<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, 1999
[ ] 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 April 29, 1999, the latest practicable date, 3,519,724 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 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>
MARCH 31 DECEMBER 31
1999 1998
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 14,791 $ 17,583
Interest bearing deposits with banks 422 422
Available-for-sale securities 19,365 18,028
Held-to-maturity securities 27,802 30,297
Loans held for sale 695 1,470
Total loans 212,458 206,365
Less: Allowances for loan losses 2,283 2,193
-------- --------
Net loans 210,175 204,172
Premises and equipment, net 4,323 3,756
FHLB stock, at cost 2,061 2,026
Accrued interest receivable and other assets 2,797 3,013
-------- --------
Total assets $282,431 $280,767
======== ========
LIABILITIES & SHAREHOLDERS' EQUITY
LIABILITIES
Deposits $239,038 $243,858
Short-term borrowings 15,891 10,398
Notes payable 521 526
Accrued interest payable & other liabilities 1,649 1,537
-------- --------
Total liabilities 257,099 256,319
SHAREHOLDERS' EQUITY
Common stock 2,991 2,972
Additional paid-in capital 7,731 7,674
Retained earnings 14,625 13,774
Accumulated other comprehensive income (15) 28
-------- --------
Total shareholders' equity 25,332 24,448
-------- --------
Total liabilities and shareholders' equity $282,431 $280,767
======== ========
</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, 1999 AND 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
INTEREST INCOME
Loans, including related fees $4,583 $4,202
Securities and other 698 516
------ ------
Total interest income 5,281 4,718
------ ------
INTEREST EXPENSE
Deposits 2,350 2,198
Borrowings 158 142
------ ------
Total interest expense 2,508 2,340
------ ------
Net interest income 2,773 2,378
Provision for loan losses 120 70
------ ------
Net interest income after
Provision for loan losses 2,653 2,308
------ ------
NON-INTEREST INCOME
Service charges and fees 298 209
Gain/(loss) on securities 0 0
Gain on loans sold 134 195
Other 144 102
------ ------
Total non-interest income 576 506
NON-INTEREST EXPENSE
Salaries and benefits 784 699
Occupancy and equipment 356 283
Data processing 109 113
Advertising 63 45
Other operating expenses 361 297
------ ------
Total non-interest expense 1,673 1,437
------ ------
INCOME BEFORE INCOME TAXES 1,556 1,377
Less: income taxes 494 455
------ ------
NET INCOME $1,062 $ 922
====== ======
Earnings per share $ 0.30 $ 0.26
Earnings per share, assuming dilution $ 0.30 $ 0.26
</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>
1999 1998
------- -------
<S> <C> <C>
Balance January 1 $24,448 $20,327
Comprehensive Income:
Net Income 1,062 922
Accumulated other comprehensive income (43) 3
------- -------
Total Comprehensive Income 1,019 925
Cash dividends paid (211) (176)
Exercise of stock options
(including tax benefits of $23 and $2) 76 11
------- -------
Balance March 31 $25,332 $21,087
======= =======
</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 1999 1998
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,062 $ 922
Adjustments to reconcile net income to net cash
From operating activities 541 369
------- -------
Net cash from operating activities 1,603 1,291
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from paydowns and maturities of
Held-to-maturity securities 3,000 4,160
Proceeds from paydowns and maturities of
Available-for-sale securities 579 3,015
Purchases of held-to-maturity securities (504) (5,798)
Purchases of available-for-sale securities (1,916) (549)
Net change in loans (5,348) (7,420)
Purchase stock in FHLB 0 0
Property and equipment expenditures (716) (177)
------- -------
Net cash from investing activities (4,905) (6,769)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits (4,820) 5,346
Net change in short-term borrowings 5,493 1,047
Proceeds from exercise of stock options 53 9
Cash dividends paid (211) (176)
Payments on note payable (5) (4)
------- -------
Net cash from financing activities 510 6,222
------- -------
Net change in cash and cash equivalents (2,792) 744
Cash and cash equivalents at beginning of period 17,583 10,125
------- -------
Cash and cash equivalents at end of period $14,791 $10,869
======= =======
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> 7
THE BANK OF KENTUCKY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
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 10-QSB 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.
NOTE 4 - EARNINGS PER SHARE:
Earnings per share are computed based upon the weighted average number of shares
outstanding during the quarter, which were 3,517,645 and 3,507,367 for 1999 and
1998. Diluted earnings per share are computed assuming 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 for the
period. For 1999 and 1998, this would result in they're being an additional
24,318 and 667 shares outstanding respectively.
<PAGE> 8
THE BANK OF KENTUCKY FINANCIAL CORPORATION
Management's Discussion and Analysis of Financial Condition
and the Results of Operations
March 31, 1999
FINANCIAL CONDITION
Total assets at March 31,1999 were $282,431,000 compared to $280,767,000 at
December 31, 1998, an increase of $1,664,000 (.59%). Deposits decreased
$4,820,000 (1.98%) to $239,038,000 at March 31, 1999 compared to $243,858,000 at
December 31, 1998. The decrease in deposits was offset with an increase of
$5,493,000 (52.83%) in short-term borrowings from $10,398,000 at December 31,
1998 to $15,891,000 at March 31, 1999. Total loans outstanding grew $6,093,000
(2.95%), from $206,365,000 at December 31, 1998 to $212,458,000 at March 31,
1999.
RESULTS OF OPERATIONS
GENERAL
Net income increased $140,000 (15.3%) in the first quarter of 1999 to $1,062,000
($.30 per share), compared to $922,000 ($.26 per share) for the same period in
1998. This increase was driven by a $395,000 increase in net interest income and
a $70,000 increase in non-interest income, partially offset by higher
non-interest and income tax expenses.
NET INTEREST INCOME
An increase of $6,093,000 in loans outstanding drove the $395,000 (16.6%)
increase in net interest income. Net interest income for the first quarter of
1999 increased to $2,773,000, compared to $2,378,000 for the same period in
1998.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $120,000 for the three months ending March 31,
1999, an increase of $50,000 compared to the $70,000 provision recorded during
the same period in 1998. At March 31, 1999 the Bank had $295,000 in
non-performing loans or .14% of total loans outstanding. Management believes the
reserve was adequate at March 31, 1999.
<PAGE> 9
NON-INTEREST INCOME
Total non-interest income increased $70,000 during the first quarter of 1999
from $506,000 in 1998 to $576,000 in 1999. Service charges on deposit accounts
totaled $298,000 for the first quarter of 1999, compared to $209,000 for the
same period in 1998, an increase of $89,000 (42.6%), driven by increased volume
and a fee increase that took place. Other fee income increased $42,000 to
$144,000 for the first quarter of 1999 compared to $102,000 for the same period
in 1998. Fee income from the sales of mortgage loans into the secondary market
decreased $61,000 in the first quarter of 1999 to $134,000 from $195,000 for the
same period last year. The decrease was due to a slight increase in mortgage
loan rates compared to this period last year. The Bank originates fixed rate
first mortgage loans and sells them, service released, into the secondary
market. During the first quarter of 1999, 69 loans with a principal balance of
$9.9 million were sold compared to 123 loans with a principal balance of $12.0
million during the same period in 1998. Loans held for sale at March 31, 1999
decreased to $695,000 from $1,470,000 at December 31, 1998. 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.
NON-INTEREST EXPENSE
Non-interest expense increased to $1,673,000 in the first quarter of 1999 from
$1,437,000 in 1998, an increase of $236,000 (16.4%). Most of the increase was
driven by increases in salaries and benefits and occupancy and equipment
expense. Salaries and benefits increased $85,000 (12.2%) in the first quarter of
1999 to $784,000 compared to $699,000 for the same period in 1998. Most of the
increase was due to annual merit increases and an increase in staffing in the
operations area. Occupancy and equipment expense increased $73,000 (25.8%) to
$356,000 through March 31,1999 compared to $283,000 for the same period in 1998.
The increase was due to expenses associated with the conversion of an existing
branch to an operations center and the relocation of that branch to a new
facility. Other operating expenses increased to $361,000 in the first quarter of
1999, from $297,000 for the same period in 1998, an increase of $64,000 (21.6%).
INCOME TAX EXPENSE
Income tax expense increased by $39,000 (8.6%) in the first quarter of 1999
compared to 1998. The increase was primarily due to higher income before tax as
the effective tax rate decreased to 31.7% for 1999 from 33.0% for 1998.
<PAGE> 10
LIQUIDITY AND CAPITAL RESOURCES
The Bank 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 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 the Company's liquidity is
sufficient at March 31, 1999.
The company's total shareholders' equity increased $884,000, from $24,448,000 at
December 31, 1998 to $25,332,000 at March 31, 1999. In the first quarter of 1999
the Company paid a cash dividend of $.06 per share totaling $211,000. 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,
1999, the Bank's leverage and total risk-based ratios were 8.99% and 11.88%
respectively, which exceed the well-capitalized thresholds.
YEAR 2000
Pursuant to the "Year 2000 Information and Readiness Disclosure Act, the
attached discussion of Year 2000 Issues is hereby designated a "Year 2000
Readiness Disclosure" by BKFC.
It is well documented that some data processing systems may experience
processing difficulties upon encountering the millenium. This "Year 2000
Problem" is believed to be material for virtually every public company. The
following section describes the steps, which BKFC is taking to handle this
serious matter. It should be noted that this section in particular, as well as
the "Management Discussion and Analysis" area in general, contains "forward
looking statements" which represent the opinions of management. Such
forward-looking statements are subject to numerous risks and uncertainties,
which obviously accompany any discussion of future actions, performances or
results. The reader of these discussions is hereby cautioned of the uncertain
nature of these discussions and is urged to use caution in relying on such
forward looking statements in forming any opinions concerning the financial
results, condition or operations of BKFC.
BKFC is conducting a formal review of its systems and system providers, due to
concerns regarding possible consequences that the year 2000 may pose to computer
and other operating systems utilized in its business activities. While a
preliminary review has resulted in the identification of certain issues which
require resolution, management believes that appropriate plans are in place to
resolve these issues in a timely manner.
<PAGE> 11
An ongoing review of the service bureau supported data processing system is
taking place, with the major data systems already certified as Year 2000
compliant. The Company's major vendors have all been contacted, with
approximately 90 % reporting Year 2000 compliance for their product or service.
The customer contact group is currently in the process of evaluating responses
from major customers.
The contingency planning group has the task of working with all areas in order
to assure uninterrupted operations and to have plans available in the event that
mission critical vendors are not Year 2000 ready. BKFC's third party data
processing provider has developed a comprehensive year 2000 contingency plan
that provides for redundant systems and processes to insure business resumption
in the event of failure. BKFC has a written contingency plan, which addresses
several critical areas including data processing, data communications, voice
communications, liquidity, and environmental issues. The contingency plan
parallels our third party processor's plan to ensure a smooth transition for
business resumption in the event of a system or software failure. The plan also
provides for alternative and manual processes to address communication and
envoirmental issues. In addition, the plan addresses liquidity issues resulting
from year 2000 readiness with a thorough analysis of liquidity needs and
provisions made to establish lines of credit to cover anticipated liquidity
needs.
The principal expense factor in addressing the Year 2000 Issue has consisted of
employee time. Year 2000 tasks have been incorporated into the daily work
routine of the Company's employees, with only minimal interruption to work flow.
It is management's opinion that certain vendors will require additional
compensation for software upgrades that will need to be installed in certain
equipment in order to make such equipment Year 2000 compliant. It is
management's opinion that such additional expense will be nominal and will not
materially impact the Company" financial performance.
The risks for BKFC in the event that certain mission-critical systems are not
Year 2000 compliant are substantial. As a financial institution, the Company's
largest volume of transactions involve loan related matters (loan originations,
the acceptance of loan payments, escrow handling and so forth) and deposit
accounts (new account openings, additions and withdrawals from accounts,
interest crediting, checking account transactions and so forth). The inability
of the Company to process these transactions in an efficient and timely manner
would greatly impact the Company's operations. No estimate is available
concerning possible lost revenue in the event of a material Year 2000 problem.
However, such loss of revenue would likely be a material amount that could have
a serious negative impact on the Company's financial performance and operations.
<PAGE> 12
THE BANK OF KENTUCKY FINANCIAL CORPORATION
PART II
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
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 AND 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> 13
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, 1999 /s/ Robert W. Zapp
------------------------------ ----------------------------------------
Robert W. Zapp
President
Date: May 9, 1999 /s/ Robert D. Fulkerson
------------------------------ ----------------------------------------
Robert D. Fulkerson
Treasurer (Chief Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 11,751
<INT-BEARING-DEPOSITS> 422
<FED-FUNDS-SOLD> 3,040
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 19,365
<INVESTMENTS-CARRYING> 27,802
<INVESTMENTS-MARKET> 27,808
<LOANS> 212,458
<ALLOWANCE> 2,283
<TOTAL-ASSETS> 282,431
<DEPOSITS> 239,038
<SHORT-TERM> 15,891
<LIABILITIES-OTHER> 1,649
<LONG-TERM> 521
0
0
<COMMON> 2,991
<OTHER-SE> 22,341
<TOTAL-LIABILITIES-AND-EQUITY> 282,431
<INTEREST-LOAN> 4,583
<INTEREST-INVEST> 698
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 5,281
<INTEREST-DEPOSIT> 2,350
<INTEREST-EXPENSE> 2,508
<INTEREST-INCOME-NET> 2,773
<LOAN-LOSSES> 120
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,673
<INCOME-PRETAX> 1,556
<INCOME-PRE-EXTRAORDINARY> 1,556
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,062
<EPS-PRIMARY> .30
<EPS-DILUTED> .30
<YIELD-ACTUAL> 7.93
<LOANS-NON> 170
<LOANS-PAST> 125
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,194
<CHARGE-OFFS> 37
<RECOVERIES> 6
<ALLOWANCE-CLOSE> 2,283
<ALLOWANCE-DOMESTIC> 2,283
<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 Quarterly Report on Form 10-QSB
for the quarter ended March 31, 1999, 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
<PAGE> 2
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.
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.
Federal legislation that was effective September 30, 1996, provides for the
merger of the BIF and the SAIF, assuming there are no savings associations under
federal law. Although it currently is unlikely that Congress will eliminate the
federal thrift charter in the near future, Congress is still considering the
merger of the BIF and the SAIF. 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.
For several years, Congress has been considering various changes in the bank
and savings association charters, the activities in which banks and savings
associations and their holding companies and subsidiaries may engage and the
authority of various regulatory authorities over the financial institutions and
their holding companies and subsidiaries. BKFC cannot predict at this time
whether and when Congress will actually adopt such "financial modernization
legislation" or in what form it will be adopted.
