Bank of Kentucky Financial (BKYF) 10-Q 2002 Q1 Quarterly report

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(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, 2002

¨ 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

(Exact name of registrant as specified in its charter)

Kentucky	61-1256535
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

1065 Burlington Pike, Florence, Kentucky	41042
(Address of principle executive offices)	(Zip Code)

(859) 371-2340

Registrant’s telephone number:

Indicate by checkmark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant 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 10, 2002, the latest practicable date, 5,964,465 shares of the Registrant’s Common Stock, no par value, were issued and outstanding.

The Bank of Kentucky Financial Corporation

INDEX

FINANCIAL INFORMATION	PAGE
The Bank of Kentucky Financial Corporation Consolidated Statements of Financial Condition	3
The Bank of Kentucky Financial Corporation Consolidated Statements of Income	4
The Bank of Kentucky Financial Corporation Consolidated Statements of Changes in Shareholders’ Equity	5
The Bank of Kentucky Financial Corporation Consolidated Statements of Cash Flows	6
The Bank of Kentucky Financial Corporation Notes to Consolidated Financial Statements	7
The Bank of Kentucky Financial Corporation Management’s Discussion and Analysis of Financial Condition and Results of Operations	8
The Bank of Kentucky Financial Corporation Part II	12
The Bank of Kentucky Financial Corporation Signatures	13

2

THE BANK OF KENTUCKY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Dollars in thousands)

	March 31 2002		December 31 2001
	(unaudited)
ASSETS
Cash and cash equivalents	$	28,735	$	26,706
Available-for-sale securities		34,676		35,164
Held-to-maturity securities		17,820		17,134
Loans held for sale		1,249		5,509
Total loans		416,029		411,472
Less:  Allowances for loan losses		4,368		4,244
Net loans		411,661		407,228
Premises and equipment, net		5,957		6,081
FHLB stock, at cost		3,630		3,590
Accrued interest receivable and other assets		5,943		5,850
Total assets	$	509,671	$	507,262
LIABILITIES & SHAREHOLDERS’ EQUITY
Liabilities
Deposits	$	431,412	$	416,183
Short-term borrowings		12,710		26,343
Notes payable		9,442		9,449
Accrued interest payable and other liabilities		3,673		3,766
Total liabilities		457,237		455,741
Shareholders’ Equity
Common stock		3,098		3,098
Additional paid-in capital		10,708		11,313
Retained earnings		38,552		36,906
Accumulated other comprehensive income		76		204
Total shareholders’ equity		52,434		51,521
Total liabilities and shareholders’ equity	$	509,671	$	507,262

See accompanying notes

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THE BANK OF KENTUCKY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001

(Dollars in thousands, except per share data)

(unaudited)

	2002		2001
INTEREST INCOME
Loans, including related fees	$	7,365	$	8,542
Securities and other		700		882
Total interest income		8,065		9,424
INTEREST EXPENSE
Deposits		2,716		4,769
Borrowings		158		255
Total interest expense		2,874		5,024
Net interest income		5,191		4,400
Provision for loan losses		172		86
Net interest income after
Provision for loan losses		5,019		4,314
NON-INTEREST INCOME
Service charges and fees		551		415
Gain/(loss) on securities		26		67
Gain on loans sold		171		239
Other		303		309
Total non-interest income		1,051		1,030
NON-INTEREST EXPENSE
Salaries and benefits		1,500		1,352
Occupancy and equipment		493		495
Data processing		228		215
Advertising		97		81
Other operating expenses		781		713
Total non-interest expense		3,099		2,856
Income before income taxes		2,971		2,488
Less: income taxes		967		782
Net income	$	2,004	$	1,706
Earnings per share	$	0.34	$	0.28
Earnings per share, assuming dilution	$	0.33	$	0.28
Dividends per share	$	0.06	$	0.05

See accompanying notes

4

THE BANK OF KENTUCKY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Dollars in thousands)

(unaudited)

	2002			2001
Balance January 1	$	51,521		$	47,777
Comprehensive Income:
Net Income		2,004			1,706
Change in net unrealized gain/(loss)		(128	)		114
Total Comprehensive Income		1,876			1,820
Cash dividends paid		(358	)		(309	)
Exercise of stock options (including tax benefits of $3 in 2001)		0			15
Stock repurchase and retirement		(605	)		0
Balance March 31	$	52,434		$	49,303

See accompanying notes

5

THE BANK OF KENTUCKY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(unaudited)

	For the three months ended March 31
	2002			2001
Cash Flows from Operating Activities
Net income	$	2,004		$	1,706
Adjustments to reconcile net income to net cash
From operating activities		4,415			154
Net cash from operating activities		6,419			1,860
Cash flows from Investing Activities
Proceeds from paydowns and maturities of Held-to-maturity securities		695			8,541
Proceeds from paydowns and maturities of Available-for-sale securities		2,641			10,988
Purchases of held-to-maturity securities		(1,380	)		(205	)
Purchases of available-for-sale securities		(2,328	)		(16,296	)
Net change in loans		(4,605	)		7,467
Property and equipment expenditures		(39	)		(201	)
Net cash from investing activities		(5,016	)		10,294
Cash Flows from Financing Activities
Net change in deposits		15,229			13,727
Net change in short-term borrowings		(13,633	)		(8,883	)
Proceeds from exercise of stock options		0			12
Cash dividends paid		(358	)		(309	)
Stock repurchase and retirement		(605	)		0
Payments on note payable		(7	)		(65	)
Net cash from financing activities		626			4,482
Net change in cash and cash equivalents		2,029			16,636
Cash and cash equivalents at beginning of period		26,706			22,248
Cash and cash equivalents at end of period	$	28,735		$	38,884

See accompanying notes

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THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2002

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-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. Except for required accounting changes, 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—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 number of shares used to compute basic and diluted earnings per share for the indicated periods:

	Three Months Ended March 31
	2002	2001
Weighted Average Shares Outstanding	5,974,169	6,158,236
Shares used to compute diluted Earnings per share	6,001,119	6,184,660

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THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 4—New and proposed accounting standards:

A new accounting standard dealing with asset retirement obligations will apply for 2003. The company does not believe this standard will have a material affect on its financial position or results of operations.

Effective January 1, 2002, the Company adopted a new standard issued by the FASB on impairment and disposal of long-lived assets. The effect of this on the financial position and results of operations of the Company was not material.

New accounting standards issued in 2001 require all business combinations to be recorded using the purchase method of accounting for any transaction initiated after June 30, 2001. Under the purchase method, all identifiable tangible and intangible assets and liabilities of the acquired company must be recorded at fair value at date of acquisition, and the excess of cost over fair value of net assets acquired is recorded as goodwill. Identifiable intangible assets must be separated from goodwill. Identifiable intangible assets with finite useful lives will be amortized under the new standard, whereas goodwill, both amounts previously recorded and future amounts purchased, will cease being amortized starting in 2002. Annual impairment testing will be required for goodwill with impairment being recorded if the carrying amount of goodwill exceeds it implied fair value. Adoption of this standard on January 1, 2002 did not have a material effect on the Company’s financial statements.

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THE BANK OF KENTUCKY FINANCIAL CORPORATION

Management’s Discussion and Analysis of Financial Condition

and the Results of Operations

March 31, 2002

FINANCIAL CONDITION

Total assets at March 31, 2002 were $509,671,000 compared to $507,262,000 at December 31, 2001, an increase of $2,409,000 (.47%). Deposits increased $15,229,000 (3.66%) to $431,412,000 at March 31, 2002 compared to $416,183,000 at December 31, 2001 resulting in a decrease in short-term borrowings of $13,633,000 (-51.75%) to $12,710,000 at March 31,2002 from $26,343,000 December 31, 2001. Loans outstanding increased $4,557,000 (1.11%) from $411,472,000 at December 31, 2001 to $416,029,000 at March 31, 2002.

RESULTS OF OPERATIONS

GENERAL

Net income increased $298,000 (17.47%) in the first quarter of 2002 to $2,004,000 ($.34 per share), compared to $1,706,000 ($.28 per share) for the same period in 2001. An improvement in net interest income was the primary factor contributing to the increased earnings.

NET INTEREST INCOME

Net interest income for the first quarter of 2002 increased to $5,191,000, an increase of $791,000 (17.98%) compared to $4,400,000 for the same period in 2001. A large increase in the net interest margin to 4.55% in the first quarter of 2002 from 4.15% for the same period in 2001 drove the increase in net interest income. While both the average yield on assets and the average cost of funds declined, the average yield on assets declined by 172 basis points to 7.04% for the first quarter of 2002 compared to 8.76% for the same period in 2001 and the average cost of funds declined by 250 basis points to 2.96% for the first quarter of 2002 compared to 5.46% for the same period in 2001, resulting in a higher net interest margin.

PROVISION FOR LOAN LOSSES

The provision for loan losses was $172,000 for the three months ending March 31, 2002, an increase of $86,000 compared to the $86,000 provision recorded during the same period in 2001. During the three-month period, total loans increased by $4,557,000, from $411,472,000 at December 31, 2001 to $416,029,000 at March 31, 2002, and non-

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performing loans declined slightly, to $2,889,000 or .69% of total loans outstanding at March 31, 2002, compared to $3,167,000 at December 31, 2001. Net charge-offs, year to date 2002 were $48,000, similar to the $41,000 recorded in 2001. Management continues to monitor the loan portfolio closely and believes the allowance, at 1.05% of loans at March 31, 2002 compared to 1.03% of loans at December 31, 2001, is sufficient to absorb probable incurred losses in the loan portfolio.

NON-INTEREST INCOME

Total non-interest income increased $21,000 (2.04%) during the first quarter of 2002 from $1,030,000 in 2001 to $1,051,000 in 2002. The increase was driven by, service charges and fees on deposit accounts which increased by $136,000 (32.77%) from $415,000 in the first quarter of 2001 to $551,000 for the same period in 2002. This increase was partially offset by a decrease in fee income from the sale of mortgage loans into the secondary market, which decreased $68,000 in the first quarter of 2002 to $171,000 from $239,000 for the same period last year. The decrease was due to a slowing demand for refinancing the secondary mortgage market. The Bank originates fixed rate first mortgage loans and sells them, service released, into the secondary market. During the first quarter of 2002, 114 loans with a principal balance of $15.2 million were sold compared to 173 loans with a principal balance of $20.3 million during the same period in 2001. Loans held for sale at March 31, 2002 decreased to $1,249,000 from $5,509,000 at December 31, 2001. 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. The Bank also realized a gain of $26,000 on the sale of $2,000,000 in available for sale securities in 2002 compared to a gain of $67,000 in 2001. These securities sold in 2002 were replaced with bonds in the two to three year maturity ranges.

NON-INTEREST EXPENSE

Non-interest expense increased to $3,099,000 in the first quarter of 2002 from $2,856,000 in 2001, an increase of $243,000 (8.51%). The change was driven by increases in salaries and benefits. Salaries and benefits increased $148,000 (10.95%) in the first quarter of 2002 to $1,500,000 compared to $1,352,000 for the same period in 2001. The increase was due to increased staffing due the two branches opened in the last quarter of 2001 and annual merit increases. Advertising expenses increased $16,000 (19.75%) to $97,000 in the first quarter of 2002 compared to $81,000 for the same period in 2001. Other operating expenses increased to $781,000 in the first quarter of 2002, from $713,000 for the same period in 2001, an increase of $68,000 (9.54%).

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INCOME TAX EXPENSE

Income tax expense increased due to higher income before taxes and a higher effective tax rate of 32.55% compared to 31.43% for the same period last year. The higher effective tax rate was due to a decrease in tax free loans and the associated interest income.

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, 2002.

The company’s total shareholders’ equity increased $913,000, from $51,521,000 at December 31, 2001 to $52,434,000 at March 31, 2002. In the first quarter of 2002 the Company paid a cash dividend of $.06 per share totaling $358,000.

On March 16, 2001 the Company’s Board of Directors approved the repurchase and retirement of up to 2% of the outstanding common shares of the Company in the over-the-counter market. All shares were repurchased according to the agreement by the end of the third quarter of 2001. On October 8, 2001 the Company’s Board of Directors approved the repurchase and retirement of 100,000 common shares of the Company in the over-the-counter market. As of the date of this report 70,000 of the 100,000 shares authorized for repurchase had been repurchased. Any repurchases are funded, as needed, by dividends from the Bank

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, 2002, the Bank’s leverage and total risk-based ratios were 10.19% and 11.86% respectively, which exceed the well-capitalized thresholds.

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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 99 Safe Harbor under the Private Securities Litigation Reform Act of 1995.

(a)  The registrant did not file any reports on Form 8-K during the quarter ended March 31, 2002.

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SIGNATURES

Pursuant to the requirements 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.

	By:	/s/    ROBERT W. ZAPP
		Robert W. Zapp President
Date: May 9, 2002
	By:	/s/    ROBERT D. FULKERSON
		Robert D. Fulkerson Treasurer (Chief Financial Officer)
Date: May 9, 2002

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