest income after
Provision for loan losses 2,560 2,177 7,241 6,227
------ ------ ------- -------
NON-INTEREST INCOME
Service charges and fees 279 186 755 489
Gain/(loss) on securities 0 0 0 0
Gain on loans sold 152 81 557 177
Other 111 91 326 242
------ ------ ------- -------
Total non-interest income 542 358 1,638 908
NON-INTEREST EXPENSE
Salaries and benefits 741 699 2,161 2,061
Occupancy and equipment 315 260 891 748
Data processing 100 96 331 281
Advertising 56 42 145 126
Other 318 277 950 824
------ ------ ------- -------
Total non-interest expense 1,530 1,374 4,478 4,040
------ ------ ------- -------
INCOME BEFORE INCOME TAXES 1,572 1,161 4,401 3,095
Less: income taxes (510) (382) (1,443) (1,035)
------ ------ ------- -------
NET INCOME $1,062 $ 779 $ 2,958 $ 2,060
====== ====== ======= =======
Earnings per share $ .30 $ .22 $ .84 $ .59
Earnings per share, assuming dilution $ .30 $ .22 $ .84 $ .59
Dividends per share $ 0 $ 0 $ .10 $ .08
</TABLE>
See accompanying notes
<PAGE> 5
THE BANK OF KENTUCKY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Balance January 1 $20,327 $17,385
Comprehensive Income:
Net Income 2,958 2,060
Change in net unrealized Gain/Loss on
Available-for-sale Securities 113 22
-- ------- -------
TOTAL COMPREHENSIVE INCOME 3,071 2,082
Cash dividends paid (176) (146)
Exercise of stock options (including tax benefit of $14) 120 0
-- ------- -------
Balance September 30 $23,342 $19,321
======= =======
</TABLE>
See accompanying notes
<PAGE> 6
THE BANK OF KENTUCKY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30 1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,958 $ 1,480
Adjustments to reconcile net income to net cash
From operating activities 548 1,121
-------- --------
Net cash from operating activities 3,506 2,601
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from paydowns and maturities of
Held-to-maturity securities 14,522 4,065
Proceeds from paydowns and maturities of
Available-for-sale securities 8,072 4,581
Purchases of held-to-maturity securities (13,114) (1,555)
Purchases of available-for-sale securities (12,733) (7,496)
Net change in loans (19,895) (27,572)
Purchase stock in FHLB 0 (123)
Property and equipment expenditures (119) (535)
-------- --------
Net cash from investing activities (23,267) (28,635)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 25,202 20,956
Net change in short-term borrowings 1,598 3,743
Proceeds from exercise of stock options 106 0
Cash dividends paid (176) (145)
Payments on note payable (17) (10)
-------- --------
Net cash from financing activities 26,713 24,544
-------- --------
Net change in cash and cash equivalents 6,952 (1,490)
Cash and cash equivalents at beginning of period 10,125 11,132
-------- --------
Cash and cash equivalents at end of period $17,077 $ 9,642
======== ========
</TABLE>
See accompanying notes
<PAGE> 7
THE BANK OF KENTUCKY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
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:
- ----------------------------
As required by a new accounting standard, comprehensive income is now reported
for all periods. Comprehensive income includes both net income and other
comprehensive income. Other comprehensive income includes the change in
unrealized gains and losses on securities available for sale, foreign currency
translation adjustments, and additional minimum pension liability adjustments.
<PAGE> 8
NOTE 4 - EARNINGS PER SHARE:
- ----------------------------
Earnings per share have been computed based upon the weighted average number of
shares outstanding during the period. In the second quarter the Company declared
a two for one stock split resulting in there being 1,754,467 additional shares
outstanding. Per share data for the prior periods has been restated to reflect
the stock dividend. Earnings per share are computed based upon the weighted
average shares outstanding during the period. Diluted earnings per share further
assume that average stock options outstanding are exercised and the proceeds,
including the relevant tax benefit, are used entirely to reacquire shares at the
average price during the period. The following table presents weighted average
shares outstanding and the number of shares used to compute diluted earnings per
share:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30 September 30
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted Average Shares Outstanding 3,512,780 3,500,934 3,509,639 3,500,934
Shares used to compute diluted
Earnings per share 3,532,315 3,500,934 3,519,289 3,500,934
</TABLE>
<PAGE> 9
THE BANK OF KENTUCKY FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND THE RESULTS OF OPERATIONS
SEPTEMBER 30, 1998
FINANCIAL CONDITION
Total assets at September 30, 1998 were $260,870,000 compared to $230,849,000 at
December 31, 1997, an increase of $30,021,000 (13.0%). This increase was
primarily due to an increase in loans of $19,899,000 (11.0%), from $181,494,000
at December 31, 1997 to $201,393,000 at September 30,1998. This growth was
funded by an increase in deposits of $25,202,000 (12.7%), from $199,207,000 at
December 31, 1997 to $224,409,000 at September 30,1998. Short-term borrowings
increased $1,598,000 (17.3%), from $9,256,000 at December 31, 1997 to
$10,854,000 at September 30,1998. Deposit growth of $18,354,000 during the third
quarter resulted in a decrease of $12,009,000 in short term borrowings during
the third quarter.
RESULTS OF OPERATIONS
GENERAL
Net income year to date increased significantly from $2,060,000 in 1997 to
$2,958,000 in 1998, an increase of $898,000 (43.6%). Net income for the quarter
ended September 30, 1998 was $1,062,000 ($.30 per share) compared to $779,000
($.22 per share) during the same period in 1997, an increase of $283,000
(36.3%). The increase in earnings was driven by improvements in non-interest
income, primarily due to loan sales activities, and net interest income,
primarily due to increased volume.
NET INTEREST INCOME
Net interest income increased $370,000 (15.9%) in the second quarter of 1998
over the same period in 1997, while the year to date total increased $1,114,000
(17.0%) from $6,544,000 in 1997 to $7,658,000 in 1998. 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 $417,000 for the nine months ended September 30,1998
compared to $317,000 recorded in the same period in 1997. The provision was
increased in response to continued loan growth and higher net charge-offs, which
were $413,000 through September 30, 1998. One loan accounted for $343,000 (83.0
%) of the net charge-offs. Non-performing loans at September 30, 1998 totaled
$505,000 or .25% of total loans outstanding compared to .06% at September 30,
1997. While higher than in 1997, this level of non-performing loans is still
well below peer levels. As a result of the continuing strong loan growth and
problem loan trends, management expects the loan loss provision will remain
higher through the remainder of the year. Management is satisfied that the
reserve is adequate at September 30, 1998.
<PAGE> 10
NON INTEREST INCOME
Total non-interest income increased $730,000 (80.4%) to $1,638,000 through
September 30,1998, compared to $908,000 for the same period in 1997. Service
charges on deposits increased $93,000 (50.0%) in the third quarter, to $279,000
for the quarter ending September 30,1998 compared to $186,000 for the same
period in 1997. This increase followed a $104,000 (63.8%) increase in the second
quarter. Transaction growth and fee increases in the first and second quarters
contributed to the continued growth in deposit fees. Income from the sale of
loans into the secondary market increased $380,000 (214.7%) to $557,000 through
September 30, 1998, compared to $177,000 for the same period in 1997. The Bank
originates fixed rate first mortgage loans and sells them, service released,
into the secondary market. The increase in fee income is driven by increased
volume. Through September 30, 1998, 270 loans with a principal balance of $28.2
million were sold compared to 115 loans with a principal balance of $10.9
million during the same period in 1997. Loans held for sale at September 30,
1998 decreased to $508,000 from $828,000 at December 31, 1997. These loans have
been approved by the secondary market buyer and closed by the Bank. The Bank is
awaiting settlement but is not exposed to significant interest rate or pricing
risk during the period between closing the loan and settlement. In addition, the
Bank originates and sells, servicing retained, SBA loans. SBA loan sale gains
totaled $110,000 through September 30, 1998 compared to $43,000 in 1997.
NON INTEREST EXPENSE
Non interest expense increased $156,000 (11.3%) in the third quarter of 1998,
with year to date expenses increasing $438,000 (10.8%) to $4,478,000 through
September 30, 1998 compared to $4,040,000 for the same period in 1997. Occupancy
and equipment expense increased $143,000 (19.1%) to $891,000 through September
30, 1998, compared to $748,000 for the same period in 1997. The increase was
driven by the opening of one new branch and the relocation of existing branch to
a larger facility in the fourth quarter of 1997. Data processing expense
increased $50,000 (17.8%) through the first nine months of 1998 to $331,000 from
$281,000 for the same period last year. Other operating expenses increased
$126,000 (15.3%) through September 30, 1998 to $950,000 from $824,000 for the
same period in 1997.
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 which will participate in loans to meet 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, 1998. 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, 1998, the Bank's leverage and total risk-based ratios were 9.53% and 12.65%
respectively, which exceeds the well-capitalized threshold.
<PAGE> 11
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
-----------------
Any proposals of shareholders intended to be included in the Company's
proxy statement and proxy card for the 1999 Annual Meeting of
Shareholders should be sent to the Company by certified mail and must
be received by the Company not later than December 1, 1998. In
addition, if a shareholder intends to present a proposal at the 1999
Annual Meeting without including the proposal in the proxy materials
related to that meeting, and if the proposal is not received by
February 12, 1999, then the proxies designated by the Board of
Directors of the Company for the 1999 Annual Meeting of Shareholders of
the Company may vote in their discretion on any such proposal any
shares for which they have been appointed proxies without mention of
such matter in the proxy statement or on the proxy card for such
meeting.
ITEM 6. Exhibits and 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> 12
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: November 11, 1998 /s/ ROBERT W. ZAPP
----------------------- -----------------------------------
Robert W. Zapp
President
Date: November 11, 1998 /s/ ROBERT D. FULKERSON
----------------------- -----------------------------------
Robert D. Fulkerson
Treasurer (Chief Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 10,151
<INT-BEARING-DEPOSITS> 422
<FED-FUNDS-SOLD> 6,926
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 13,161
<INVESTMENTS-CARRYING> 22,857
<INVESTMENTS-MARKET> 22,972
<LOANS> 201,393
<ALLOWANCE> 2,082
<TOTAL-ASSETS> 260,870
<DEPOSITS> 224,409
<SHORT-TERM> 10,854
<LIABILITIES-OTHER> 1,732
<LONG-TERM> 533
0
0
<COMMON> 2,957
<OTHER-SE> 20,385
<TOTAL-LIABILITIES-AND-EQUITY> 260,870
<INTEREST-LOAN> 13,329
<INTEREST-INVEST> 1,608
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 14,937
<INTEREST-DEPOSIT> 6,811
<INTEREST-EXPENSE> 7,279
<INTEREST-INCOME-NET> 7,658
<LOAN-LOSSES> 417
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,478
<INCOME-PRETAX> 4,401
<INCOME-PRE-EXTRAORDINARY> 4,401
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,958
<EPS-PRIMARY> .84
<EPS-DILUTED> .84
<YIELD-ACTUAL> 8.49
<LOANS-NON> 142
<LOANS-PAST> 363
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,078
<CHARGE-OFFS> 435
<RECOVERIES> 22
<ALLOWANCE-CLOSE> 2,082
<ALLOWANCE-DOMESTIC> 2,082
<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 appears 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.
