<PAGE> 1
FORM 10-Q
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, 2000
[ ] 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
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THE BANK OF KENTUCKY FINANCIAL CORPORATION
----------------------------------------------
(Exact name of registrant as specified 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)
Registrant's telephone number: (859) 371-2340
--------------
Indicate by checkmark whether the registrant (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 10, 2000 the latest practicable date, 6,156,917 shares of the
Registrant's Common Stock, no par value, were issued and outstanding.
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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 10
The Bank of Kentucky Financial Corporation
Signatures 11
<PAGE> 3
THE BANK OF KENTUCKY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 DECEMBER 31, 1999
ASSETS
<S> <C> <C>
Cash and due from banks $ 17,480 $ 19,407
Federal Funds sold 0 0
--------- ---------
Total cash and due from banks 17,480 19,407
Interest bearing deposits with banks 0 1,000
Available-for-sale securities 23,871 23,832
Held-to-maturity securities 33,087 32,971
Total loans 370,820 333,023
Less: Allowance for loan loss (3,710) (3,257)
--------- ---------
Net Loans 367,110 329,766
Loans held for sale 666 426
Premises and equipment, net 6,326 5,068
FHLB stock, at cost 3,296 3,107
Accrued interest receivable and other assets 5,988 6,682
--------- ---------
Total assets $ 457,824 $ 422,259
========= =========
LIABILITIES & SHAREHOLDERS' EQUITY
LIABILITIES
Deposits $ 355,340 $ 343,588
Short-term borrowings 40,456 20,445
Long-term borrowings 11,753 12,492
Accrued interest payable & other liabilities 4,271 3,150
--------- ---------
Total liabilities 411,820 379,675
SHAREHOLDERS' EQUITY
Common Stock 3,098 3,098
Additional paid-in capital 14,537 14,080
Retained earnings 28,842 26,459
Unearned compensation (335) (815)
Accumulated other comprehensive income (138) (238)
--------- ---------
Total shareholders' equity 46,004 42,584
--------- ---------
Total liabilities & shareholders' equity $ 457,824 $ 422,259
========= =========
</TABLE>
See accompanying notes
<PAGE> 4
THE BANK OF KENTUCKY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
Sept 30 Sept 30
INTEREST INCOME 2000 1999 2000 1999
<S> <C> <C> <C> <C>
Loans, including related fees $ 8,432 $ 6,845 $ 24,039 $ 20,059
Securities and other 864 780 2,666 2,416
-------- -------- -------- --------
Total interest income 9,296 7,625 26,705 22,475
INTEREST EXPENSE
Deposits 4,142 3,273 11,715 9,806
Borrowings 840 386 2,131 1,065
-------- -------- -------- --------
Total interest expense 4,981 3,659 13,846 10,871
-------- -------- -------- --------
Net interest income 4,315 3,966 12,859 11,604
Provision for loan losses (393) (194) (927) (470)
-------- -------- -------- --------
Net interest income after
provision for loan losses 3,922 3,772 11,932 11,134
-------- -------- -------- --------
NON-INTEREST INCOME
Service charges and fees 424 375 1,181 1,040
Gain/(loss) on securities 0 0 0 0
Gain on loans sold 56 61 160 314
Other 242 181 727 549
-------- -------- -------- --------
Total non-interest income 722 617 2,068 1,903
NON-INTEREST EXPENSE
Salaries and benefits 1,270 1,288 3,824 3,507
Occupancy and equipment 491 423 1,445 1,240
Data processing 142 172 519 490
Advertising 75 78 237 204
Restructuring charges 43 0 1,448 0
Merger and Acquisition 51 0 541 0
Other 633 490 2,013 1,749
-------- -------- -------- --------
Total non-interest expense 2,705 2,451 10,027 7,190
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 1939 1,938 3,973 5,847
Less: income taxes (626) (596) (1,364) (1,873)
-------- -------- -------- --------
NET INCOME $ 1,313 $ 1,342 $ 2,609 $ 3,974
======== ======== ======== ========
COMPREHENSIVE INCOME $ 1,458 $ 1,338 $ 2,709 $ 3,817
======== ======== ======== ========
Earnings per share $ .21 $ .22 $ .42 $ .65
Earnings per share, assuming dilution $ .21 $ .22 $ .42 $ .64
Dividends per share $ .04 $ .00 $ .09 $ .04
</TABLE>
See accompanying notes
<PAGE> 5
<TABLE>
<CAPTION>
THE BANK OF KENTUCKY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
2000 1999
-------- --------
<S> <C> <C>
Balance as of January 1 $ 42,584 $ 37,161
Comprehensive income
Net income 2,609 3,974
Change in net unrealized gain/(loss)
Net of tax 100 (157)
-------- --------
Total comprehensive income 2,709 3,817
Cash dividends paid (458) (580)
Purchase of fractional shares (7) --
Exercise of stock options 710 196
Payments to dissenting shareholders (88) --
Adjustments related to merger 448 295
Benefit Plan Amortization 106 298
-------- --------
Balance as of September 30 $ 46,004 $ 41,187
======== ========
</TABLE>
See accompanying notes
<PAGE> 6
THE BANK OF KENTUCKY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPT 30 2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 2,609 $ 3,974
Adjustments to reconcile net income to net cash
from operating activities 3,298 507
-------- --------
Net cash from operating activities 5,907 4,481
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in interest bearing deposits with banks 1,000 422
Proceeds from paydowns and maturities of 3,367 9,125
held-to-maturity securities
Proceeds from paydowns and maturities of
available-for-sale securities 2,652 4,159
Purchases of held-to-maturity securities (3,476) (8,830)
Purchases of available-for-sale securities (2,500) (6,233)
Net change in loans (38,271) (22,905)
Property and equipment expenditures (1,770) (1,092)
-------- --------
Net cash from investing activities (38,998) (25,354)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 11,752 (2,018)
Net change in short-term borrowings 20,011 14,931
Proceeds from exercise of stock options 693 134
Payments for dissenting shareholders (88) 0
Payment for fractional shares (7) --
Cash dividends paid (458) (580)
Draws on note payable -- 5,750
Payments on note payable (739) (4,554)
-------- --------
Net cash from financing activities 31,164 13,663
Net change in cash and cash equivalents (1,927) (7,210)
Cash and cash equivalents at beginning of period 19,407 20,718
-------- --------
Cash and cash equivalents at end of period $ 17,480 $ 13,508
======== ========
</TABLE>
See accompanying notes
<PAGE> 7
THE BANK OF KENTUCKY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
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.
On June 14, 2000, the Company consummated the acquisition of the Fort Thomas
Financial Corporation (FTFC) and its wholly owned subsidiary, the Fort Thomas
Savings Bank. Upon consummation, 865,592 shares of the Company were issued for
substantially all of the outstanding shares of FTFC. The combination was
accounted for as a pooling of interests and the historical financial position
and results of operations of the two companies have been combined for
financial reporting purposes. FTFC reported its results on a September 30
fiscal year basis. These financial statements combine the historical financial
position of FTFC as of September 30, 1999 with the historical financial
position of the Company as of December 31, 1999. The results of operations of
the separate companies are combined and presented for the three and nine-month
periods ended Sept 30, 1999 and 2000. FTFC's results of operations for the
three months ended December 31, 1999 are not included in these financial
statements. Net interest income and net income for that period were $923,000
and $232,000, respectively. Net income, combined with $216,000 in dividends
paid on unawarded FTFC shares, that were returned to the Company upon
consummation of the transaction, are reflected in the consolidated statements
of changes in shareholders' equity and as a $448,000 adjustment related to the
merger. Dividends per share are the company's historical dividends. The
following table presents the combination of the operating results for the 1999
periods included in these financial statements (dollars in thousands):
<TABLE>
<CAPTION>
--------------------------------------- --------------------- ----------------- ------------------
COMPANY FTFC COMBINED
--------------------------------------- --------------------- ----------------- ------------------
THREE MONTHS ENDED SEPT 30, 1999:
--------------------------------------- --------------------- ----------------- ------------------
<S> <C> <C> <C>
Net interest income $ 3,048 $ 918 $ 3,966
--------------------------------------- --------------------- ----------------- ------------------
Net income 1,102 240 1,342
--------------------------------------- --------------------- ----------------- ------------------
NINE MONTHS ENDED SEPT 30, 1999:
--------------------------------------- --------------------- ----------------- ------------------
Net interest income 8,743 2,861 11,604
--------------------------------------- --------------------- ----------------- ------------------
Net income 3,249 725 3,974
--------------------------------------- --------------------- ----------------- ------------------
</TABLE>
NOTE 2 - GENERAL:
These financial statements were prepared in accordance with the instructions
for Form 10-Q 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. These
financial statements have been prepared on a basis consistent with the annual
<PAGE> 8
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 - EARNINGS PER SHARE:
Earnings per share are computed based upon the weighted average number of
shares outstanding during the respective three and six month periods. 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. The following table presents the numbers of shares used to compute
basic and diluted earnings per share for the indicated periods:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
Sept 30 Sept 30
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted Average Shares Outstanding 6,157,002 6,092,650 6,138,686 6,087,429
Shares used to compute diluted
Earnings per share 6,166,200 6,188,625 6,167,470 6,172,163
</TABLE>
NOTE 4 - RESTRUCTURING CHARGES:
Restructuring charges reflected on the consolidated statement of income relate
to severance benefits for three former FTFC executives and penalties associated
with the early termination of data processing and equipment lease contracts
associated with FTFC's operations. On June 14, 2000, the effective date of the
merger, the Company executed severance agreements with three senior executives
of FTFC. These agreements call for monthly cash payments, beginning July 2000
and the continuation of certain benefits for 36 months. This obligation,
approximately $1.2 million, was accrued at that time. Most of the balance of the
$1.4 million in identified restructuring charges relates to a penalty associated
with the early termination of FTFC's data processing service agreement,
effective June 24, 2000.
NOTE 5 - NEW ACCOUNTING PRONOUNCEMENT
Beginning January 1, 2001, a new accounting standard will require all
derivatives to be recorded at fair value. Unless designated as hedges, changes
in these fair values will be recorded in the income statement. Fair value
changes involving hedges will generally be recorded by offsetting gains and
losses on the hedge and on the hedged item, even if the fair value of the hedged
item is not otherwise recorded. Adoption of this pronouncement will not have a
material effect on the Company's financial results, but the effect will depend
on derivative holdings when this standard is adopted.
<PAGE> 9
THE BANK OF KENTUCKY FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND THE RESULTS OF OPERATIONS
SEPTEMBER 30, 2000
Total assets at September 30, 2000 were $457,824,000 compared to $422,259,000
at December 31, 1999, an increase of $35,565,000 (8.4%). This increase was
primarily due to an increase in loans of $37,797,000 (11.4%), from
$333,023,000 at December 31, 1999 to $370,820,000 at September 30, 2000. Loan
growth was funded by increases in deposits and short-term borrowings.
Short-term borrowings increased $20,011,000 (97.9%), from $20,445,000 at
December 31, 1999 to $40,456,000 at September 30, 2000. Total deposits
increased $11,752,000 (3.4%), from $343,588,000 at December 31, 1999 to
$355,340,000 at September 30,2000.
RESULTS OF OPERATIONS
GENERAL
Net income year to date decreased from $3,974,000 in 1999 to $2,609,000 in
2000, a decrease of $1,365,000 (34.4%). Net income for the quarter ended
September 30, 2000 was $1,313,000 ($.21 per share) compared to $1,342,000
($.22 per share) during the same period in 1999, a decrease of $29,000 (2.2%).
The decrease in earnings was due primarily to restructuring and merger related
expenses incurred during the second and third quarters, which aggregated to
$1,417,000 and $79,000 respectively, net of taxes. Earnings year to date
excluding merger related expenses increased $131,000 (3.3%) to $4,105,000 in
2000 compared to $3,974,000 for the same period in 1999. Net income for the
quarter ended September 30, 2000 excluding merger related expenses, increased
$50,000 (3.7%) to $1,392,000 in 2000 from $1,342,000 in 1999. The increase in
earnings was driven by higher net interest income, substantially offset by an
increase in the loan loss provision and noninterest expenses.
NET INTEREST INCOME
Net interest income increased $349,000 (8.8%) in the third quarter of 2000
over the same period in 1999, while the year to date total increased
$1,255,000 (10.8%) from $11,604,000 in 1999 to $12,859,000 in 2000. 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 $927,000 for the nine months ended September 30,
2000 compared to $470,000 recorded in the same period in 1999. The provision
was increased due to increased loan volume and a $41,000 increase in net
charge-offs to $406,000 through September 30, 2000
<PAGE> 10
compared to $365,000 for the same period last year. The Bank had $5,941,000 in
non-performing loans or 1.60% of total loans outstanding at September 30, 2000
compared to $2,968,000 or .91% of total loans outstanding at September 30, 1999.
Real estate loans accounted for $4,656,000 of the non-performing loans at
September 30, 2000. Management is satisfied that the reserve is adequate at
September 30, 2000.
NON INTEREST INCOME
Total non-interest income increased $165,000 (8.7%) to $2,068,000 through
September 30,2000, compared to $1,903,000 for the same period in 1999. Service
charges on deposits have increased $141,000 (13.6%) for the year to date and
$49,000 (13.0%) in the third quarter, to $424,000 for the period ending
September 30,2000 compared to $375,000 for the same period in 1999.
Transaction growth contributed to the continued growth in deposit fees. Income
from the sale of loans into the secondary market decreased $154,000 (49.0%) to
$160,000 through September 30, 2000, compared to $314,000 for the same period
in 1999. The Bank originates fixed rate first mortgage loans and sells them,
service released, into the secondary market. The decrease in fee income is
driven by decreased volume. Through September 30, 2000, 105 loans with a
principal balance of $13.4 million were sold compared to 175 loans with a
principal balance of $22.0 million during the same period in 1999. Loans held
for sale at September 30, 2000 increased to $666,000 from $426,000 at December
31, 1999. 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 $254,000 (10.4%) in the third quarter of 2000,
with year to date expenses increasing $2,837,000 (39.5%) to $10,027,000
through September 30, 2000 compared to $7,190,000 for the same period in 1999.
Merger and restructuring related expenses accounted for $1,989,000 of the
increase (see note 4). Non-interest expense excluding merger and restructuring
related expenses increased $848,000 (11.8%) through September 30,2000.
Salaries and benefits were similar for the third quarter of 2000, compared to
1999, but were up $320,000, year to year. Occupancy and equipment expense
increased $205,000 (16.6%) to $1,445,000 through September 30, 2000, compared
to $1,240,000 for the same period in 1999. The increases were due to expenses
associated with the opening of branches in the last quarter of 1999 and the
first quarter of 2000. Data processing expense increased $29,000 (5.9%)
through the first nine months of 2000 to $519,000 from $490,000 for the same
period last year. Other operating expenses increased $264,000 (15.1%) through
September 30, 2000 to $2,013,000 from $1,749,000 for the same period in 1999.
<PAGE> 11
INCOME TAX EXPENSE
Income tax expense decreased by $509,000 (27.2%) through the third quarter of
2000 compared to 1999 and the effective tax rate increased to 34.3% from
32.0%. The change was driven by lower income before tax and the fact that the
majority of merger and acquisition costs are not deductible for tax purposes.
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, 2000. 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, 2000, the Bank's leverage and total risk-based ratios were 9.90%
and 12.66% respectively, which exceeds the well-capitalized threshold.
<PAGE> 12
THE BANK OF KENTUCKY FINANCIAL CORPORATION
PART II
ITEM 1. Legal Proceedings
-----------------
None.
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
---------------------------------------------------
(a) None.
ITEM 5. Other Information
(a) None.
ITEM 6. Exhibits and Reports on Form 8 - K
------------------------------------
(a) Exhibit 27 - Financial Data Schedule.
(b) 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: November 13, 2000 /s/ Robert W. Zapp
--------------------------- ----------------------------------
Robert W. Zapp
President
Date: November 13, 2000 /s/ Robert D. Fulkerson
--------------------------- -----------------------------------
Robert D. Fulkerson
Treasurer (Chief Financial Officer)
