Bank of Kentucky Financial (BKYF) 8-K Announces Third Quarter Earnings

THE BANK OF KENTUCKY FINANCIAL CORPORATION

ANNOUNCES THIRD QUARTER EARNINGS

Net income available to common shareholders up 33% for the third quarter of 2011 and 67% year to date

CRESTVIEW HILLS, KENTUCKY, October 20, 2011 – The Bank of Kentucky Financial Corporation (the “Company”) (NASDAQ: BKYF), the holding company of The Bank of Kentucky, Inc. (the “Bank”), today reported its earnings for the third quarter and nine months ended September 30, 2011.   For the third quarter and the first nine months of 2011, the Company reported an increase in diluted earnings per common share of 2% and 27% respectively as compared to the same periods in 2010.

A summary of the Company’s results follows:

Third Quarter ended September 30,	2011		2010		Change
Net income	$	4,274,000	$	3,528,000		21	%
Net income available to common shareholders	$	4,013,000	$	3,013,000		33	%
Earnings per common share, basic	$	0.54	$	0.53		2	%
Earnings per common share, diluted	$	0.54	$	0.53		2	%
Nine Months ended September 30,		2011		2010	Change
Net income	$	11,580,000	$	7,998,000		45	%
Net income available to common shareholders	$	10,803,000	$	6,459,000		67	%
Net income per common share, basic	$	1.45	$	1.14		27	%
Net income per common share, diluted	$	1.45	$	1.14		27	%

Robert Zapp, President & CEO stated, “We continue to build upon a solid year of financial performance and we are pleased with our latest results. We are closely monitoring the current economic environment, which remains unstable, but are confident in the work we have done and strategies we have in place to navigate through a prolonged recovery.  Decreasing our provision expense as we experience lower levels of non-performing loans and losses helped push earnings higher, as well as a reduction in costs associated with deposit insurance and the Bank’s partial repayment of TARP.   We believe our continued gain in market share through core deposit growth and our expansion plans to open two new branch locations in the coming months, strengthens our prospects going forward.”

Driving the increase in earnings in the third quarter of 2011 was a $950,000 (27%) decrease in the provision for loan losses as compared to the third quarter of 2010.  The increase in net income available to common shareholders was also attributable to a 49% reduction in preferred stock dividends and amortization expense. The decrease in the provision for loan losses reflected improving credit metrics as compared to September of 2010, while the reduction of preferred stock dividends and amortization expense reflects the December 2010 repurchase of $17 million of the outstanding $34 million of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Series A Preferred Stock”), previously issued to the U.S. Department of the Treasury as part of the TARP CPP program.

Net interest income increased $484,000, or 4% in the third quarter of 2011, as compared to the same period in 2010.  Contributing to the increase in net interest income was the growth in average earning assets, which increased $101 million, or 7% on average from the third quarter of 2010.  The net interest margin, on a tax equivalent basis, decreased 14 basis points from 3.97% in the third quarter of 2010 to 3.83% in the third quarter of 2011.  Contributing to the decrease in the net interest margin was the mix of the growth in earning assets.  Of the $101 million in growth, $90 million or 89% of the growth was attributed to the Bank’s securities portfolio, which generally have lower yields than loans.

The provision for loan losses decreased by $950,000 (27%)  in the third quarter of 2011, as compared to the same period in 2010.  Contributing to this decrease were lower levels of non-performing loans and charge-offs as compared to September 2010.   The Company’s non-performing loans as a percentage of total loans were 1.43% as of September 30, 2011, as compared to 1.69% as of September 30, 2010, while annualized net charge-offs to average loans decreased from 1.02% in the third quarter of 2010 to .86% in the third quarter of 2011.  The Company recorded $2,425,000 in net charge-offs in the third quarter of 2011 as compared to $2,867,000 in the third quarter of 2010.  On a sequential basis, the provision for loan losses of $2,550,000 in the third quarter of 2011 was $450,000 lower than the provision in the second quarter of 2011, while non-performing loans decreased from $16.4 million (1.46% of total loans) at June 30, 2011 to $16.0 million (1.43% of total loans) at September 30, 2011.  Net charge-offs on a sequential basis decreased from $2,871,000 (1.03% of loans) in the second quarter of 2011 to $2,425,000 (.86% of loans) in the third quarter of 2011.  The allowance for loan losses (ALL) increased $778,000 or 5% from September 2010, and $573,000 from December 31, 2010.  As a result of the added allowance, the ALL has increased from 1.53% of loans at the end of the third quarter of 2010 to 1.60% of loans at the end of the third quarter of 2011.   The adequacy of the ALL is analyzed quarterly and adjusted as necessary to maintain appropriate reserves for probable incurred losses in the Bank’s loan portfolio.

Non-interest income decreased 6% ($330,000) in the third quarter of 2011, as compared to the same period in 2010, while non-interest expense remained unchanged ($2,000) from the same period last year.  Contributing to the decrease in non-interest income was a $338,000 or 32% decrease in the gains on sale of real estate loans.  These gains were driven by a sharp drop in interest rates in the third quarter of 2010, which prompted increased demand for home mortgage loan refinancing.   On a sequential basis, the gains on the sale of real estate loans increased $475,000 or 208% from the second quarter of 2011; this increase was also driven by a drop in interest rates.  Non-interest expense included a $241,000 (5%) increase in salaries and employee benefits expense, offset by $235,000 (47%) lower cost for FDIC insurance expense.  The decrease in FDIC insurance was the result of recent changes in the methodology used by the FDIC to determine federal deposit insurance assessments.

Total assets were $1.624 billion at the end of the third quarter of 2011, which was $114 million or 8% higher than the same date a year ago.  Total loans decreased $2 million while investments in securities increased $99 million (41%) from September of 2010.   The increased investments in securities were funded by an increase in deposits of $98 million, or 8%, and an increase in shareholders’ equity of $23 million, or 16%.  The growth in equity was a result of increased earnings as described above and the net increase in capital from the Company’s December 2010 common stock offering, less the Series A Preferred Stock repurchase.

The Bank of Kentucky Financial Corporation

Selected Consolidated Financial Data

(Dollars in thousands, except per share data)

	Third Quarter Comparison									Nine months ended June 30, Comparison
Income Statement Data	9/30/11			9/30/10			% Chg			9/30/11			9/30/10			% Chg
Interest income	$	16,280		$	16,694			(2	)%	$	48,702		$	50,280			(3	)%
Interest expense		2,204			3,102			(29	)%		7,251			10,300			(30	)%
Net interest income		14,076			13,592			4	%		41,451			39,980			4	%
Provision for loan losses		2,550			3,500			(27	)%		8,550			12,500			(31	)%
Net interest income after provision for loan losses		11,526			10,092			14	%		32,901			27,480			20	%
Non interest income		5,297			5,627			(6	)%		15,194			15,172			-	%
Non  interest expense		10,727			10,725			-	%		31,711			31,654			-	%
Net income before income taxes		6,096			4,994			22	%		16,384			10,998			49	%
Provision for income taxes		1,822			1,466			24	%		4,804			3,000			60	%
Net income		4,274			3,528			21	%		11,580			7,998			45	%
Preferred stock dividends & amortization		261			515			(49	)%		777			1,539			(50	)%
Net income available to common shareholders	$	4,013		$	3,013			33	%	$	10,803		$	6,459			67	%
Per Common Share Data
Diluted earnings per common share		0.54			0.53			2	%		1.45			1.14			27	%
Cash dividends declared		0.28			0.28			0	%		0.56			0.56			0	%
Earnings Performance Data
Return on common equity		10.51	%		10.68	%	(17		)bps		9.78	%		7.81	%	197		bps
Return on assets		1.05	%		.93	%	12		bps		.95	%		.69	%	26		bps
Net interest margin		3.76	%		3.90	%	(14		)bps		3.69	%		3.75	%	(6		)bps

The Bank of Kentucky Financial Corporation

Selected Consolidated Financial Data

(Dollars in thousands, except per share data)

Balance Sheet Data
	September 30, 2011			December 31, 2010			September 30, 2010
Assets:
Cash and cash equivalents	$	67,657		$	172,664		$	41,280
Investments		339,780			285,326			240,657
Loans held for sale		6,612			15,279			21,903
Total loans, gross		1,118,630			1,106,009			1,120,168
Allowance for loan losses		(17,941	)		(17,368	)		(17,163	)
Premises and equipment, net		22,653			23,170			23,373
Goodwill and acquisition intangibles, net		24,826			25,464			25,820
Other assets and accrued interest receivable		62,182			54,340			54,028
Total assets	$	1,624,399		$	1,664,884		$	1,510,066
Liabilities & Shareholders’ Equity
Total deposits	$	1,369,215		$	1,422,312		$	1,271,455
Short-term borrowings		26,248			23,419			36,175
Notes payable		48,745			48,761			44,766
Accrued interest payable and other liabilities		10,905			11,022			11,307
Total liabilities		1,455,113			1,505,514			1,363,703
Common stockholders’ equity		152,356			142,580			112,873
Preferred stock		16,930			16,790			33,490
Shareholders’ equity		169,286			159,370			146,363
Total liabilities and shareholders’ equity	$	1,624,399		$	1,664,884		$	1,510,066

The Bank of Kentucky Financial Corporation

Selected Consolidated Financial Data

(Dollars in thousands, except per share data)

	Average Balance Sheet Rates (presented on a tax equivalent basis )
	Three Months ended September 30, 2011							Three Months ended September 30, 2010
	Average outstanding balance		Interest earned/ paid		Yield/ rate			Average outstanding balance		Interest earned/ paid		Yield/ rate
Interest-earning assets:
Loans receivable (1)(2)	$	1,126,118	$	14,652		5.16	%	$	1,123,503	$	15,497		5.47	%
Securities (2)		324,144		1,881		2.30			234,335		1,384		2.34
Other interest-earning assets		39,721		69		0.69			28,232		76		1.07
Total interest-earning assets		1,489,983		16,602		4.42			1,386,070		16,957		4.85
Non-interest-earning assets		133,736							123,751
Total assets	$	1,623,719						$	1,509,821
Interest-bearing liabilities:
Transaction accounts		711,046		524		0.29			637,835		732		0.46
Time deposits		411,193		1,430		1.38			446,100		2,049		1.82
Borrowings		72,421		250		1.37			67,153		321		1.90
Total interest-bearing liabilities		1,194,660		2,204		0.73			1,151,088		3,102		1.07
Non-interest-bearing liabilities		261,219							213,096
Total liabilities		1,455,879							1,364,184
Shareholders’ equity		167,840							145,637
Total liabilities and shareholders’ equity	$	1,623,719						$	1,509,821
Net interest income			$	14,398						$	13,855
Interest rate spread						3.69	%						3.78	%
Net interest margin (net interest income as a percent of average interest-earning assets)						3.83	%						3.97	%

(1) Includes non-accrual loans.

(2) Income presented on a tax equivalent basis using a 35.00% and 34.37% tax rate in 2011 and 2010, respectively. The tax equivalent adjustment was $322,000 and $263,000 in 2011 and 2010, respectively.

The Bank of Kentucky Financial Corporation

Selected Consolidated Financial Data

(Dollars in thousands, except per share data)

	Average Balance Sheet Rates (presented on a tax equivalent basis )
	Nine Months ended September 30, 2011							Nine Months ended September 30, 2010
	Average outstanding balance		Interest earned/ paid		Yield/ rate			Average outstanding balance		Interest earned/ paid		Yield/ rate
Interest-earning assets:
Loans receivable (1)(2)	$	1,118,185	$	43,886		5.25	%	$	1,138,669	$	46,303		5.44	%
Securities (2)		315,364		5,454		2.31			231,462		4,456		2.57
Other interest-earning assets		69,341		291		.56			55,086		282		.68
Total interest-earning assets		1,502,890		49,631		4.40			1,425,217		51,041		4.77
Non-interest-earning assets		132,355							124,499
Total assets	$	1,635,245						$	1,549,716
Interest-bearing liabilities:
Transaction accounts		720,339		1,708		0.32			678,509		2,328		0.46
Time deposits		424,428		4,785		1.51			451,607		7,059		2.09
Borrowings		72,879		758		1.39			66,877		913		1.83
Total interest-bearing liabilities		1,217,646		7,251		0.80			1,196,993		10,300		1.15
Non-interest-bearing liabilities		252,033							210,045
Total liabilities		1,469,679							1,407,038
Shareholders’ equity		165,566							142,678
Total liabilities and shareholders’ equity	$	1,635,245						$	1,549,716
Net interest income			$	42,380						$	40,741
Interest rate spread						3.60	%						3.62	%
Net interest margin (net interest income as a percent of average interest-earning assets)						3.77	%						3.82	%

(1) Includes non-accrual loans.

(2) Income presented on a tax equivalent basis using a 35.00% and 34.37% tax rate in 2011 and 2010, respectively. The tax equivalent adjustment was $929,000 and $761,000 in 2011 and 2010, respectively.

The Bank of Kentucky Financial Corporation

Selected Consolidated Financial Data

(Dollars in thousands, except per share data)

	Five-Quarter Comparison
Income Statement Data	9/30/11			6/30/11			3/31/11			12/31/10			9/30/10
Net interest income	$	14,076		$	14,027		$	13,348		$	13,429		$	13,592
Provision for loan losses		2,550			3,000			3,000			3,000			3,500
Net interest income after provision for loan losses		11,526			11,027			10,348			10,429			10,092
Service charges and fees		2,470			2,424			2,157			2,411			2,589
Gain on sale of real estate loans		703			228			278			946			1,041
Gain on sale of securities		-			-			231			-			-
Trust fee income		630			723			663			601			620
Bankcard transaction revenue		849			859			789			774			727
Gains/(losses) on Other Real Estate Owned		(98	)		(94	)		16			(125	)		(110	)
Other non-interest income		743			834			789			935			760
Total non-interest income		5,297			4,974			4,923			5,542			5,627
Salaries and employee benefits expense		5,351			5,045			4,754			4,959			5,110
Occupancy and equipment expense		1,216			1,241			1,248			1,185			1,195
Data processing expense		500			467			494			484			442
State bank taxes		550			550			536			477			492
Amortization of intangible assets		202			215			221			357			357
FDIC Insurance		269			384			583			566			504
Other non-interest expenses		2,639			2,733			2,513			2,742			2,625
Total non-interest expense		10,727			10,635			10,349			10,770			10,725
Net income before income tax expense		6,096			5,366			4,922			5,201			4,994
Income tax expense		1,822			1,572			1,410			1,528			1,466
Net income		4,274			3,794			3,512			3,673			3,528
Preferred stock dividends & amortization		261			259			257			707			515
Net income available to common shareholders	$	4,013		$	3,535		$	3,255		$	2,966		$	3,013
Per Common Share Data
Diluted earnings per common share		0.54			0.47			0.44			0.46			0.53
Cash dividends declared		0.28			0.00			0.28			0.00			0.28
Weighted average common shares outstanding
Basic		7,432,995			7,432,487			7,432,295			6,434,354			5,666,707
Diluted		7,488,743			7,501,731			7,459,220			6,434,354			5,666,707
Earnings Performance Data
Return on common equity		10.51	%		9.59	%		9.21	%		9.33	%		10.68	%
Return on assets		1.05	%		.93	%		.86	%		.91	%		.93	%
Net interest margin		3.76	%		3.76	%		3.56	%		3.62	%		3.90	%
Net interest margin (tax equivalent)		3.83	%		3.84	%		3.63	%		3.70	%		3.97	%

The Bank of Kentucky Financial Corporation

Selected Consolidated Financial Data

(Dollars in thousands, except per share data)

	Five-Quarter Comparison
Balance Sheet Data	9/30/11			6/30/11			3/31/11			12/31/10			9/30/10
Assets:
Cash and cash equivalents	$	67,657		$	61,098		$	97,712		$	172,664		$	41,280
Investments		339,780			320,202			328,271			285,326			240,657
Loans held for sale		6,612			1,107			1,223			15,279			21,903
Total loans		1,118,630			1,128,511			1,118,136			1,106,009			1,120,168
Allowance for loan losses		(17,941	)		(17,816	)		(17,688	)		(17,368	)		(17,163	)
Premises and equipment, net		22,653			22,576			22,856			23,170			23,373
Goodwill and acquisition intangibles, net		24,826			25,028			25,242			25,464			25,820
Other assets & accrued interest receivable		62,182			61,013			61,684			54,340			54,028
Total assets	$	1,624,399		$	1,601,719		$	1,637,436		$	1,664,884		$	1,510,066
Liabilities & Shareholders’ Equity
Total deposits	$	1,369,215		$	1,355,284		$	1,390,706		$	1,422,312		$	1,271,455
Short-term borrowings		26,248			20,610			24,667			23,419			36,175
Notes payable		48,745			48,750			48,756			48,761			44,766
Accrued interest payable & other liabilities		10,905			10,682			12,289			11,022			11,307
Total liabilities		1,455,113			1,435,326			1,476,418			1,505,514			1,363,703
Common stockholders’ equity		152,356			149,511			144,183			142,580			112,873
Preferred stock		16,930			16,882			16,835			16,790			33,490
Shareholders’ equity		169,286			166,393			161,018			159,370			146,363
Total liabilities and shareholders’ equity	$	1,624,399		$	1,601,719		$	1,637,436		$	1,664,884		$	1,510,066
Common shares outstanding		7,432,995			7,432,995			7,432,295			7,432,295			5,666,707
Average Balance Sheet Data
Average investments	$	324,144		$	319,377		$	302,331		$	252,793		$	234,335
Average other earning assets		39,721			57,607			111,484			85,384			28,232
Average loans		1,126,118			1,119,767			1,108,477			1,133,524			1,123,503
Average earning assets		1,489,983			1,496,751			1,522,292			1,471,701			1,386,070
Average assets		1,623,719			1,633,990			1,649,947			1,595,835			1,509,821
Average deposits		1,372,244			1,385,624			1,406,861			1,366,256			1,285,557
Average interest bearing deposits		1,122,239			1,144,986			1,168,383			1,130,890			1,083,935
Average interest bearing transaction deposits		711,046			721,948			729,022			682,826			637,835
Average interest bearing time deposits		411,193			423,038			439,361			448,064			446,100
Average borrowings		72,421			72,580			73,555			69,784			67,153
Average interest bearing liabilities		1,194,660			1,217,566			1,241,938			1,200,674			1,151,088
Average common stockholders equity		150,934			146,848			143,382			126,068			112,192
Average preferred stock		16,906			16,858			16,813			31,710			33,445

The Bank of Kentucky Financial Corporation

Selected Consolidated Financial Data

(Dollars in thousands, except per share data)

	Five-Quarter Comparison
Asset Quality Data	9/30/11			6/30/11			3/31/11			12/31/10			9/30/10
Allowance for loan losses to total loans		1.60	%		1.58	%		1.58	%		1.57	%		1.53	%
Allowance for loan losses to non-performing loans		1.12	%		1.07	%		87	%		82	%		90	%
Nonaccrual loans	$	15,964		$	16,322		$	19,735		$	20,648		$	18,768
Loans – 90 days past due & still accruing		45			100			637			414			207
Total non-performing loans		16,009			16,422			20,372			21,062			18,975
OREO and repossessed assets		1,894			1,902			1,083			795			1,392
Total non-performing assets		17,903			18,324			21,455			21,857			20,367
Restructured loans-accruing		13,108			7,022			3,294			6,135			3,901
Non-performing loans to total loans		1.43	%		1.46	%		1.82	%		1.90	%		1.69	%
Non-performing assets to total assets		1.11	%		1.15	%		1.32	%		1.32	%		1.35	%
Annualized charge-offs to average loans		.86	%		1.03	%		0.98	%		1.00	%		1.02	%
Net charge-offs	$	2,425		$	2,871		$	2,680		$	2,795		$	2,867

About BKFC

BKFC, a bank holding company with assets of approximately $1.624 billion, offers banking and related financial services to both individuals and business customers.  BKFC operates thirty-one branch locations and fifty-four ATMs in the Northern Kentucky market.

For more information contact:

Martin Gerrety

Executive Vice President and CFO

(859) 372-5169

mgerrety@bankofky.com

###