The Bank of Kentucky Financial Corp. Reports Operating Results (10-Q)

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Aug 06, 2010
The Bank of Kentucky Financial Corp. (BKYF, Financial) filed Quarterly Report for the period ended 2010-06-30.

The Bank Of Kentucky Financial Corp. has a market cap of $110.2 million; its shares were traded at around $19.45 with a P/E ratio of 17.5 and P/S ratio of 1.4. The dividend yield of The Bank Of Kentucky Financial Corp. stocks is 2.9%. The Bank Of Kentucky Financial Corp. had an annual average earning growth of 8% over the past 10 years. GuruFocus rated The Bank Of Kentucky Financial Corp. the business predictability rank of 1-star.

Highlight of Business Operations:

Total assets at June 30, 2010 were $1,519,620,000 as compared to $1,564,998,000 at December 31, 2009, a decrease of $45,378,000 (3%). Loans outstanding decreased $32,020,000 (3%) from $1,154,984,000 at December 31, 2009 to $1,122,964,000 at June 30, 2010. The decrease in cash and cash equivalents of $29,644,000 (30%) was partially offset with in increase in available-for-sale securities of $20,669,000 (11%).

As Table 1 illustrates, contributing to the decrease in the loan portfolio in the second quarter of 2010 was the decrease in construction and land development loans of $43,471,000 (29%) and was partially offset with an increase in commercial real estate loans of $11,501,000 (2%). The decrease in the construction and land development loans and the corresponding increase in commercial real estate loans was the result of a number of loans completing the construction phase of their project, and were moved into permanent financing. Contributing to the overall decrease in loans was the fact that the Bank continues to experience decreased levels of new and renewed residential real estate, commercial and consumer loans originated as a result of the current economic conditions. While management expects continued decreases in new and renewed loan origination, the Bank intends to continue to work to make loans that meet its longstanding prudent lending standards.

Deposits decreased $42,093,000 (3%) to $1,301,179,000 at June 30, 2010, compared to $1,343,272,000 at December 31, 2009. The largest decrease in deposits came from interest bearing transaction accounts which decreased $46,316,000, or 13%, from December 31, 2009 and was partially offset with a increase in saving deposits, which increased $15,129,000, or 25%, from December 31, 2009. The decrease in interest bearing transaction accounts was the result of the seasonal decrease in public fund deposits, which decreased approximately $57,000,000, or 19%, from the end of 2009. Public funds are deposits of local municipalities, schools and other public entities, and tend to be cyclical in nature with higher balances in the fourth quarter of the year as a result of property tax receipts. These public fund balances are collateralized with BKFCs security portfolio and letter of credit guarantees from the FHLB.

Other changes in the balance sheet included a $3,249,000 (23%) decrease in other liabilities, which included an approximately $3,400,000 final escrow payment on the Integra acquisition.

Net income available to common stockholders for the six months ended June 30, 2010 decreased from $4,110,000 ($.73 diluted earnings per share) in 2009 to $3,446,000 ($.61 diluted earnings per share) in 2010, a decrease of $664,000 (16%). Net income available to common shareholders for the quarter ended June 30, 2010 was $2,096,000 ($.37 diluted earnings per share) as compared to $1,552,000 ($.27 diluted earnings per share) during the same period of 2009, an increase of $544,000 (35%). The main reason for the increase in net income from the second quarter of 2009 to 2010 was a $3,194,000 (21%) increase in total revenue, which more than offset the $1,700,000 (61%) increase in the provision for loan losses and the $731,000 (8%) increase in noninterest expense. The increase in revenue included a $2,476,000 (23%) increase in net interest income and $718,000 (17%) increase in non-interest income. Contributing to the increase in noninterest expense was the full quarter effect of both the Integra branch acquisition and the TAM acquisition, which was partially offset by the $440,000 (43%) decrease in FDIC insurance expense. Contributing to the increase in the provision for loan losses was higher levels of net charge-offs and non-performing loans in the second quarter of 2010 versus the same period in 2009 and managements continuing concerns over the stressed economic conditions.

Net interest income increased $2,476,000 (23%) in the second quarter of 2010 as compared to the same period in 2009, while the year to date total increased $5,174,000 (24%) from $21,214,000 in 2009 to $26,388,000 in 2010. As illustrated in Table 4, both the volume and rate variances had a positive impact on net interest income in the second quarter of 2010 as compared with the second quarter of 2009, with the majority of the growth in net interest income the result of growth in the balance sheet. Table 4 shows the net interest income on a fully tax equivalent basis was positively impacted by the volume additions to the balance sheet by $1,353,000 and by a positive rate variance by $1,125,000. Contributing to the favorable volume variance was the Integra acquisition that added approximately $107,000,000 in loans and $76,000,000 in deposits. As illustrated in Table 2, average earning assets increased $196,958,000 or 16% from the second quarter of 2009 to the second quarter of 2010, while average interest bearing liabilities only increased $178,040,000 or 17% in the same period. As further illustrated in Table 4, the favorable rate variance was driven by the decrease in interest expense attributable to rate of $1,666,000 which was offset by a $541,000 decrease in interest income as a result of rate. Driving the decrease in interest expense were time deposits, which contributed $1,122,000 or 67% of the decrease in interest expense as a result of rate. While BKFC benefited from falling rates in the second quarter of 2010 as compared to the same period in 2009, if rates continue to fall in 2010 the effect on BKFC will be negative, as shown and explained below.

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