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

NEWS RELEASE

THE BANK OF KENTUCKY FINANCIAL CORPORATION

ANNOUNCES SECOND QUARTER EARNINGS

Net income available to common shareholders up 25% for the second quarter

CRESTVIEW HILLS, KENTUCKY, July 19, 2012 – 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 second quarter and six months ended June 30, 2012. For the second quarter, the Company reported an increase in diluted earnings per common share of 26% from the same period in 2011.

A summary of the Company’s results follows:

Second Quarter ended June 30,	2012		2011		Change
Net income	$	4,424,000	$	3,794,000		17	%
Net income available to common shareholders	$	4,424,000	$	3,535,000		25	%
Earnings per common share, basic	$	0.59	$	0.48		23	%
Earnings per common share, diluted	$	0.59	$	0.47		26	%

Six Months ended June 30,	2012		2011		Change
Net income	$	8,939,000	$	7,306,000		22	%
Net income available to common shareholders	$	8,939,000	$	6,790,000		32	%
Net income per common share, basic	$	1.20	$	0 .91		32	%
Net income per common share, diluted	$	1.19	$	0 .91		31	%

Robert Zapp, President & CEO stated, “We continue to execute our strategy as evidenced by the Company’s financial results for the quarter. Positive momentum within our lending lines of business contributed to the Bank’s organic loan growth of $14 million in the second quarter, which was the highest quarterly loan growth experienced over the last three years. Mortgage revenue remained strong and problem assets declined, which were key drivers of our success in the second quarter. We have invested in the resources and technology for continued growth, and I believe that the Bank is well positioned going forward.”

Driving the increase in earnings available to common shareholders in the second quarter of 2012 was a $1,300,000 (43%) decrease in the provision for loan losses and a $259,000 (100%) decrease in preferred stock dividends and amortization as compared to the second quarter of 2011. Also contributing to increased earnings was a 2% increase in total revenue (net interest income and non interest income), which was offset with an 8% increase in noninterest expense. The decrease in the provision for loan losses reflected improving credit metrics as compared to June of 2011, while the reduction of preferred stock dividends and amortization reflects the November 2011 repurchase of the final $17 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 $20,000 in the second quarter of 2012, as compared to the same period in 2011. The net interest margin, on a tax equivalent basis, decreased 19 basis points from 3.84% in the second quarter of 2011 to 3.65% in the second quarter of 2012. Contributing to the decrease in the net interest margin was the mix of the growth in earning assets. Of the $86 million growth in average earning assets from the second quarter of 2011 to second quarter of 2012, $69 million or 80% of the growth was attributed to the Bank’s securities portfolio and fed funds sold, which generally have lower yields than loans.

The provision for loan losses decreased by $1,300,000 (43%) in the second quarter of 2012, as compared to the same period in 2011. Contributing to this decrease were lower non-performing loans and charge-offs ratios as compared to June 2011. The Company’s non-performing loans as a percentage of total loans were 1.44% as of June 30, 2012, as compared to 1.46% as of June 30, 2011, while annualized net charge-offs to average loans decreased from 1.03% in the second quarter of 2011 to 0.61% in the second quarter of 2012. The Company recorded $1,716,000 in net charge-offs in the second quarter of 2012 as compared to $2,871,000 in the second quarter of 2011. On a sequential basis, the provision for loan losses of $1,700,000 in the second quarter of 2012 was $100,000 lower than the provision in the first quarter of 2012, while non-performing loans decreased from $17.5 million (1.54% of total loans) at March 31, 2012 to $16.5 million (1.44% of total loans) at June 30, 2012. Net charge-offs on a sequential basis decreased from $1,726,000 (0.62% of loans) in the first quarter of 2012 to $1,716,000 (0.61% of loans) in the second quarter of 2012. The allowance for loan losses (ALL) as of June 30, 2012 decreased $16,000 from March 2012. The ALL has decreased from 1.62% of loans at the end of the first quarter of 2012 to 1.60% of loans at the end of the second quarter of 2012. 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.

The Company’s non-performing assets as a percentage of total assets were 1.32% as of June 30, 2012, as compared to 1.15% as of June 30, 2011. Non-performing loans increased $38,000 from June 2011 to June 2012 and other real estate owned increased $4,048,000 in the same time period. On a sequential quarterly basis, other real estate owned decreased $378,000 from March 2012. The increase in other real estate owned from June of 2011 was primarily the result of one commercial real estate relationship which added $3,475,000 in other real estate owned in the fourth quarter of 2011. These properties are recorded at their fair value less estimated costs to sell with the difference between this value and the loan balance being recorded as a charge-off.

Non-interest income increased 8% ($379,000) in the second quarter of 2012, as compared to the same period in 2011, while non-interest expense increased 8% ($892,000) from the same period last year. Contributing to the increase in non-interest income was a $361,000 or a 158% increase in the gains on sale of real estate loans. These gains were driven by a drop in interest rates from the second quarter of 2011, which has prompted increased demand for home mortgage loan refinancing. Contributing to the increase in non-interest expense was a $679,000 (13%) increase in salaries and benefits expense. The increase in salaries and benefits included $134,000 in higher bonus accruals and $122,000 in higher commission expense. The added bonus accrual reflects the end of the TARP restriction on bonus pay for executives, while the increased commission expense included higher commissions paid based on higher real estate loan originations.

Total assets were $1.704 billion at the end of the second quarter of 2012, which was $102 million or 6% higher than the same date a year ago. Total loans increased $15 million (1%), investments in securities increased $56 million (18%) and cash and cash equivalents increased $6 million (9%) from June of 2011. The balance sheet increases were funded by an increase in deposits of $100 million, or 7%. Total equity decreased $1.9 million from the same date in 2011 as a result of the repurchase of the Series A Preferred Stock.

The Bank of Kentucky Financial Corporation

Selected Consolidated Financial Data

(Dollars in thousands, except per share data)

	Second Quarter Comparison									Six months ended June 30, Comparison
Income Statement Data	6/30/12			6/30/11			% Chg			6/30/12			6/30/11			% Chg
Interest income	$	15,661		$	16,423			(5	)%	$	31,349		$	32,422			(3	)%
Interest expense		1,614			2,396			(33	)%		3,458			5,047			(31	)%
Net interest income		14,047			14,027			-%			27,891			27,375			2	%
Provision for loan losses		1,700			3,000			(43	)%		3,500			6,000			(42	)%
Net interest income after provision for loan losses		12,347			11,027			12	%		24,391			21,375			14	%
Non interest income		5,353			4,974			8	%		10,959			9,897			11	%
Non  interest expense		11,527			10,635			8	%		22,869			20,984			9	%
Net income before income taxes		6,173			5,366			15	%		12,481			10,288			21	%
Provision for income taxes		1,749			1,572			11	%		3,542			2,982			19	%
Net income		4,424			3,794			17	%		8,939			7,306			22	%
Preferred stock dividends & amortization		-			259			(100	)%		-			516			(100	)%
Net income available to common shareholders	$	4,424		$	3,535			25	%	$	8,939		$	6,790			32	%
Per Common Share Data
Diluted earnings per common share		0.59			0.47			26	%		1.19			0.91			31	%
Cash dividends declared		0.00			0.00			0	%		0.30			0.28			7	%
Earnings Performance Data
Return on common equity		10.99	%		9.59	%		140	bps		11.24	%		9.40	%		184	bps
Return on assets		1.03	%		0.93	%		10	bps		1.03	%		0.90	%		13	bps
Net interest margin		3.57	%		3.76	%		(19	)bps		3.53	%		3.66	%		(13	)bps

The Bank of Kentucky Financial Corporation

Selected Consolidated Financial Data

(Dollars in thousands, except per share data)

Balance Sheet Data
	June 30, 2012			December 31, 2011
Assets:
Cash and cash equivalents	$	66,719		$	135,964
Investments		376,454			371,737
Loans held for sale		13,983			8,920
Total loans, gross		1,143,733			1,129,954
Allowance for loan losses		(18,346	)		(18,288	)
Premises and equipment, net		22,923			22,827
Goodwill and acquisition intangibles, net		24,856			25,251
Other assets and accrued interest receivable		73,543			68,359
Total assets	$	1,703,865		$	1,744,724
Liabilities & Shareholders’ Equity
Total deposits	$	1,455,328		$	1,498,821
Short-term borrowings		24,373			29,300
Notes payable		48,727			48,739
Accrued interest payable and other liabilities		10,987			11,294
Total liabilities		1,539,415			1,588,154
Common stockholders’ equity		164,450			156,570
Total liabilities and shareholders’ equity	$	1,703,865		$	1,744,724

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 June 30, 2012							Three Months ended June 30, 2011
	Average outstanding balance		Interest earned/ paid		Yield/ rate			Average outstanding balance		Interest earned/ paid		Yield/ rate
Interest-earning assets:
Loans receivable (1)(2)	$	1,136,894	$	13,948		4.93	%	$	1,119,767	$	14,770		5.29	%
Securities (2)		375,245		1,961		2.10			319,377		1,881		2.36
Other interest-earning assets		70,648		79		0.45			57,607		84		0.58
Total interest-earning assets		1,582,787		15,988		4.06			1,496,751		16,735		4.48
Non-interest-earning assets		147,788							137,239
Total assets	$	1,730,575						$	1,633,990
Interest-bearing liabilities:
Transaction accounts		813,312		425		0.21			721,948		513		0.29
Time deposits		381,387		923		0.97			423,038		1,629		1.54
Borrowings		75,789		266		1.41			72,580		254		1.40
Total interest-bearing liabilities		1,270,488		1,614		0.51			1,217,566		2,396		0.79
Non-interest-bearing liabilities		298,125							252,718
Total liabilities		1,568,613							1,470,284
Shareholders’ equity		161,962							163,706
Total liabilities and shareholders’ equity	$	1,730,575						$	1,633,990
Net interest income			$	14,374						$	14,339
Interest rate spread						3.55	%						3.69	%
Net interest margin (net interest income as a percent of average interest-earning assets)						3.65	%						3.84	%

(1) Includes non-accrual loans.

(2) Income presented on a tax equivalent basis using a 35.00% tax rate in 2012 and 2011. The tax equivalent adjustment was $327,000 and $312,000 in 2012 and 2011, 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 )
	Six Months ended June 30,2012							Six Months ended June 30, 2011
	Average outstanding balance		Interest earned/ paid		Yield/ rate			Average outstanding balance		Interest earned/ paid		Yield/ rate
Interest-earning assets:
Loans receivable (1)(2)	$	1,135,131	$	27,906		4.94	%	$	1,114,153	$	29,234		5.29	%
Securities (2)		374,636		3,921		2.10			310,901		3,573		2.32
Other interest-earning assets		79,622		171		0.43			84,397		222		0.53
Total interest-earning assets		1,589,389		31,998		4.05			1,509,451		33,029		4.41
Non-interest-earning assets		148,483							133,063
Total assets	$	1,737,872						$	1,642,514
Interest-bearing liabilities:
Transaction accounts		817,477		895		0.22			725,063		1,184		0.33
Time deposits		392,243		2,019		1.04			431,155		3,355		1.57
Borrowings		78,293		544		1.40			73,065		508		1.40
Total interest-bearing liabilities		1,288,013		3,458		0.54			1,229,283		5,047		0.83
Non-interest-bearing liabilities		289,867							251,281
Total liabilities		1,577,880							1,480,564
Shareholders’ equity		159,992							161,950
Total liabilities and shareholders’ equity	$	1,737,872						$	1,642,514
Net interest income			$	28,540						$	27,982
Interest rate spread						3.51	%						3.58	%
Net interest margin (net interest income as a percent of average interest-earning assets)						3.61	%						3.74	%

___________________________

(1) Includes non-accrual loans.

(2) Income presented on a tax equivalent basis using a 35.00% tax rate in 2012 and 2011. The tax equivalent adjustment was $649,000 and $607,000 in 2012 and 2011, respectively.

The Bank of Kentucky Financial Corporation

Selected Consolidated Financial Data

(Dollars in thousands, except per share data)

	Five-Quarter Comparison
Income Statement Data	6/30/12			3/31/12			12/31/11			9/30/11			6/30/11
Net interest income	$	14,047		$	13,844		$	14,087		$	14,076		$	14,027
Provision for loan losses		1,700			1,800			2,200			2,550			3,000
Net interest income after provision for loan losses		12,347			12,044			11,887			11,526			11,027
Service charges and fees		2,241			2,201			2,390			2,470			2,424
Gain on sale of real estate loans		589			586			580			703			228
Gain/(loss) on sale of securities		(4	)		207			-			-			-
Trust fee income		694			689			625			630			723
Bankcard transaction revenue		952			902			885			849			859
Gains/(losses) on other real estate owned		(40	)		(94	)		(85	)		(98	)		(94	)
Other non-interest income		921			1,115			1,135			743			834
Total non-interest income		5,353			5,606			5,530			5,297			4,974
Salaries and employee benefits expense		5,724			5,451			5,044			5,351			5,045
Occupancy and equipment expense		1,315			1,277			1,192			1,216			1,241
Data processing expense		533			535			522			500			467
State bank taxes		579			559			415			550			550
Amortization of intangible assets		196			200			220			202			215
FDIC Insurance		295			305			305			269			384
Other non-interest expenses		2,885			3,015			2,705			2,639			2,733
Total non-interest expense		11,527			11,342			10,403			10,727			10,635
Net income before income tax expense		6,173			6,308			7,014			6,096			5,366
Income tax expense		1,749			1,793			2,105			1,822			1,572
Net income		4,424			4,515			4,909			4,274			3,794
Preferred stock dividends & amortization		-			-			195			261			259
Net income available to common shareholders	$	4,424		$	4,515		$	4,714		$	4,013		$	3,535
Per Common Share Data
Diluted earnings per common share		0.59			0.60			0.63			0.54			0.47
Cash dividends declared		0.00			0.30			0.00			0.28			0.00
Weighted average common shares outstanding
Basic		7,465,434			7,448,604			7,432,995			7,432,995			7,432,487
Diluted		7,542,372			7,520,062			7,465,606			7,488,743			7,501,731
Earnings Performance Data
Return on common equity		10.99	%		11.49	%		12.21	%		10.51	%		9.59	%
Return on assets		1.03	%		1.04	%		1.13	%		1.05	%		0.93	%
Net interest margin		3.57	%		3.49	%		3.55	%		3.76	%		3.76	%
Net interest margin (tax equivalent)		3.65	%		3.57	%		3.63	%		3.83	%		3.84	%

The Bank of Kentucky Financial Corporation

Selected Consolidated Financial Data

(Dollars in thousands, except per share data)

	Five-Quarter Comparison
Balance Sheet Data	6/30/12			3/31/12			12/31/11			9/30/11			6/30/11
Assets:
Cash and cash equivalents	$	66,719		$	133,153		$	135,964		$	67,657		$	61,098
Investments		376,454			374,336			371,737			339,780			320,202
Loans held for sale		13,983			10,863			8,920			6,612			1,107
Total loans		1,143,733			1,130,200			1,129,954			1,118,630			1,128,511
Allowance for loan losses		(18,346	)		(18,362	)		(18,288	)		(17,941	)		(17,816	)
Premises and equipment, net		22,923			23,159			22,827			22,653			22,576
Goodwill and acquisition intangibles, net		24,856			25,051			25,251			24,826			25,028
Other assets & accrued interest receivable		73,543			74,381			68,359			62,182			61,013
Total assets	$	1,703,865		$	1,752,781		$	1,744,724		$	1,624,399		$	1,601,719
Liabilities & Shareholders’ Equity
Total deposits	$	1,455,328		$	1,505,709		$	1,498,821		$	1,369,215		$	1,355,284
Short-term borrowings		24,373			29,334			29,300			26,248			20,610
Notes payable		48,727			48,733			48,739			48,745			48,750
Accrued interest payable & other liabilities		10,987			9,531			11,294			10,905			10,682
Total liabilities		1,539,415			1,593,307			1,588,154			1,455,113			1,435,326
Common stockholders’ equity		164,450			159,474			156,570			152,356			149,511
Preferred stock		-			-			-			16,930			16,882
Shareholders’ equity		164,450			159,474			156,570			169,286			166,393
Total liabilities and shareholders’ equity	$	1,703,865		$	1,752,781		$	1,744,724		$	1,624,399		$	1,601,719
Common shares outstanding		7,465,841			7,464,811			7,432,995			7,432,995			7,432,995
Average Balance Sheet Data
Average investments	$	375,245		$	374,027		$	360,265		$	324,144		$	319,377
Average other earning assets		70,648			88,597			76,258			39,721			57,607
Average loans		1,136,894			1,133,367			1,139,767			1,126,118			1,119,767
Average earning assets		1,582,787			1,595,991			1,576,290			1,489,983			1,496,751
Average assets		1,730,575			1,745,169			1,717,816			1,623,719			1,633,990
Average deposits		1,482,222			1,494,332			1,464,550			1,372,244			1,385,624
Average interest bearing deposits		1,194,699			1,224,743			1,190,716			1,122,239			1,144,986
Average interest bearing transaction deposits		813,312			821,643			783,753			711,046			721,948
Average interest bearing time deposits		381,387			403,100			406,963			411,193			423,038
Average borrowings		75,789			80,798			77,832			72,421			72,580
Average interest bearing liabilities		1,270,488			1,305,541			1,268,548			1,194,660			1,217,566
Average common stockholders equity		161,962			158,022			153,175			150,934			146,848
Average preferred stock		-			-			9,753			16,906			16,858

The Bank of Kentucky Financial Corporation

Selected Consolidated Financial Data

(Dollars in thousands, except per share data)

	Five-Quarter Comparison
Asset Quality Data	6/30/12			3/31/12			12/31/11			9/30/11			6/30/11
Allowance for loan losses to total loans		1.60	%		1.62	%		1.62	%		1.60	%		1.58	%
Allowance for loan losses to non-performing loans		111	%		105	%		115	%		112	%		107	%
Nonaccrual loans	$	16,265		$	16,779		$	15,651		$	15,964		$	16,322
Loans – 90 days past due & still accruing		195			680			219			45			100
Total non-performing loans		16,460			17,459			15,870			16,009			16,422
OREO and repossessed assets		5,950			6,328			5,844			1,894			1,902
Total non-performing assets		22,410			23,787			21,714			17,903			18,324
Restructured loans-accruing		15,388			15,492			13,306			13,108			7,022
Non-performing loans to total loans		1.44	%		1.54	%		1.40	%		1.43	%		1.46	%
Non-performing assets to total assets		1.32	%		1.36	%		1.25	%		1.11	%		1.15	%
Annualized charge-offs to average loans		0.61	%		0.62	%		0.65	%		0.86	%		1.03	%
Net charge-offs	$	1,716		$	1,726		$	1,853		$	2,425		$	2,871

Other Information
Total assets under management  (in millions)	701	702	667	639	681
Full-time equivalent employees	376	359	356	349	354

About BKFC

BKFC, a bank holding company with assets of approximately $1.704 billion, offers banking and related financial services to both individuals and business customers. BKFC operates thirty-three branch locations and fifty-four ATMs in the Northern Kentucky/Cincinnati market.

For more information contact:

Martin Gerrety

Executive Vice President and CFO

(859) 372-5169

mgerrety@bankofky.com

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