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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-K





(Mark One)

|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------

For the Fiscal Year Ended December 31, 2010

OR



| ̈ | 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: 001-34214





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)
|                                                              
|111 Lookout Farm Drive,
Crestview Hills, Kentucky 41017       

(Address of principal executive offices) (Zip Code)

Registrants
telephone number, including area code: (859) 371-2340

Securities registered pursuant to Section 12(b) of the
Exchange Act:



|                                |  |                                            
|------------------------------- |  | -------------------------------------------
|Common Stock, without par value |  | The Nasdaq Stock Market LLC                
|(Title of each class)           |  | (Name of each exchange on which registered)

Securities registered pursuant to Section 12(g) of the Exchange Act:

None





Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act.    Yes   ̈    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes   ̈    No  x

Indicate
by check mark whether the registrant has (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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   ̈

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).    Yes   ̈    No   ̈

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.
See definitions of large accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer   ̈    Accelerated
filer  x    Non-accelerated filer   ̈    Smaller reporting company   ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).    Yes   ̈    No  x

The aggregate market value of the voting Common Stock held by non-affiliates of the registrant as of June 30, 2010 (the last business day of the registrants most recently completed second
fiscal quarter) was approximately $87,267,000.

At March 11, 2011, there were 7,432,295 shares of the registrants Common Stock
issued and outstanding.



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DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement of the registrant filed, or to be filed, with the Securities and Exchange Commission are incorporated by reference into Part III of this Form 10-K.









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TABLE OF CONTENTS



|                  |  |                                                                                                                             |     |                                                                                                              |  |  |     | 
|----------------- |  | --------------------------------------------------------------------------------------------------------------------------- | --- | ------------------------------------------------------------------------------------------------------------ |  |  | --- | 
|PART I            |  |                                                                                                                             |     |                                                                                                              |  |  | 4   | 
|Item 1.           |  |                                                                                                                             |     | Business                                                                                                     |  |  | 4   | 
|Item 1A.          |  |                                                                                                                             |     | Risk Factors                                                                                                 |  |  | 26  | 
|Item 1B.          |  |                                                                                                                             |     | Unresolved Staff Comments                                                                                    |  |  | 33  | 
|Item 2.           |  |                                                                                                                             |     | Properties                                                                                                   |  |  | 33  | 
|Item 3.           |  |                                                                                                                             |     | Legal Proceedings                                                                                            |  |  | 33  | 
|Item 4.           |  |                                                                                                                             |     | (Removed and Reserved)                                                                                       |  |  | 33  | 
|                  |  |                                                                                                                             |    
|PART III          |  |                                                                                                                             |     |                                                                                                              |  |  | 34  | 
|Item 5.           |  |                                                                                                                             |     | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  |  | 34  | 
|Item 6.           |  |                                                                                                                             |     | Selected Financial Data                                                                                      |  |  | 35  | 
|Item 7.           |  |                                                                                                                             |     | Managements Discussion and Analysis of Financial Condition and Results of Operation                         |  |  | 36  | 
|Item 7A.          |  |                                                                                                                             |     | Quantitative and Qualitative Disclosure about Market Risk                                                    |  |  | 53  | 
|Item 8.           |  |                                                                                                                             |     | Financial Statements and Supplementary Data                                                                  |  |  | 58  | 
|Item 9.           |  |                                                                                                                             |     | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  |  | 102 | 
|Item 9A.          |  |                                                                                                                             |     | Controls and Procedures                                                                                      |  |  | 102 | 
|Item 9B.          |  |                                                                                                                             |     | Other Information                                                                                            |  |  | 104 | 
|                  |  |                                                                                                                             |    
|PART III          |  |                                                                                                                             |     |                                                                                                              |  |  | 104 | 
|Item 10.          |  |                                                                                                                             |     | Directors, Executive Officers and Corporate Governance                                                       |  |  | 104 | 
|Item 11.          |  |                                                                                                                             |     | Executive Compensation                                                                                       |  |  | 104 | 
|Item 12.          |  |                                                                                                                             |     | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  |  | 104 | 
|Item 13.          |  |                                                                                                                             |     | Certain Relationships and Related Transactions, and Director Independence                                    |  |  | 104 | 
|Item 14.          |  |                                                                                                                             |     | Principal Accountant Fees and Services                                                                       |  |  | 104 | 
|                  |  |                                                                                                                             |    
|PART IV           |  |                                                                                                                             |     |                                                                                                              |  |  | 104 | 
|Item 15.          |  |                                                                                                                             |     | Exhibits and Financial Statement Schedules                                                                   |  |  | 104 | 
|                  |  |                                                                                                                             |    
|SIGNATURES        |  |                                                                                                                             |     |                                                                                                              |  |  | 105 | 
|INDEX TO EXHIBITS |  |                                                                                                                             | 106 |                                                                                                             
|Exhibit 21        |  | SUBSIDIARIES OF THE REGISTRANT                                                                                              |    
|Exhibit 23        |  | CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                                                                    |    
|Exhibit 31.1      |  | SECTION 302 CERTIFICATION OF ROBERT W. ZAPP, CHIEF EXECUTIVE OFFICER                                                        |    
|Exhibit 31.2      |  | SECTION 302 CERTIFICATION OF MARTIN J. GERRETY, TREASURER AND ASSISTANT SECRETARY                                           |    
|Exhibit 32.1      |  | SECTION 906 CERTIFICATION OF ROBERT W. ZAPP, CHIEF EXECUTIVE OFFICER                                                        |    
|Exhibit 32.2      |  | SECTION 906 CERTIFICATION OF MARTIN J. GERRETY, TREASURER AND ASSISTANT SECRETARY                                           |    
|Exhibit 99.1      |  | CERTIFICATION OF CHIEF EXECUTIVE OFFICER, PURSUANT TO SECTION 111(B)(4) OF THE EMERGENCY ECONOMIC STABILIZATION ACT OF 2008 |    
|Exhibit 99.2      |  | CERTIFICATION OF CHIEF FINANCIAL OFFICER, PURSUANT TO SECTION 111(B)(4) OF THE EMERGENCY ECONOMIC STABILIZATION ACT OF 2008 |    



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PART I



|Item 1. | Business
|------- | --------

General

The Bank of Kentucky Financial Corporation (BKFC) is a bank holding company that was incorporated as a Kentucky corporation in
1993 and engaged in no business activities until 1995, when BKFC acquired all of the issued and outstanding shares of common stock of The Bank of Kentucky, Inc. (the Bank), a bank incorporated under the laws of the Commonwealth of
Kentucky (formerly named The Bank of Boone County, Inc.), and Burnett Federal Savings Bank (Burnett), a federal savings bank that was later merged into the Bank. BKFC, through the Bank, is engaged in the banking business in Kentucky.

Formed in 1990, the Bank provides financial services and other financial solutions through 31 offices located in northern
Kentucky, which includes Boone, Kenton and Campbell counties and parts of Grant and Gallatin counties in northern Kentucky and also greater Cincinnati, Ohio. The principal products produced and services rendered by the Bank are as follows:



| |  |  | Commercial Banking  The Bank provides a full range of commercial banking services to corporations and other business clients. Loans are
provided for a variety of general corporate purposes, including financing for commercial and industrial projects, income producing commercial real estate, owner-occupied real estate and construction and land development. The Bank also provides a
wide range of deposit services, including checking, lockbox services and other treasury management services.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Consumer Banking  The Bank provides banking services to consumers, including checking, savings and money market accounts as well as
certificates of deposits and individual retirement accounts. The Bank also provides consumers with electronic banking products like internet banking, debit cards and 47 ATMs. In addition, the Bank provides consumer clients with installment and real
estate loans and home equity lines of credit.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Trust Services  The Bank offers specialized services and expertise in the areas of wealth management and trust. These services include the
administration of personal trusts and estates as well as the management of investment accounts for individuals.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The majority of the Banks loan portfolio, approximately 77%, consists of loans secured with or by real estate. Loans secured with real estate are further broken down by loan type and borrower.
Included in loans secured with or by real estate as of December 31, 2010 are:



| |  |  | Residential real estate loans - $261 million or 24% of loans. These loans are secured by residential properties, where the repayment comes from
the borrowers personal cash flows and liquidity, and collateral values are a function of residential real estate values in the markets we serve.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Commercial real estate loans - $356 million or 32% of loans. This loan type includes non owner-occupied commercial real estate loans and
construction and land development loans. These loans are made to borrowers where the primary source of repayment is derived from the cash flows generated by the real estate collateral. These loans are secured by property such as apartment complexes,
retail centers, and land which is being developed and sold.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Owner-occupied commercial real estate loans - $234 million or 21% of loans. These are loans secured by real estate where the operating business
is the source of repayment. These properties serving as collateral are characterized as industrial, warehouse or office.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

BKFCs senior management monitors and evaluates financial performance on a company-wide basis. All of BKFCs financial service operations are similar, and considered by management to be
aggregated into one reportable operating segment for purposes of generally accepted accounting principles, although certain management responsibilities are assigned by business line. Accordingly, all of BKFCs operations are aggregated in one
reportable operating segment in this Annual Report on Form 10-K (this Annual Report). Revenue, net income and total assets for the years ended December 31, 2010, 2009 and 2008 are presented below:



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|                                            |  |                                 |           |  |      |   |           |      |  |   |           | 
|------------------------------------------- |  | ------------------------------- | --------- |  | ---- | - | --------- | ---- |  | - | --------- | 
|                                            |  | For the year ended December 31, |          
|                                            |  | 2010                            |           |  | 2009 |   |           | 2008 | 
|                                            |  | (Dollars in thousands)          |          
|Revenue:                                    |  |                                 |           |  |      |   |           |      |  |   |           | 
|Net Interest Income                         |  | $                               | 53,409    |  |      | $ | 44,793    |      |  | $ | 40,662    | 
|Non-interest Income                         |  |                                 | 20,714    |  |      |   | 16,616    |      |  |   | 14,768    | 
|                                            |  |                                 |           |  |      |   |           |      |  |   |           | 
|Total Revenue                               |  |                                 | 74,123    |  |      |   | 61,409    |      |  |   | 55,430    | 
|                                            |  |                                 |           |  |      |   |           |      |  |   |           | 
|                                            |  |                                 |          
|Net Income available to common shareholders |  | $                               | 9,425     |  |      | $ | 6,968     |      |  | $ | 11,341    | 
|                                            |  |                                 |           |  |      |   |           |      |  |   |           | 
|Total Assets                                |  | $                               | 1,664,884 |  |      | $ | 1,564,998 |      |  | $ | 1,255,382 | 

As described in more
detail in this Annual Report, the recent economic recession and ongoing economic recovery have had a substantial effect on the operations of BKFC and the Bank. In an effort to stabilize and strengthen the financial markets and the banking industry,
the United States Congress and various federal agencies have taken a number of significant actions over the past several years, including the passage of legislation and the implementation of a number of programs. The most recent of these actions was
the passage into law, on July 21, 2010, of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act). See below under Regulation and Supervision for further discussion of the Dodd-Frank Act.

BKFC and the Bank participated in two government programs enacted in response to the recession. First, in October 2008 the
Bank participated in the transaction account guarantee component of the Federal Deposit Insurance Corporations (the FDIC) Temporary Liquidity Guarantee Program (the TLGP), whereby the FDIC will temporarily guarantee all
depositor funds in qualifying noninterest-bearing transaction accounts. Second, in February 2009 BKFC participated in the Troubled Asset Relief Program (TARP)Capital Purchase Program (CPP) sponsored by the United States
Department of the Treasury (the Treasury Department), in order to enhance BKFCs liquidity and capital position. BKFC received $34.0 million under the CPP in exchange for issuing 34,000 shares of Fixed Rate Cumulative Perpetual
Preferred Stock, Series A (the Series A Preferred Stock), and a warrant (the Warrant) to purchase approximately 274,784 shares of BKFC common stock (Common Stock). The Treasury Departments authority to make
new investments under the CPP expired in October 2010. On December 22, 2010, BKFC effected the repurchase of one-half of the outstanding $34 million of Series A Preferred Stock held by the Treasury Department. Neither BKFC nor the Bank have
participated in any of the other wide-ranging programs that were instituted by the federal government in response to the economic recession. For a discussion of the impact of the current economic conditions on the financial condition and results of
operations of BKFC and its subsidiaries, as well as a discussion of how curtailment or ending any such programs would effect BKFC and/or the Bank, see below under The Current Economic Environment, as well as Item 7.
Managements Discussion and Analysis of Financial Condition and Results of Operations in this Annual Report.

As a
bank incorporated under the laws of the Commonwealth of Kentucky, the Bank is subject to regulation, supervision and examination by the Department of Financial Institutions of the Commonwealth of Kentucky (the Department) and the FDIC.
The Bank is also a member of the Federal Home Loan Bank of Cincinnati (the FHLB).

Acquisition Activities

On June 14, 2000, BKFC consummated the acquisition of the Fort Thomas Financial Corporation (FTFC) and its wholly owned
subsidiary, the Fort Thomas Savings Bank (FTSB). FTFC was merged with and into BKFC and FTSB was merged with and into the Bank. Upon consummation of this acquisition, 865,592 shares of Common Stock 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.

On November 22, 2002, BKFC consummated the acquisition of certain assets and assumption of certain liabilities of Peoples Bank of
Northern Kentucky (PBNK). This acquisition was accounted for under the purchase method of accounting and accordingly the tangible and identifiable intangible assets and liabilities of the purchase were recorded at estimated fair values.
The excess of the purchase price over the net tangible and identifiable intangible assets was recorded as goodwill. The adjustments necessary to record tangible and identifiable intangible assets and liabilities at fair value are amortized to income
and expensed over the estimated remaining lives of the related assets and liabilities.



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On May 18, 2007, BKFC consummated the acquisition of FNB Bancorporation, Inc. and its
subsidiary, First Bank of Northern Kentucky, Inc. (First Bank). This acquisition was accounted for under the purchase method of accounting and accordingly the tangible and identifiable intangible assets and liabilities of the purchase
were recorded at estimated fair values. The excess of the purchase price over the net tangible and identifiable intangible assets was recorded as goodwill. The adjustments necessary to record tangible and identifiable intangible assets and
liabilities at fair value are amortized to income and expensed over the estimated remaining lives of the related assets and liabilities.

On December 11, 2009, the Bank completed the purchase of three banking offices of Integra Bank Corporations wholly-owned bank subsidiary, Integra Bank N.A. (Integra Bank), located
in Crittenden, Dry Ridge and Warsaw, Kentucky and a portfolio of selected commercial loans originated by Integra Banks Covington, Kentucky loan production office. This transaction also included the deposits of two additional branches in
northern Kentucky where the banking offices were excluded. This transaction added $76 million in deposits and $51 million in loans. The deposits were purchased at a premium of 6.50%, while the loans were purchased at an approximate 1% discount. The
acquisition included a core deposit intangible asset of $1.579 million and goodwill of $5.31 million. In a separate transaction, the Bank also bought an additional $49 million in loans from Integra Bank in the third quarter and $7 million in the
fourth quarter of 2009 at an approximate 1% discount. None of these purchased loans had shown evidence of credit deterioration since origination

On December 31, 2009, the Bank completed the purchase of Tapke Asset Management, LLC (TAM). TAM was an independent investment advisory firm, headquartered in Fort Wright, Kentucky, and
one of northern Kentuckys largest independent investment advisory firms. As a result of this transaction, the Banks client assets increased to over $650 million at December 31, 2009. TAM was purchased for $3 million, consisting of
$2 million in cash and $1 million in Common Stock, with an additional $500,000 in contingent consideration payable in three years based on revenue retention, which had a fair value of $395,000. The acquisition included a customer relationship
intangible of $1,525,000, a non-compete agreement intangible of $320,000, a trade name intangible of $165,000 and goodwill of $1,370,000.

The Current Economic Environment

During 2010, there have been signs that the national economy is recovering; however, the recovery remains fragile and is still threatened by weak labor markets, continued issues with asset quality in the
residential and commercial mortgage markets, household and business uncertainty and tight credit conditions. The effects of the financial crisis and recession are expected to persist for some time, especially as the magnitude of economic distress
facing local markets places continued pressure on asset quality and earnings, with the potential for undermining the stability of the banking organizations that serve these markets.

Although the Bank has experienced an increase in defaults and foreclosures during 2009 and 2010, such levels have been significantly less
than other regions of the United States. This is due, in part, to the fact that the Banks markets in northern Kentucky and Cincinnati, Ohio have not experienced as dramatic a reduction in real estate values from previous years as compared to
markets like Florida and California.

As a result of management concerns over the current economic environment, individual
lending authorities remain at reduced levels and the loan committee structure established in 2009 remains in place, which added the Banks Chief Executive Officer to the Banks loan committee to further scrutinize credit decisions.
Additionally, the Bank previously established a problem asset workout group in 2009. This groups primary task is to reduce risk by accelerating the exit from troubled credits. The problem asset workout group does this employing a number of
strategies. In addition, this group provides advice and support for the Banks lending professionals with respect to those relationships that are showing signs of stress, but have not elevated to the point of transfer to workout. In addition to
these monitoring and management processes, BKFC also conducts quarterly reviews and evaluations of all criticized loans. These comprehensive reviews, which pre-date the current economic recession, include the formulation of action plans and updates
on recent developments on all criticized loans. Proactive management of problem loans is a high priority of the Banks senior management.

BKFC has not experienced the stress or deterioration in its residential real estate portfolio that other financial institutions may be experiencing, as residential real estate loans represent a small
portion of the Banks overall loan portfolio. The Bank has not created or marketed any sub-prime loan products to its customers and does not service mortgages on behalf of other institutions. The Bank follows a strategy of selling a majority of
its originated residential loans in the secondary market. In the majority of situations, the Bank follows the underwriting guidelines of the various government agencies on residential real estate loans the Bank seeks to portfolio. For the year ended
December 31, 2010, the Banks residential real estate loan production was $166.3 million. Of this, sold loans totaled $148.1 million, while portfolio and construction loans totaled $7.4 million and $10.8 million, respectively. Residential
real estate charge-offs in this portfolio in 2010 and 2009



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were .91% and .58% respectively. Delinquencies have been moderate, and non-accruals were at $3.45 million as of December 31, 2010 versus $112.7 million outstanding (amortizing portfolio loan
balances) or 3.06%. The foregoing measures are a reflection of the Banks underwriting and collection practices. The Bank also added full time equivalent resources to its collections department, allowing the Bank to make more frequent and
earlier collection calls, resulting in better working relationships with those borrowers who may have difficulty in making timely payments.

The economic recession and current recovery has also affected the operations of BKFC and the Bank. During the fourth quarter of 2008 and first quarter of 2009, BKFC and the Bank each participated in two
government programs, which had the effect of enabling it to enhance liquidity and to augment its strong capital position and otherwise facilitate its response to the economic crisis. First, in October 2008 the Bank participated in the transaction
account guarantee component of the FDICs TLGP program. Second, in February 2009 BKFC participated in the CPP Program, receiving $34,000,000, of which only $17,000,000 remains outstanding, in exchange for issuing 34,000 shares of Series A
Preferred Stock and a Warrant to purchase approximately 274,784 shares of Common Stock. Neither BKFC nor the Bank actively participate in any of the other federal government programs that have been instituted in response to the current economic
recession.

BKFC has not been adversely affected by the expiration of the Treasury Departments authority to make new
investments under the CPP, given that the Series A Preferred Stock and related Warrant issued to the Treasury Department are perpetual instruments which will remain outstanding until BKFC elects to repurchase the remaining outstanding amount. Until
such time as the Series A Preferred Stock and the related Warrant are repurchased in full, BKFC will remain subject to the terms and conditions of those instruments, which, among other things, requires BKFC to obtain regulatory approval to pay
dividends on Common Stock in excess of $0.28 per share (on a semi-annual basis) and, with some exceptions, to repurchase shares of Common Stock. Further, participation in the CPP subjects BKFC and the Bank to increased regulatory and legislative
oversight, including with respect to executive compensation. Any new oversight, legal requirements and implementing standards under the CPP may have unforeseen or unintended adverse effects on BKFCs results of operations and business
condition.

Management believes BKFC has been responsive to its obligations to the Federal government to expand the flow of
credit to U.S. consumers and businesses. In particular, by purchasing U.S. government agency mortgage-backed securities (MBS) following the Treasury Departments investment of $34.0 million in BKFCs Series A Preferred Stock,
BKFC provided incremental liquidity to that market. The Bank increased its holdings of U.S. government MBS from $13.8 million at December 31, 2007 to $43.9 million, $83.1 million and $99.3 million at December 31, 2008, 2009 and 2010,
respectively.

For additional discussion of the impact of the current economic recession on the financial condition and
results of operations of BKFC and its subsidiaries, see Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations in this Annual Report.

Available Information

BKFC maintains an internet website at the following
internet address: http://www.bankofky.com. BKFC makes available free of charge through its website, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the Exchange Act), as soon as reasonably practicable after such material was electronically filed with, or furnished to the Securities and
Exchange Commission (SEC). Materials that BKFC files with the SEC may be read and copied at the SEC Public Reference Room at 100 F Street, N.E., Washington, DC 20549. This information may also be obtained by calling the SEC at
1-800-SEC-0330. The SEC also maintains an internet website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at the SECs website, www.sec.gov. BKFC will
provide a copy of any of the foregoing documents to shareholders free of charge upon request.



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Lending Activities

General. As a commercial bank, the Bank offers a wide variety of loans. Among the Banks lending activities are the origination of loans secured by first mortgages on nonresidential real
estate; loans secured by first mortgages on one- to four-family residences; commercial loans secured by various assets of the borrower; unsecured consumer loans and consumer loans secured by automobiles, boats and recreational vehicles; and
construction and land development loans secured by mortgages on the underlying property.

The following table sets forth the
composition of the Banks loan portfolio by type of loan at the dates indicated:



|                                        |  |                        |           |  |      |  |       |        |  |   |           |  |  |        |       |   |   |   |           |        |  |  |       |   |  |        |         |  |   |  |       |   |  |   |         |  |  |  |       |  
|--------------------------------------- |  | ---------------------- | --------- |  | ---- |  | ----- | ------ |  | - | --------- |  |  | ------ | ----- | - | - | - | --------- | ------ |  |  | ----- | - |  | ------ | ------- |  | - |  | ----- | - |  | - | ------- |  |  |  | ----- | -
|                                        |  | As of December 31,     |          
|                                        |  | 2010                   |           |  | 2009 |  |       | 2008   |  |   | 2007      |  |  | 2006   |      
|                                        |  | Amount                 |           |  | %    |  |       | Amount |  |   | %         |  |  | Amount |       |   | % |   |           | Amount |  |  | %     |   |  | Amount |         |  | % | 
|                                        |  | (Dollars in thousands) |          
|Type of Loan:                           |  |                        |           |  |      |  |       |        |  |   |           |  |  |        |       |   |   |   |           |        |  |  |       |   |  |        |         |  |   |  |       |   |  |   |         |  |  |  |       |  
|Nonresidential real estate loans        |  | $                      | 482,173   |  |      |  | 43.5  | %      |  | $ | 476,089   |  |  |        | 41.2  | % |   | $ | 428,859   |        |  |  | 41.7  | % |  | $      | 387,234 |  |   |  | 40.7  | % |  | $ | 359,943 |  |  |  | 44.2  | %
|Residential real estate loans           |  |                        | 260,625   |  |      |  | 23.5  |        |  |   | 267,857   |  |  |        | 23.2  |   |   |   | 239,729   |        |  |  | 23.3  |   |  |        | 215,915 |  |   |  | 22.7  |   |  |   | 181,534 |  |  |  | 22.3  |  
|Commercial loans                        |  |                        | 216,660   |  |      |  | 19.6  |        |  |   | 223,404   |  |  |        | 19.3  |   |   |   | 175,188   |        |  |  | 17.1  |   |  |        | 182,431 |  |   |  | 19.2  |   |  |   | 151,213 |  |  |  | 18.6  |  
|Consumer loans                          |  |                        | 16,546    |  |      |  | 1.5   |        |  |   | 20,750    |  |  |        | 1.8   |   |   |   | 17,693    |        |  |  | 1.7   |   |  |        | 20,601  |  |   |  | 2.2   |   |  |   | 19,260  |  |  |  | 2.3   |  
|Construction and land development loans |  |                        | 107,611   |  |      |  | 9.8   |        |  |   | 148,288   |  |  |        | 12.8  |   |   |   | 150,754   |        |  |  | 14.7  |   |  |        | 134,807 |  |   |  | 14.2  |   |  |   | 95,812  |  |  |  | 11.8  |  
|Municipal obligations                   |  |                        | 23,573    |  |      |  | 2.1   |        |  |   | 20,232    |  |  |        | 1.7   |   |   |   | 14,983    |        |  |  | 1.5   |   |  |        | 9,354   |  |   |  | 1.0   |   |  |   | 6,970   |  |  |  | 0.8   |  
|                                        |  |                        |           |  |      |  |       |        |  |   |           |  |  |        |       |   |   |   |           |        |  |  |       |   |  |        |         |  |   |  |       |   |  |   |         |  |  |  |       |  
|Total loans                             |  | $                      | 1,107,188 |  |      |  | 100.0 | %      |  | $ | 1,156,620 |  |  |        | 100.0 | % |   | $ | 1,027,206 |        |  |  | 100.0 | % |  | $      | 950,342 |  |   |  | 100.0 | % |  | $ | 814,732 |  |  |  | 100.0 | %
|                                        |  |                        |           |  |      |  |       |        |  |   |           |  |  |        |       |   |   |   |           |        |  |  |       |   |  |        |         |  |   |  |       |   |  |   |         |  |  |  |       |  
|Less:                                   |  |                        |           |  |      |  |       |        |  |   |           |  |  |        |       |   |   |   |           |        |  |  |       |   |  |        |         |  |   |  |       |   |  |   |         |  |  |  |       |  
|Deferred loan fees                      |  |                        | 1,179     |  |      |  |       |        |  |   | 1,636     |  |  |        |       |   |   |   | 649       |        |  |  |       |   |  |        | 628     |  |   |  |       |   |  |   | 631     |  |  |  |       |  
|Allowance for loan losses               |  |                        | 17,368    |  |      |  |       |        |  |   | 15,153    |  |  |        |       |   |   |   | 9,910     |        |  |  |       |   |  |        | 8,505   |  |   |  |       |   |  |   | 6,918   |  |  |  |       |  
|                                        |  |                        |           |  |      |  |       |        |  |   |           |  |  |        |       |   |   |   |           |        |  |  |       |   |  |        |         |  |   |  |       |   |  |   |         |  |  |  |       |  
|Net loans                               |  | $                      | 1,088,641 |  |      |  |       |        |  | $ | 1,139,831 |  |  |        |       |   |   | $ | 1,016,647 |        |  |  |       |   |  | $      | 941,209 |  |   |  |       |   |  | $ | 807,183 |  |  |  |       |  
|                                        |  |                        |           |  |      |  |       |        |  |   |           |  |  |        |       |   |   |   |           |        |  |  |       |   |  |        |         |  |   |  |       |   |  |   |         |  |  |  |       |  



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##### Table of Contents

Loan Maturity Schedule. The following table sets forth certain information, as of
December 31, 2010, regarding the dollar amount of certain loans maturing in the Banks portfolio based on their contractual terms to maturity and the dollar amount of such loans that have fixed or variable rates within certain maturity
ranges ending after 2010:



|                                        |  |                        |         |  |                            |   |        |                  |  |   |       |  |  |   |         | 
|--------------------------------------- |  | ---------------------- | ------- |  | -------------------------- | - | ------ | ---------------- |  | - | ----- |  |  | - | ------- | 
|                                        |  | Due within one year    |         |  | Due after 1 yearto 5 years |   |        | Due after 5years |  |   | Total | 
|                                        |  | (Dollars in thousands) |        
|Commercial loans                        |  | $                      | 132,967 |  |                            | $ | 81,506 |                  |  | $ | 2,187 |  |  | $ | 216,660 | 
|Construction and land development loans |  |                        | 107,611 |  |                            |   |       |                  |  |   |      |  |  |   | 107,611 | 
|                                        |  |                        |         |  |                            |   |        |                  |  |   |       |  |  |   |         | 
|Total                                   |  | $                      | 240,578 |  |                            | $ | 81,506 |                  |  | $ | 2,187 |  |  | $ | 324,271 | 
|                                        |  |                        |         |  |                            |   |        |                  |  |   |       |  |  |   |         | 
|Interest sensitivity:                   |  |                        |         |  |                            |   |        |                  |  |   |       |  |  |   |         | 
|With fixed rates                        |  |                        |         |  |                            | $ | 30,177 |                  |  | $ | 392   |  |  |   |         | 
|With variable rates                     |  |                        |         |  |                            |   | 51,329 |                  |  |   | 1,795 |  |  |   |         | 
|                                        |  |                        |         |  |                            |   |        |                  |  |   |       |  |  |   |         | 
|Total                                   |  |                        |         |  |                            | $ | 81,506 |                  |  | $ | 2,187 |  |  |   |         | 
|                                        |  |                        |         |  |                            |   |        |                  |  |   |       |  |  |   |         | 

Nonresidential Real Estate Loans. The Bank makes loans secured by first mortgages on
nonresidential real estate, including retail stores, office buildings, warehouses, apartment buildings and recreational facilities. Such mortgage loans generally have terms to maturity of between 10 and 20 years and are made with adjustable interest
rates (ARMs). Interest rates on the ARMs adjust every one-, three- or five-years based upon the interest rates of the applicable one-, three- or five- year U.S. Treasury security then offered.

The Bank limits the amount of each loan in relationship to the appraised value of the real estate and improvements at the time of
origination of a nonresidential real estate loan. In accordance with regulations, the maximum loan-to-value ratio (the LTV) on nonresidential real estate loans made by the Bank is 80%, subject to certain exceptions.

Nonresidential real estate lending is generally considered to involve a higher degree of risk than residential lending. Such risk is due
primarily to the dependence of the borrower on the cash flow from the property to service the loan. If the cash flow from the property is reduced due to a downturn in the economy, for example, or due to any other reason, the borrowers ability
to repay the loan may be impaired. To reduce such risk, the decision to underwrite a nonresidential real estate loan is based primarily on the quality and characteristics of the income stream generated by the property and/or the business of the
borrower. In addition, the Bank generally obtains the personal guarantees of one or more of the principals of the borrower and carefully evaluates the location of the real estate, the quality of the management operating the property, the debt
service ratio and appraisals supporting the propertys valuation.

At December 31, 2010, the Bank had a total of
$482 million invested in nonresidential real estate loans, the vast majority of which were secured by property located in the northern Kentucky metropolitan area. Owner-occupied nonresidential real estate was $234 million of the total nonresidential
real estate loans. Total nonresidential real estate loans comprised approximately 44% of the Banks total loans at such date, $6.38 million of which were non-performing.

Residential Real Estate Loans. The Bank originates permanent conventional loans secured by first mortgages on single-family and multi-family residential properties located in the northern Kentucky
area. The Bank also originates loans for the construction of residential properties and home equity loans secured by second mortgages on residential real estate. Each of such loans is secured by a mortgage on the underlying real estate and
improvements thereon, if any.

The residential real estate loans originated for the Banks portfolio are either one- or
three-year ARMs. Such loans typically have adjustment period caps of 2% and lifetime caps of 6%. The maximum amortization period of such loans is 30 years. The Bank does not engage in the practice of deeply discounting the initial rates on such
loans, nor does the Bank engage in the practice of putting payment caps on loans that could lead to negative amortization. Historically, the Bank has not made fixed-rate residential mortgage loans for its portfolio. In order to meet consumer demand
for fixed-rate loans, however, the Bank has originated loans for other lenders willing to accept the interest rate and credit risk.

While in a rising rate environment the delinquencies and foreclosure rates associated with rate resets on residential real estate loans would increase, this risk is somewhat mitigated by the 2% period cap
and the 6% lifetime cap on the typical loan in the Banks residential real estate portfolio. Furthermore, the aggregate amount of residential real estate loans held by



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the Bank does not represent a significant portion of the Banks overall loan portfolio. Accordingly, the risks associated with a material increase in delinquencies and foreclosures resulting
upon the occurrence of any rate reset are minimal.

BKFC does not have higher risk loans such as subprime loans, alt
A loans, no or little documentation loans, interest-only or option adjustable rate mortgage products in its portfolio. The majority of the Banks residential portfolio would be considered conforming loans in accordance with standards of
governmental agencies.

The Bank requires private mortgage insurance for the amount of any such loan with an LTV in excess of
90%.

The aggregate amount of the Banks residential real estate loans equaled approximately $261 million at
December 31, 2010, and represented 24% of total loans at such date. At December 31, 2010, the Bank had $4.47 million of non-performing loans of this type.

Loans Held for Sale. The Bank originates residential real estate loans to be sold, service released, subject to commitment to purchase in the secondary market. These loans are fixed rate with terms
ranging from fifteen to thirty years. At December 31, 2010, these loans totaled $15.3 million.

Commercial Loans.
The Bank offers commercial loans to individuals and businesses located throughout northern Kentucky and the metropolitan area. The typical commercial borrower is a small to mid-sized company with annual sales under $10 million. The majority of
commercial loans are made with adjustable rates of interest tied to the Banks prime interest rate. Commercial loans typically have terms of one to five years. Commercial lending entails significant risks. Such loans are subject to greater risk
of default during periods of adverse economic conditions. Because such loans are secured by equipment, inventory, accounts receivable and other non-real estate assets, the collateral may not be sufficient to ensure full payment of the loan in the
event of a default. To reduce such risk, the Bank generally obtains personal guarantees from one or more of the principals backing the borrower. At December 31, 2010, the Bank had $217 million, or 20% of total loans, invested in commercial
loans, $4.75 million of which were non-performing.

Consumer Loans. The Bank makes a variety of consumer loans,
including automobile loans, recreational vehicle loans and personal loans. Such loans generally have fixed rates with terms from three to five years. Consumer loans involve a higher risk of default than residential real estate loans, particularly in
the case of consumer loans that are unsecured or secured by rapidly depreciating assets, such as automobiles. Repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a
result of the greater likelihood of damage, loss or depreciation, and the remaining deficiency may not warrant further substantial collection efforts against the borrower. In addition, consumer loan collections depend on the borrowers
continuing financial stability, and thus are more likely to be adversely affected by job loss, illness or personal bankruptcy. Various federal and state laws, including federal and state bankruptcy and insolvency laws, may also limit the amount that
can be recovered on such loans. At December 31, 2010, the Bank had $17 million, or 2% of total loans, invested in consumer loans, $134,000 of which were non-performing.

Construction and Land Development Loans. The Bank makes loans for the construction of residential and nonresidential real estate and land development purposes. Most of these loans are structured
with adjustable rates of interest tied to changes in the Banks prime interest rate for the period of construction. A general contractor makes many of the construction loans originated by the Bank to owner-occupants for the construction of
single-family homes. Other loans are made to builders and developers for various projects, including the construction of homes and other buildings that have not been pre-sold and the preparation of land for site and project development.

Construction and land development loans involve greater underwriting and default risks than do loans secured by mortgages on improved and
developing properties, due to the effects of general economic conditions on real estate developments, developers, managers and builders. In addition, such loans are more difficult to evaluate and monitor. Loan funds are advanced upon the security of
the project under construction, which is more difficult to value before the completion of construction. Moreover, because of the uncertainties inherent in estimating construction costs, it is relatively difficult to evaluate accurately the LTVs and
the total loan funds required to complete a project. In the event a default on a construction or land development loan occurs and foreclosure follows, the Bank must take control of the project and attempt either to arrange for completion of
construction or dispose of the unfinished project. At December 31, 2010, a total of $108 million, or approximately 10% of the Banks total loans, consisted of construction and land development loans, $5.3 million of which were
non-performing.

Municipal Obligations. The Bank makes loans to various Kentucky municipalities for various purposes,
including the construction of municipal buildings and equipment purchases. Loans made to municipalities are usually secured by mortgages on the properties financed, by a lien on equipment purchased or by the general taxing authority of the
municipality



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and provide certain tax benefits for the Bank. At December 31, 2010, the Bank had $24 million, or 2.1% of total loans, invested in municipal obligation loans, none of which were
non-performing.

Loan Solicitation and Processing. The Banks loan originations are developed from a number of
sources, including continuing business with depositors, borrowers and real estate developers, periodic newspaper and radio advertisements, solicitations by the Banks lending staff, walk-in customers, director referrals and an officer call
program. For nonresidential real estate loans, the Bank obtains information with respect to the credit and business history of the borrower and prior projects completed by the borrower. Personal guarantees of one or more principals of the borrower
are generally obtained. An environmental study of such real estate is normally conducted. Upon the completion of the appraisal of the nonresidential real estate and the receipt of information on the borrower, the loan application is submitted to the
Banks Loan Committee if the amount and/or relationship exceeds the officers lending authority for approval or rejection. If, however, the loan relationship is in excess of $2.50 million, the loan will be submitted to the Banks
Executive Committee for approval or rejection.

In connection with residential real estate loans, the Bank obtains a credit
report, verification of employment and other documentation concerning the creditworthiness of the borrower. An appraisal of the fair market value of the real estate on which the Bank will be granted a mortgage to secure the loan is prepared by an
independent fee appraiser approved by the Banks Board of Directors. An environmental study of such real estate is conducted only if the appraiser has reason to believe that an environmental problem may exist.

When a residential real estate loan application is approved, title insurance is normally obtained in respect of the real estate, which
will secure the loan. When a nonresidential real estate loan application is approved, title insurance is customarily obtained on the title to the real estate, which will secure the mortgage loan. All borrowers are required to carry satisfactory fire
and casualty insurance and flood insurance, if applicable, and name the Bank as an insured mortgagee.

Commercial loans are
underwritten primarily on the basis of the stability of the income generated by the business and/or property. For most commercial loans, however, the personal guarantees of one or more principals of the borrowers are generally obtained. Consumer
loans are underwritten on the basis of the borrowers credit history and an analysis of the borrowers income and expenses, ability to repay the loan and the value of the collateral, if any. The procedure for approval of construction loans
is the same as for permanent mortgage loans, except that an appraiser evaluates the building plans, construction specifications and estimates of construction costs. The Bank also evaluates the feasibility of the proposed construction project and the
experience and record of the builder.

Loan Origination and Other Fees. The Bank realizes loan origination fees and
other fee income from its lending activities and also realizes income from late payment charges, application fees, and fees for other miscellaneous services. Loan origination fees and other fees are a volatile source of income, varying with the
volume of lending, loan repayments and general economic conditions. Nonrefundable loan origination fees and certain direct loan origination costs are deferred and recognized as an adjustment to yield over the life of the related loan.

Delinquent Loans, Non-Performing Assets and Classified Assets. When a borrower fails to make a required payment on a loan, the
Bank attempts to cause the deficiency to be cured by contacting the borrower. In most cases, deficiencies are cured promptly as a result of these collection efforts.

Loans that are 90 days past due are not considered well secured and in the process of collection shall be placed on non-accrual status. Under-collateralized loans that are 90 days past due in which the
Bank does not expect to be repaid by the borrowers or guarantors financial wherewithal after an extensive collection effort, shall be reviewed for full or partial charge-off. The amount charged-off will be charged against the loan loss
allowance.

The Bank utilizes a risk-rating system to quantify loan quality. The system assigns a risk rating from one to
eight for each loan. Classified commercial loans are those with risk ratings of seven or higher. Each loan rating is determined by analyzing the borrowers management, financial ability, sales trends, operating results, financial conditions,
asset protection, contingencies, payment history, financial flexibility, credit enhancements and other relevant factors. Loans that fall into the classified categories are monitored on a regular basis and proper action is taken to minimize the
Banks exposure. Losses or partial losses will be taken when they are recognized.

The Banks risk rating system was
developed in a manner that is consistent with the regulatory guidance. Problem assets are classified as special mention (risk rating 6), substandard (risk rating 7), substandard non-accrual (risk rating 8), or
doubtful (risk rating 9). Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected.
Doubtful assets



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have the same weaknesses as substandard assets, with the additional characteristics that (i) the weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable and (ii) there is a high possibility of loss. The regulations also contain a special mention or also known as criticized assets category, consisting of assets which do
not currently expose an institution to a sufficient degree of risk to warrant classification but which possess credit deficiencies or potential weaknesses deserving managements close attention.

The aggregate amounts of the Banks classified assets at December 31, 2010 and 2009 were as follows:



|                                |  |                        |         |  |          |   |         | 
|------------------------------- |  | ---------------------- | ------- |  | -------- | - | ------- | 
|                                |  | 12/31/10               |         |  | 12/31/09 |  
|                                |  | (Dollars in thousands) |        
|Special mention (risk rating 6) |  | $                      | 25,374  |  |          | $ | 52,177  | 
|Substandard (risk rating 7 & 8) |  |                        | 84,030  |  |          |   | 101,582 | 
|Doubtful (risk rating 9)        |  |                        | 8       |  |          |   | 252     | 
|                                |  |                        |         |  |          |   |         | 
|Total classified assets         |  | $                      | 109,412 |  |          | $ | 154,011 | 
|                                |  |                        |         |  |          |   |         | 

The following table reflects the amount of loans that are in delinquent status of 30 to 89 days as of
December 31, 2010 and 2009. Loans that are delinquent 90 days or more or are in non-accrual status are detailed below.



|                                                             |  |                        |        |   |          |   |        |  
|------------------------------------------------------------ |  | ---------------------- | ------ | - | -------- | - | ------ | -
|                                                             |  | 12/31/10               |        |   | 12/31/09 |  
|                                                             |  | (Dollars in thousands) |       
|Loans delinquent                                             |  |                        |        |   |          |   |        |  
|30 to 59 days                                                |  | $                      | 8,073  |   |          | $ | 7,472  |  
|60 to 89 days                                                |  |                        | 3,741  |   |          |   | 5,602  |  
|                                                             |  |                        |        |   |          |   |        |  
|Total delinquent loans                                       |  | $                      | 11,814 |   |          | $ | 13,074 |  
|                                                             |  |                        |        |   |          |   |        |  
|Ratio of total delinquent loans 30 to 89 days to total loans |  |                        | 1.09   | % |          |   | 1.15   | %
|                                                             |  |                        |        |   |          |   |        |  

The following table sets forth information with respect to the Banks non-performing assets for the
periods indicated. In addition, the Bank evaluates loans to identify those that are impaired. Impaired loans are those for which management has determined that it is probable that the customer will be unable to comply with the
contractual terms of the loan. Loans so identified are reduced (i) to the fair value of the collateral securing the loan, or (ii) to the present value of expected future cash flows, or (iii) to the market price of the loan based upon
readily available information for that type of loan, by the allocation of a portion of the allowance for loan losses to the loan. As of December 31, 2010, the Bank had designated $26 million as impaired loans, and a portion of these loans were
included in the non-accrual and 90 days past due and accruing troubled debt restructurings totals below. Management evaluates for impairment all loans selected for specific review during the quarterly allowance analysis. Generally, that analysis
will not address smaller balance consumer credits.



|                                                                 |  |                        |        |   |      |   |        |      |  |   |       |   |  |      |       |   |  |   |       |  
|---------------------------------------------------------------- |  | ---------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ----- | - |  | ---- | ----- | - |  | - | ----- | -
|                                                                 |  | At December 31,        |       
|                                                                 |  | 2010                   |        |   | 2009 |   |        | 2008 |  |   | 2007  |   |  | 2006 |      
|                                                                 |  | (Dollars in thousands) |       
|Loans accounted for on a non-accrual basis:(1)                   |  |                        |        |   |      |   |        |      |  |   |       |   |  |      |       |   |  |   |       |  
|Nonresidential real estate                                       |  | $                      | 6,311  |   |      | $ | 8,588  |      |  | $ | 2,401 |   |  | $    | 1,391 |   |  | $ | 318   |  
|Residential real estate                                          |  |                        | 4,208  |   |      |   | 5,113  |      |  |   | 2,325 |   |  |      | 1,731 |   |  |   | 1,630 |  
|Construction                                                     |  |                        | 5,329  |   |      |   | 7,302  |      |  |   | 2,778 |   |  |      | 2,281 |   |  |   | 601   |  
|Commercial                                                       |  |                        | 4,749  |   |      |   | 2,712  |      |  |   | 588   |   |  |      | 851   |   |  |   | 356   |  
|Consumer and other                                               |  |                        | 51     |   |      |   | 111    |      |  |   | 119   |   |  |      | 135   |   |  |   |      |  
|                                                                 |  |                        |        |   |      |   |        |      |  |   |       |   |  |      |       |   |  |   |       |  
|Total                                                            |  |                        | 20,648 |   |      |   | 23,826 |      |  |   | 8,211 |   |  |      | 6,389 |   |  |   | 2,905 |  
|                                                                 |  |                        |        |   |      |   |        |      |  |   |       |   |  |      |       |   |  |   |       |  
|Accruing loans which are contractually past due 90 days or more: |  |                        |        |   |      |   |        |      |  |   |       |   |  |      |       |   |  |   |       |  
|Nonresidential real estate                                       |  | $                      | 68     |   |      | $ | 220    |      |  | $ | 86    |   |  | $    | 297   |   |  | $ | 271   |  
|Residential real estate                                          |  |                        | 263    |   |      |   | 758    |      |  |   | 812   |   |  |      | 1,739 |   |  |   | 799   |  
|Construction                                                     |  |                        | 0      |   |      |   | 682    |      |  |   | 0     |   |  |      | 205   |   |  |   |      |  
|Commercial                                                       |  |                        | 0      |   |      |   | 34     |      |  |   | 291   |   |  |      | 360   |   |  |   | 959   |  
|Consumer and other loans                                         |  |                        | 83     |   |      |   | 42     |      |  |   | 161   |   |  |      | 57    |   |  |   | 39    |  
|                                                                 |  |                        |        |   |      |   |        |      |  |   |       |   |  |      |       |   |  |   |       |  
|Total                                                            |  |                        | 414    |   |      |   | 1,736  |      |  |   | 1,350 |   |  | $    | 2,658 |   |  |   | 2,068 |  
|                                                                 |  |                        |        |   |      |   |        |      |  |   |       |   |  |      |       |   |  |   |       |  
|Total non-performing loans                                       |  | $                      | 21,062 |   |      | $ | 25,562 |      |  | $ | 9,561 |   |  | $    | 9,047 |   |  | $ | 4,973 |  
|                                                                 |  |                        |        |   |      |   |        |      |  |   |       |   |  |      |       |   |  |   |       |  
|Percentage of total loans                                        |  |                        | 1.90   | % |      |   | 2.21   | %    |  |   | 0.93  | % |  |      | 0.95  | % |  |   | 0.61  | %
|                                                                 |  |                        |        |   |      |   |        |      |  |   |       |   |  |      |       |   |  |   |       |  
|Other non-performing assets(2)                                   |  | $                      | 795    |   |      | $ | 1,381  |      |  | $ | 712   |   |  | $    | 4,117 |   |  | $ | 2,981 |  
|                                                                 |  |                        |        |   |      |   |        |      |  |   |       |   |  |      |       |   |  |   |       |  
|Accruing Trouble Debt Restructurings (TDRs)(3)                 |  | $                      | 6,135  |   |      | $ | 3,568  |      |  | $ | 575   |   |  | $    |      |   |  | $ |      |  
|                                                                 |  |                        |        |   |      |   |        |      |  |   |       |   |  |      |       |   |  |   |       |  



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|(1) | A loan is generally placed on non-accrual status if: (1) it becomes 90 days or more past due (120 days past due for installment loans), or (2) for which
payment in full of both principal and interest can not be reasonably expected. Payments received on a non-accrual loan are applied to principal, until qualifying for return to accrual method.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Consists of real estate acquired through foreclosure, which is carried at fair value less estimated selling expenses.
|--- | ---------------------------------------------------------------------------------------------------------------------



|(3) | Consists of accruing TDR loans to borrowers experiencing financial difficulties where the Bank made certain concessionary modifications to the loans contractual
terms such as interest rate reductions, principal forgiveness and other actions intended to minimize or eliminate the economic loss and to avoid foreclosure or repossession of collateral. TDRs accrue interest as long as the borrower complies with
the modified terms.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Allowance for Loan Losses. While management believes that it uses the best
information available to determine the allowance for loan losses, unforeseen market conditions could result in adjustments, and net earnings could be significantly affected if circumstances differ substantially from the assumptions used in making
the final determination. At December 31, 2010, the Banks allowance for loan losses totaled $17.4 million.

On at
least a quarterly basis, a formal analysis of the adequacy of the allowance is prepared and reviewed by management and the Banks Board of Directors. This analysis serves as a point in time assessment of the level of the allowance and serves as
a basis for provisions for loan losses. The loan quality monitoring process includes assigning loan grades and the use of a watch list to identify loans of concern.

The analysis of the allowance for loan losses includes the allocation of specific amounts of the allowance to individual problem loans, generally based on an analysis of the collateral securing those
loans. Portions of the allowance are also allocated to loans based on their risk rating with the higher the risk rating, the higher the allowance allocated to that loan. These components are added together and compared to the balance of our
allowance at the evaluation date. A high and low range of the allowance is calculated to recognize the imprecision in estimating and measuring loss when evaluating reserves for pools of loans. The position of the allowance for loan losses within the
computed range may be adjusted for significant factors that, in managements judgment, reflect the impact of any current conditions of credit quality.

The following table provides an allocation of the Banks allowance for loan losses as of each of the following dates:



|                                |  |                        |        |  |      |   |        |      |  |   |       |  |  |      |       |  |  |   |       | 
|------------------------------- |  | ---------------------- | ------ |  | ---- | - | ------ | ---- |  | - | ----- |  |  | ---- | ----- |  |  | - | ----- | 
|                                |  | At December 31,        |       
|                                |  | 2010                   |        |  | 2009 |   |        | 2008 |  |   | 2007  |  |  | 2006 |      
|                                |  | (Dollars in thousands) |       
|Loan type:                      |  |                        |        |  |      |   |        |      |  |   |       |  |  |      |       |  |  |   |       | 
|Commercial                      |  | $                      | 3,440  |  |      | $ | 3,001  |      |  | $ | 1,963 |  |  | $    | 1,683 |  |  | $ | 1,370 | 
|Residential Real Estate         |  |                        | 2,431  |  |      |   | 2,121  |      |  |   | 1,387 |  |  |      | 1,191 |  |  |   | 968   | 
|Non Residential Real Estate     |  |                        | 8,126  |  |      |   | 7,090  |      |  |   | 4,637 |  |  |      | 3,980 |  |  |   | 3,237 | 
|Construction                    |  |                        | 3,150  |  |      |   | 2,748  |      |  |   | 1,797 |  |  |      | 1,543 |  |  |   | 1,255 | 
|Consumer                        |  |                        | 166    |  |      |   | 145    |      |  |   | 95    |  |  |      | 81    |  |  |   | 66    | 
|Municipal Obligations           |  |                        | 55     |  |      |   | 48     |      |  |   | 31    |  |  |      | 27    |  |  |   | 22    | 
|                                |  |                        |        |  |      |   |        |      |  |   |       |  |  |      |       |  |  |   |       | 
|Total allowance for loan losses |  | $                      | 17,368 |  |      | $ | 15,153 |      |  | $ | 9,910 |  |  | $    | 8,505 |  |  | $ | 6,918 | 
|                                |  |                        |        |  |      |   |        |      |  |   |       |  |  |      |       |  |  |   |       | 

The Bank increased its allowance for loan losses from $15.2 million at December 31, 2009, to $17.4
million at December 31, 2010. Because the loan loss allowance is based on estimates, it is monitored on an ongoing basis and adjusted as necessary to provide an adequate allowance. For further discussion on the allowance for loan losses see
Managements Discussion and Analysis of Financial Condition and Results of Operations of this Annual Report.



13



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##### Table of Contents

Investment Activities

The investment policy of the Bank is both to manage the utilization of excess funds and to provide for the liquidity needs of the Bank as loan demand and daily operations dictate. The Banks federal
income tax position is also a consideration in its investment decisions. Investments in tax-exempt securities with maturities of less than 10 years are considered when the net yield exceeds that of taxable securities and the Banks effective
tax rate warrants such investments.

The following table sets forth the composition of the Banks securities portfolio,
at the dates indicated:



|                                                                     |  |                        |         |  |           |   |         |               |  |   |           |  |  |               |         |  |           |   |        |  |  |   |        | 
|-------------------------------------------------------------------- |  | ---------------------- | ------- |  | --------- | - | ------- | ------------- |  | - | --------- |  |  | ------------- | ------- |  | --------- | - | ------ |  |  | - | ------ | 
|                                                                     |  | At December 31,        |        
|                                                                     |  | 2010                   |         |  | 2009      |   |         | 2008          | 
|                                                                     |  | AmortizedCost          |         |  | FairValue |   |         | AmortizedCost |  |   | FairValue |  |  | AmortizedCost |         |  | FairValue |  
|                                                                     |  | (Dollars in thousands) |        
|Held-to-maturity securities:                                         |  |                        |         | 
|Municipal and other obligations                                      |  | $                      | 39,778  |  |           | $ | 40,262  |               |  | $ | 30,722    |  |  | $             | 31,275  |  |           | $ | 33,725 |  |  | $ | 33,416 | 
|                                                                     |  |                        |         |  |           |   |         |               |  |   |           |  |  |               |         |  |           |   |        |  |  |   |        | 
|Total held-to-maturity securities                                    |  | $                      | 39,778  |  |           | $ | 40,262  |               |  | $ | 30,722    |  |  | $             | 31,275  |  |           | $ | 33,725 |  |  | $ | 33,416 | 
|                                                                     |  |                        |         |  |           |   |         |               |  |   |           |  |  |               |         |  |           |   |        |  |  |   |        | 
|Available-for-sale securities:                                       |  |                        |         |  |           |   |         |               |  |   |           |  |  |               |         |  |           |   |        |  |  |   |        | 
|U.S.Treasury                                                         |  | $                      |        |  |           | $ |        |               |  | $ |          |  |  | $             |        |  |           | $ |       |  |  | $ |       | 
|U.S. Government, Federal Agency and Government Sponsored Enterprises |  |                        | 145,536 |  |           |   | 145,067 |               |  |   | 99,400    |  |  |               | 99,562  |  |           |   | 40,044 |  |  |   | 40,425 | 
|U.S. Government Mortgage-Backed                                      |  |                        | 97,429  |  |           |   | 99,256  |               |  |   | 81,815    |  |  |               | 83,098  |  |           |   | 42,632 |  |  |   | 43,817 | 
|Corporate obligations                                                |  |                        | 1,125   |  |           |   | 1,125   |               |  |   | 1,185     |  |  |               | 1,185   |  |           |   | 1,245  |  |  |   | 1,245  | 
|                                                                     |  |                        |         |  |           |   |         |               |  |   |           |  |  |               |         |  |           |   |        |  |  |   |        | 
|Total available-for-sale securities                                  |  | $                      | 244,090 |  |           | $ | 245,448 |               |  | $ | 182,400   |  |  | $             | 183,845 |  |           | $ | 83,921 |  |  | $ | 85,487 | 
|                                                                     |  |                        |         |  |           |   |         |               |  |   |           |  |  |               |         |  |           |   |        |  |  |   |        | 

The following table sets forth the amortized cost of the Banks securities portfolio at
December 31, 2010 by contractual or expected maturity. Securities with call features are presented at call date if management expects that option to be exercised.



|                                                                     |  |                         |        |  |                                         |  |      |                                         |  |   |                         |  |  |               |      |   |              |   |        |               |  |  |              |   |  |               |       |  |              |  |      |   |  |   |         |  |  |  |      |  
|-------------------------------------------------------------------- |  | ----------------------- | ------ |  | --------------------------------------- |  | ---- | --------------------------------------- |  | - | ----------------------- |  |  | ------------- | ---- | - | ------------ | - | ------ | ------------- |  |  | ------------ | - |  | ------------- | ----- |  | ------------ |  | ---- | - |  | - | ------- |  |  |  | ---- | -
|                                                                     |  | Maturing withinone year |        |  | Maturing after oneand within five
years |  |      | Maturing after fiveand within ten
years |  |   | Maturing afterten years |  |  | Total         |     
|                                                                     |  | AmortizedCost           |        |  | AverageYield                            |  |      | AmortizedCost                           |  |   | AverageYield            |  |  | AmortizedCost |      |   | AverageYield |   |        | AmortizedCost |  |  | AverageYield |   |  | AmortizedCost |       |  | AverageYield | 
|                                                                     |  | (Dollars in thousands)  |       
|Held-to-maturity:                                                    |  |                         |        | 
|Municipal and other obligations (1)                                  |  | $                       | 2,431  |  |                                         |  | 3.21 | %                                       |  | $ | 16,045                  |  |  |               | 3.44 | % |              | $ | 21,302 |               |  |  | 4.23         | % |  |               |      |  |              |  | 0.00 | % |  | $ | 39,778  |  |  |  | 3.85 | %
|Available-for-sale:                                                  |  |                         |        | 
|Corporate obligations                                                |  |                         |       |  |                                         |  | 0.00 | %                                       |  |   |                        |  |  |               | 0.00 | % |              |   |       |               |  |  | 0.00         | % |  |               | 1,125 |  |              |  | 0.59 | % |  |   | 1,125   |  |  |  | 0.59 | %
|U.S. Government, Federal Agency and Government Sponsored Enterprises |  |                         | 41,459 |  |                                         |  | .91  | %                                       |  |   | 95,171                  |  |  |               | 1.44 | % |              |   | 8,906  |               |  |  | 2.65         | % |  |               |      |  |              |  | 0.00 | % |  |   | 145,536 |  |  |  | 1.37 | %
|U.S. Government Mortgage-Backed                                      |  |                         | 14,461 |  |                                         |  | 4.20 | %                                       |  |   | 39,532                  |  |  |               | 4.21 | % |              |   | 43,436 |               |  |  | 4.56         | % |  |               |      |  |              |  | 0.00 | % |  |   | 97,429  |  |  |  | 4.36 | %



|(1) | Yield stated on a tax-equivalent basis using a 35% effective rate.
|--- | ------------------------------------------------------------------

Deposits and Borrowings

General.Deposits have traditionally been
the primary source of the Banks funds for use in lending and other investment activities. In addition to deposits, the Bank derives funds from interest payments and principal repayments on loans and income on earning assets. Loan payments are
a relatively stable source of funds, while deposit inflows and outflows fluctuate more in response to economic conditions and interest rates. The Bank has lines of credit established at its



14



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##### Table of Contents

major correspondent banks to purchase federal funds to meet liquidity needs. The Bank may also borrow funds from the FHLB in the form of advances.

The Bank also uses retail repurchase agreements as a source of funds. These agreements essentially represent borrowings by the Bank from
customers with maturities of three months or less. Certain securities are pledged as collateral for these agreements. At December 31, 2010, the Bank had $23.4 million in retail repurchase agreements.

The Bank also entered into a capital lease obligation for a branch in 1997 with a term of 20 years and a monthly payment of $4,000.

Deposits. Deposits are attracted principally from within the Banks designated lending area through the offering
of numerous deposit instruments, including regular passbook savings accounts, negotiable order of withdrawal (NOW) accounts, money market deposit accounts, term certificate accounts and individual retirement accounts (IRAs).
Interest rates paid, maturity terms, service fees and withdrawal penalties for the various types of accounts are established periodically by the Banks Board of Directors based on the Banks liquidity requirements, growth goals and market
trends. The Bank may on occasion use brokers to attract deposits. The Bank did not have brokered deposits as of December 31, 2010.

The following table presents the amount of the Banks jumbo certificates of deposit with principal balances greater than $100,000 by the time remaining until maturity as of December 31, 2010:



|                           |  |                      |         | 
|-------------------------- |  | -------------------- | ------- | 
|Maturity                   |  | At December 31, 2010 |        
|                           |  | (In thousands)       |        
|Three months or less       |  | $                    | 39,318  | 
|Over 3 months to 6 months  |  |                      | 32,319  | 
|Over 6 months to 12 months |  |                      | 37,343  | 
|Over 12 months             |  |                      | 29,433  | 
|                           |  |                      |         | 
|Total                      |  | $                    | 138,413 | 
|                           |  |                      |         | 

The following table presents the average daily deposits for the years ended December 31, 2010, 2009 and
2008, and the average rates paid on those deposits are summarized in the following table:



|                                  |  |                        |           |  |                  |  |      |                |  |   |                  |  |  |                |      |   |                  |   |           |  |  |  |      |  
|--------------------------------- |  | ---------------------- | --------- |  | ---------------- |  | ---- | -------------- |  | - | ---------------- |  |  | -------------- | ---- | - | ---------------- | - | --------- |  |  |  | ---- | -
|                                  |  | At December 31,        |          
|                                  |  | 2010                   |           |  | 2009             |  |      | 2008           | 
|                                  |  | AverageBalance         |           |  | AverageRate paid |  |      | AverageBalance |  |   | AverageRate paid |  |  | AverageBalance |      |   | AverageRate paid |  
|                                  |  | (Dollars in thousands) |          
|Demand deposits                   |  | $                      | 208,017   |  |                  |  | 0.00 | %              |  | $ | 162,728          |  |  |                | 0.00 | % |                  | $ | 144,022   |  |  |  | 0.00 | %
|Savings and transaction accounts: |  |                        |           |  |                  |  |      |                |  |   |                  |  |  |                |      |   |                  |   |           |  |  |  |      |  
|Savings                           |  |                        | 338,915   |  |                  |  | 0.51 | %              |  |   | 287,673          |  |  |                | 0.92 | % |                  |   | 284,369   |  |  |  | 1.93 | %
|Interest bearing checking         |  |                        | 340,682   |  |                  |  | 0.38 | %              |  |   | 280,462          |  |  |                | 0.46 | % |                  |   | 232,933   |  |  |  | 1.61 | %
|Time deposits:                    |  |                        |           |  |                  |  |      |                |  |   |                  |  |  |                |      |   |                  |   |           |  |  |  |      |  
|Deposits of $100,000 or more      |  |                        | 149,814   |  |                  |  | 1.93 | %              |  |   | 151,374          |  |  |                | 2.96 | % |                  |   | 124,461   |  |  |  | 4.23 | %
|Other time deposits               |  |                        | 300,898   |  |                  |  | 2.05 | %              |  |   | 264,805          |  |  |                | 3.03 | % |                  |   | 245,556   |  |  |  | 4.28 | %
|                                  |  |                        |           |  |                  |  |      |                |  |   |                  |  |  |                |      |   |                  |   |           |  |  |  |      |  
|Total deposits                    |  | $                      | 1,338,326 |  |                  |  | 0.90 | %              |  | $ | 1,147,042        |  |  |                | 1.43 | % |                  | $ | 1,031,341 |  |  |  | 2.43 | %
|                                  |  |                        |           |  |                  |  |      |                |  |   |                  |  |  |                |      |   |                  |   |           |  |  |  |      |  

Short-Term Borrowings. In addition to repurchase agreements, the Bank has agreements with
correspondent banks to purchase federal funds on an as needed basis to meet liquidity needs.

The following table sets forth
the maximum month-end balance amount of the Banks outstanding short-term borrowings during the years ended December 31, 2010, 2009 and 2008, along with the average aggregate balances of the Banks outstanding short-term borrowings
for such periods:



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##### Table of Contents

|                                                   |  |                                |        |   |      |   |        |      |  |   |        |  
|-------------------------------------------------- |  | ------------------------------ | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                   |  | During year ended December 31, |       
|                                                   |  | 2010                           |        |   | 2009 |   |        | 2008 | 
|                                                   |  | (Dollars in thousands)         |       
|Maximum balance at any month-end during the period |  | $                              | 36,175 |   |      | $ | 46,220 |      |  | $ | 68,454 |  
|Average balance                                    |  |                                | 22,532 |   |      |   | 22,506 |      |  |   | 29,616 |  
|Weighted average interest rate                     |  |                                | 0.60   | % |      |   | 0.98   | %    |  |   | 1.63   | %

The following table sets
forth certain information as to short-term borrowings at the dates indicated:



|                                  |  |              |        |   |      |   |        |      |  |   |        |  
|--------------------------------- |  | ------------ | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                  |  | December 31, |       
|                                  |  | 2010         |        |   | 2009 |   |        | 2008 | 
|Short-term borrowings outstanding |  | $            | 23,419 |   |      | $ | 21,669 |      |  | $ | 28,153 |  
|Weighted average interest rate    |  |              | 0.53   | % |      |   | 0.81   | %    |  |   | 1.49   | %

Asset/Liability
Management. The Banks earnings depend primarily upon its net interest income, which is the difference between its interest income on its interest-earning assets, such as mortgage loans and investment securities, and its interest expense
paid on its interest-bearing liabilities, consisting of deposits and borrowings. As market interest rates change, asset yields and liability costs do not change simultaneously. Due to maturity, re-pricing and timing differences of interest-earning
assets and interest-bearing liabilities, earnings will be affected differently under various interest rate scenarios. The Bank has sought to limit these net income fluctuations and manage interest rate risk by originating adjustable-rate loans and
purchasing relatively short-term and variable-rate investments and securities.

The Banks interest rate spread is the
principal determinant of the Banks net interest income. The interest rate spread can vary considerably over time because asset and liability re-pricing do not coincide. Moreover, the long-term and cumulative effect of interest rate changes can
be substantial. Interest rate risk is defined as the sensitivity of an institutions earnings and net asset values to changes in interest rates.

The ability to maximize net interest income is largely dependent upon sustaining a positive interest rate spread during fluctuations in the prevailing level of interest rates. Interest rate sensitivity is
a measure of the difference between amounts of interest-earning assets and interest-bearing liabilities, which either re-price or mature within a given period of time. The difference, or the interest rate re-pricing gap, provides an
indication of the extent to which a financial institutions interest rate spread will be affected by changes in interest rates. A positive gap occurs when interest-earning assets exceed interest-bearing liabilities re-pricing during a
designated time frame. Conversely, a negative gap occurs when interest-bearing liabilities exceed interest-earning assets re-pricing within a designated time frame. Generally, during a period of rising interest rates, a negative gap would adversely
affect net interest income, while a positive gap would result in an increase in net interest income, and during a period of falling interest rates, a negative gap would result in an increase in net interest income, while a positive gap would have
the opposite effect.

In recognition of the foregoing factors, the management and the Board of Directors of the Bank have
implemented an asset and liability management strategy directed toward maintaining a reasonable degree of interest rate sensitivity. The principal elements of such strategy include: (i) meeting the consumer preference for fixed-rate loans by
establishing a correspondent lending program that has enabled the Bank to originate and sell fixed-rate mortgage loans; (ii) maintaining relatively short weighted-average terms to maturity in the securities portfolio as a hedge against rising
interest rates; (iii) emphasizing the origination and retention of adjustable-rate loans; and (iv) utilizing longer term certificates of deposit as funding sources when available. Management and the Board of Directors monitor the
Banks exposure to interest rate risk on a monthly basis to ensure the interest rate risk is maintained within an acceptable range. For more information on the Banks interest rate risk see the Asset/Liability Management and Market
Risk section of Item 7A. Quantitative and Qualitative Disclosure about Market Risk.

The following table
sets forth the amounts of the Banks interest-earning assets and interest-bearing liabilities outstanding at December 31, 2010, which are scheduled to re-price or mature in each of the time periods shown. The amount of assets and
liabilities shown which re-price or mature in a given period were determined in accordance with the contractual terms of the asset or liability. The table shows that the maturity or re-pricing of the Banks liabilities exceed the contractual
terms to maturity or re-pricing of the Banks earning assets in a twelve-month period by $190 million. While this table based



16



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##### Table of Contents

on contractual terms shows a negative gap, the Banks interest rate model which incorporates assumptions based on historical behavior shows a negative gap of $37.8
million. The difference is a result of the Banks interest rate model assumption that the balances in NOW and savings accounts react within a two-year timeframe to market rate changes, rather than re-pricing immediately. These instruments are
not tied to specific indices and are only influenced by market conditions and other factors. The Banks experience with NOW and savings accounts has been that they have re-priced at a pace equal to approximately 25% of a prime change.
Accordingly, a general movement in interest rates may not have any immediate effect on the rates paid on those deposit accounts.



|                                                                              |  |                        |          |    |               |   |          |                   |  |   |              |   |  |       |         |   |  |   |           | 
|----------------------------------------------------------------------------- |  | ---------------------- | -------- | -- | ------------- | - | -------- | ----------------- |  | - | ------------ | - |  | ----- | ------- | - |  | - | --------- | 
|                                                                              |  | Within 3 months        |          |    | 4 - 12 months |   |          | 1 through 5 years |  |   | Over 5 years |   |  | Total |        
|                                                                              |  | (Dollars in thousands) |          |    |               |  
|Interest-earning assets:                                                      |  |                        |          |    |               |   |          |                   |  |   |              |   |  |       |         |   |  |   |           | 
|Federal funds sold                                                            |  | $                      | 132,249  |    |               | $ |         |                   |  | $ |             |   |  | $     |        |   |  | $ | 132,249   | 
|Interest bearing deposits with banks                                          |  |                        | 100      |    |               |   |         |                   |  |   |             |   |  |       |        |   |  |   | 100       | 
|Securities                                                                    |  |                        | 27,122   |    |               |   | 37,532   |                   |  |   | 152,079      |   |  |       | 73,452  |   |  |   | 290,185   | 
|Loans receivable (1)                                                          |  |                        | 509,949  |    |               |   | 197,533  |                   |  |   | 404,591      |   |  |       | 12,351  |   |  |   | 1,124,424 | 
|                                                                              |  |                        |          |    |               |   |          |                   |  |   |              |   |  |       |         |   |  |   |           | 
|Total interest-earning assets                                                 |  |                        | 669,420  |    |               |   | 235,065  |                   |  |   | 556,670      |   |  |       | 85,803  |   |  |   | 1,546,958 | 
|                                                                              |  |                        |          |    |               |   |          |                   |  |   |              |   |  |       |         |   |  |   |           | 
|Interest-bearing liabilities:                                                 |  |                        |          |    |               |   |          |                   |  |   |              |   |  |       |         |   |  |   |           | 
|Savings deposits                                                              |  |                        | 75,769   |    |               |   |         |                   |  |   |             |   |  |       |        |   |  |   | 75,769    | 
|Money market deposit accounts                                                 |  |                        | 250,120  |    |               |   |         |                   |  |   |             |   |  |       |        |   |  |   | 250,120   | 
|NOW accounts                                                                  |  |                        | 393,071  |    |               |   |         |                   |  |   |             |   |  |       |        |   |  |   | 393,071   | 
|Certificates of deposit                                                       |  |                        | 78,551   |    |               |   | 188,869  |                   |  |   | 106,854      |   |  |       |        |   |  |   | 374,274   | 
|IRAs                                                                          |  |                        | 13,720   |    |               |   | 33,184   |                   |  |   | 21,182       |   |  |       |        |   |  |   | 68,086    | 
|Federal funds purchased                                                       |  |                        |         |    |               |   |         |                   |  |   |             |   |  |       |        |   |  |   |          | 
|Repurchase agreements                                                         |  |                        | 23,419   |    |               |   |         |                   |  |   |             |   |  |       |        |   |  |   | 23,419    | 
|Other borrowings                                                              |  |                        |         |    |               |   |         |                   |  |   |             |   |  |       |        |   |  |   |          | 
|Notes payable                                                                 |  |                        | 38,000   |    |               |   |         |                   |  |   | 10,000       |   |  |       | 761     |   |  |   | 48,761    | 
|                                                                              |  |                        |          |    |               |   |          |                   |  |   |              |   |  |       |         |   |  |   |           | 
|Total interest-bearing liabilities                                            |  |                        | 872,650  |    |               |   | 222,053  |                   |  |   | 138,036      |   |  |       | 761     |   |  |   | 1,233,500 | 
|                                                                              |  |                        |          |    |               |   |          |                   |  |   |              |   |  |       |         |   |  |   |           | 
|Interest-earning assets less interest-bearing liabilities                     |  | $                      | (203,230 | )  |               | $ | 13,012   |                   |  | $ | 418,634      |   |  | $     | 85,042  |   |  | $ | 313,458   | 
|                                                                              |  |                        |          |    |               |   |          |                   |  |   |              |   |  |       |         |   |  |   |           | 
|Cumulative interest-rate sensitivity gap                                      |  | $                      | (203,230 | )  |               | $ | (190,218 | )                 |  | $ | 228,416      |   |  | $     | 313,458 |   |  |   |           | 
|                                                                              |  |                        |          |    |               |   |          |                   |  |   |              |   |  |       |         |   |  |   |           | 
|Cumulative interest-rate gap as a percentage of total interest earning assets |  |                        | (13.14   | )% |               |   | (12.30   | )%                |  |   | 14.77        | % |  |       | 20.26   | % |  |   |           | 
|                                                                              |  |                        |          |    |               |   |          |                   |  |   |              |   |  |       |         |   |  |   |           | 



|(1) | Excludes the allowance for loan losses, in process accounts and purchase accounting adjustments.
|--- | ------------------------------------------------------------------------------------------------

Competition

There is significant competition within the banking and
financial services industry in northern Kentucky, which is the primary market in which the Bank operates. Changes in regulation, technology and product delivery systems have resulted in an increasingly competitive environment. The Bank expects to
continue to face increasing competition from online and traditional financial institutions seeking to attract customers by providing access to similar services and products.

Some of the institutions which compete with the Bank are among the largest financial institutions in the United States. Any actual intervention or assistance to these competitors made by the U.S. federal
government, as well as the perception that such assistance would be forthcoming if needed, could have the effect of eroding any competitive advantages of the Bank in the markets in which it operates. Within the northern Kentucky and greater
Cincinnati, Ohio markets, the Bank competes with approximately seven financial institutions with over $50 billion in total assets, as well as numerous state chartered banking institutions of comparable or larger size and resources and smaller
community banking organizations. The Bank also has numerous local, regional and national nonbank competitors, including savings and loan associations, credit unions, mortgage companies, insurance companies, finance companies, financial service
operations of major retailers, investment brokerage and financial advisory firms and mutual fund companies. Because nonbank financial institutions are not subject to the same regulatory restrictions as banks and bank holding companies, they can
often operate with greater



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flexibility and lower cost structures. Currently, the Bank does not face meaningful competition from international banks in its market, although that could change in the future.

The Bank competes for deposits primarily with other commercial banks, savings associations and credit unions and with the issuers of
commercial paper and other securities, such as shares in money market mutual funds. The primary factors in competing for deposits are interest rates and convenience of office locations. The Bank competes for making loans primarily with other banks,
savings associations, consumer finance companies, credit unions, leasing companies and other nonbank competitors. The Bank competes for loan originations primarily through the interest rates and loan fees it charges and through the efficiency and
quality of services it provides to borrowers. Competition for loans is affected by, among other things, the general availability of lendable funds, general and local economic conditions, current interest rate levels and other factors that are not
readily predictable.

Due to the Banks size relative to the many other financial institutions in its market, management
believes that the Bank does not have a substantial share of the deposit and loan markets. The table below presents FDIC deposit data regarding the Banks deposit market share. The June 2010 data set forth below is the most current data
available from the FDIC at this time and represents those counties in which the Bank has reported market share for deposits.

Bank Deposit Market Share

($ in thousands)



|                         |  |                   |         |  |                     |  |       |  
|------------------------ |  | ----------------- | ------- |  | ------------------- |  | ----- | -
|Market (1)               |  | June 2010Deposits |         |  | DepositMarket Share | 
|Boone County Kentucky    |  | $                 | 439,915 |  |                     |  | 21.73 | %
|Campbell County Kentucky |  |                   | 170,510 |  |                     |  | 13.07 | %
|Gallatin County Kentucky |  |                   | 28,358  |  |                     |  | 65.07 | %
|Grant County Kentucky    |  |                   | 61,581  |  |                     |  | 22.16 | %
|Kenton County Kentucky   |  |                   | 601,404 |  |                     |  | 27.42 | %



|(1) | Source: FDIC
|--- | ------------

Services
provided by the Banks trust division face competition from many national, regional and local financial institutions. Companies that offer broad services similar to those provided by the Bank, such as other banks, trust companies and full
service brokerage firms, as well as companies that specialize in particular services offered by the Bank, such as investment advisors and mutual fund providers, all compete with the Banks trust division.

The Banks ability to compete effectively is a result of being able to provide customers with desired products and services in a
convenient and cost effective manner. Customers for commercial, consumer and mortgage banking as well as trust services are influenced by convenience, quality of service, personal contacts, availability of products and services and related pricing.
The Bank continually reviews its products, locations, alternative delivery channels, and pricing strategies to maintain and enhance its competitive position. Management believes it can compete effectively as a result of local market knowledge and
awareness of, and attention to, customer needs.

Employees

As of December 31, 2010, the Bank had 298 full-time employees and 72 part-time employees. The Bank believes that relations with its employees are good. None of the employees of the Bank are
represented by a labor union or subject to a collective bargaining agreement.

Regulation and Supervision

The following discussion describes elements of an extensive regulatory framework applicable to bank holding companies and banks and
specific information about BKFC. Federal and state regulation of banks and their holding companies is intended primarily for the protection of depositors and the Deposit Insurance Fund (DIF), rather than for the protection of
shareholders and creditors. A change in statutes, regulations or policies could have a material impact on the business of BKFC and its subsidiaries, including changes resulting from the recently enacted Dodd-Frank Act that was signed into law by the
President on July 21, 2010, as described in more detail below. BKFC and its subsidiaries may also be affected by future legislation that can change banking statutes in substantial and unexpected ways and by the actions of the Board of Governors
of the Federal Reserve System (the FRB) as it attempts to control the money supply and credit availability in order to influence the economy.



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Regulation of BKFC. BKFC is a bank holding company subject to regulation by the FRB
under the Bank Holding Company Act of 1956, as amended (BHCA). As a bank holding company, BKFC is required to file periodic reports with, and is subject to the regulation, supervision and examination by, the FRB. Such examination by the
FRB determines whether BKFC is operating in accordance with various regulatory requirements and in a safe and sound manner. The FRB may initiate enforcement proceedings against BKFC for violations of laws or regulations or for engaging in unsafe and
unsound practices, particularly if such conduct could or does adversely impact the Bank. BKFC is also subject to the disclosure and regulatory requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as
amended, as administered by the SEC.

Under the BHCA, the FRBs prior approval is required in any case in which BKFC
proposes to acquire all or substantially all of the assets of any bank, acquire direct or indirect ownership or control of more than 5% of the voting shares of any bank, or merge or consolidate with any other bank holding company. The BHCA also
prohibits, with certain exceptions, BKFC from acquiring direct or indirect ownership or control of more than 5% of any class of voting shares of any non-banking company. Under the BHCA, BKFC may not engage in any business other than managing and
controlling banks or furnishing certain specified services to subsidiaries and may not acquire voting control of non-banking companies unless the FRB determines such businesses and services to be closely related to banking. When reviewing bank
acquisition applications for approval, the FRB considers, among other things, each subsidiary banks record in meeting the credit needs of the communities it serves in accordance with the Community Reinvestment Act of 1977, as amended (the
CRA). The Bank has a current CRA rating of satisfactory. In addition, the FRB could require that BKFC terminate any activity, if the FRB deems the activity to constitute a serious risk to the financial soundness of the Bank.

It is the policy of the FRB that a bank holding company be ready and able to use its resources to provide capital to its
subsidiary banks during periods of financial stress or adversity. The FRB could require BKFC to provide such support at times when BKFC lacks the resources to do so. See Regulatory Capital Requirements and Dividend
Restrictions regarding minimum capital levels to which BKFC is subject and regulatory limits on BKFCs ability to pay dividends to shareholders. As a bank holding company, BKFC must notify the FRB if, during any one-year period, it seeks
to redeem shares of stock in an amount such that total redemptions during the year, net of sales of shares, would be greater than 10% of BKFCs net worth.

Regulation of the Bank.The Bank is a Kentucky-chartered bank with FDIC deposit insurance. The Bank is subject to numerous federal and state statutes and regulations regarding the conduct of its
business, including, among other things, maintenance of reserves against deposits; capital adequacy; restrictions on the nature and amount of loans which may be made and the interest which may be charged thereon; restrictions on the terms of loans
to officers, directors, large shareholders and their affiliates; restrictions relating to investments and other activities; and requirements regarding mergers and branching activities.

The Bank is subject to the regulation, supervision and examination by the Department and the FDIC. Both the Department and the FDIC have
the authority to issue cease-and-desist orders if either determines that the activities of the Bank represent unsafe and unsound banking practices. If the grounds provided by law exist, the Department or the FDIC may appoint a conservator or
receiver for the Bank.

State-chartered banks, like the Bank, are subject to regulatory oversight under various consumer
protection and fair lending laws. These laws govern, among other things, truth-in-lending disclosure, equal credit opportunity, fair credit reporting and community reinvestment. Failure to abide by federal laws and regulations governing community
reinvestment could limit the ability of a state-chartered bank to open a new branch or engage in a merger transaction.

The
Bank is subject to the guidance on sound risk management practices for concentrations in commercial real estate lending set forth by the Office of the Comptroller of the Currency, the FRB and the FDIC. The guidance is intended to help ensure that
institutions pursuing a significant commercial real estate lending strategy remain healthy and profitable while continuing to serve the credit needs of their communities. Also, this guidance directs institutions in developing risk management
practices and levels of capital that are commensurate with the level and nature of their commercial real estate concentrations.

Kentucky law limits loans or other extensions of credit to any borrower to 20% of the Banks paid-in capital and actual surplus.
Such limit is increased to 30% if the borrower provides good collateral security or executes to it a mortgage upon real or personal property with a cash value exceeding the amount of the loan. Loans or extensions of credit to certain borrowers are
aggregated, and loans secured by certain government obligations are exempt from these limits. At December 31, 2010, the maximum the Bank could lend to any one borrower generally equaled $23 million and equaled $34 million if



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the borrower provided collateral with a cash value in excess of the amount of the loan. Federal banking laws and regulations also limit the transfer of funds or other items of value, including
pursuant to the provision of loans, from banks to their affiliates.

Generally, the Banks permissible activities and
investments are prescribed by Kentucky law. However, state-chartered banks, including the Bank, may not, directly or through a subsidiary, engage in activities or make any investments as principal not permitted for a national bank, a bank holding
company or a subsidiary of a nonmember bank, unless they obtain FDIC approval.

The Dodd-Frank Act.The Dodd-Frank Act
represents a significant overhaul of many aspects of the regulation of the financial-services industry. Although many provisions remain subject to further rulemaking, the Dodd-Frank Act implements numerous and far-reaching changes that affect
financial companies, including banks and bank holding companies such as BKFC by, among other things:



| |  |  | centralizing responsibility for consumer financial protection by creating a new independent agency, the Consumer Financial Protection Bureau, with
responsibility for implementing, enforcing and examining for compliance with federal consumer financial laws;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | applying the same leverage and risk-based capital requirements that apply to insured depository institutions to bank holding companies;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------



| |  |  | requiring the FDIC to seek to make its capital requirements for banks countercyclical so that the amount of capital required to be maintained increases
in times of economic expansion and decreases in times of economic contraction;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | changing the assessment base for federal deposit insurance from the amount of insured deposits to consolidated assets less tangible capital;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | implementing corporate governance revisions, including with regard to executive compensation and proxy access by shareholders, that apply to all public
companies, not just financial institutions;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | making permanent the $250,000 limit for federal deposit insurance and increasing the cash limit of Securities Investor Protection Corporation
protection from $100,000 to $250,000, and providing unlimited federal deposit insurance until January 1, 2013, for non-interest bearing demand transaction accounts at all insured depository institutions; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | repealing the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on
business transaction and other accounts starting July 2011.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The majority of the provisions in the
Dodd-Frank Act are aimed at financial institutions that are significantly larger than BKFC or the Bank. Nonetheless, there are provisions with which we will have to comply now that the Dodd-Frank Act is signed into law. Among many other legislative
changes that BKFC will assess, BKFC will experience a new assessment model from the FDIC based on assets, not deposits, and be subject to enhanced executive compensation and corporate governance requirements. Because most aspects of this legislation
will be subject to intensive agency rulemaking and subsequent public comment prior to implementation over the next six to 18 months, it is difficult to predict at this time the ultimate effect of the Dodd-Frank Act on BKFC or the Bank.

Emergency Economic Stabilization Act of 2008. The Emergency Economic Stabilization Act of 2008 (the EESA) was enacted
on October 3, 2008. The EESA authorized the Secretary of the Treasury Department (the Secretary) to purchase or guarantee up to $700 billion in troubled assets from financial institutions under TARP. Pursuant to authority granted
under the EESA, the Secretary created the TARP CPP under which the Treasury Department was authorized to invest up to $250 billion in senior preferred stock of U.S. banks and savings associations or their holding companies. The Treasury
Departments authority to make new investments under the CPP expired in October 2010.

Institutions participating in the
TARP or CPP are required to issue warrants for common or preferred stock or senior debt to the Secretary. If an institution participates in the CPP or if the Secretary acquires a meaningful equity or debt position in the institution as a result of
TARP participation, the institution is required to meet certain standards for executive compensation and corporate governance, including a prohibition against incentives to take unnecessary and excessive risks,



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recovery of bonuses paid to senior executives based on materially inaccurate earnings or other statements and a prohibition against agreements for the payment of golden parachutes. Institutions
that sell more than $300 million in assets under TARP auctions or participate in the CPP will not be entitled to a tax deduction for compensation in excess of $500,000 paid to its chief executive or chief financial officer or any of its other three
most highly compensated officers. In addition, any severance paid to such officers for involuntary termination or termination in connection with a bankruptcy or receivership will be subject to the golden parachute rules under the Internal Revenue
Code. Additional standards with respect to executive compensation and corporate governance for institutions that have participated or will participate in the TARP (including the CPP) were enacted as part of the American Recovery and Reinvestment Act
of 2009 (ARRA), described below.

CPP Participation. On February 13, 2009, BKFC issued 34,000 shares
of Series A Preferred Stock for a total price of $34 million pursuant to a Letter Agreement with the Treasury Department (the Purchase Agreement). On December 22, 2010, BKFC repurchased $17 million of the outstanding $34 million of
Series A Preferred Stock held by the Treasury Department. Accordingly, BKFC remains subject to the restrictions applicable to CPP participants until such time as BKFC completes the repurchase of the remaining $17 million of Series A Preferred Stock
held by the Treasury Department. The Series A Preferred Stock is to pay cumulative dividends at a rate of 5% per year for the first five years and thereafter at a rate of 9% per year. The Series A Preferred Stock is generally non-voting,
but does have the right to vote as a class on the issuance of any preferred stock ranking senior, any change in its terms or any merger, exchange or similar transaction that would adversely affect its rights. The holder(s) of Series A Preferred
Stock also have the right to elect two directors if dividends have not been paid for six periods.

As part of its purchase of
the Series A Preferred Stock, the Treasury Department received the Warrant to purchase 274,784 shares of Common Stock at an initial per share exercise price of $18.56. The Warrant provides for the adjustment of the exercise price and the number of
shares of Common Stock issuable upon exercise pursuant to customary anti-dilution provisions, such as upon stock splits or distributions of securities or other assets to holders of Common Stock, and upon certain issuances of Common Stock at or below
a specified price relative to the initial exercise price. The Warrant expires ten years from the issuance date. Pursuant to the Purchase Agreement, the Treasury Department has agreed not to exercise voting power with respect to any shares of Common
Stock issued upon exercise of the Warrant. Under the ARRA, the Warrant would be liquidated upon the full redemption by BKFC of the Series A Preferred Stock.

Both the Series A Preferred Stock and the Warrant will be accounted for as components of Tier 1 capital, as further described below.

Prior to February 13, 2012, unless BKFC has fully redeemed the Series A Preferred Stock or the Treasury Department has transferred
the Series A Preferred Stock to a third party, the consent of the Treasury Department will be required for BKFC to (1) declare or pay any dividend or make any distribution on its Common Stock (other than regular semiannual cash dividends of not
more than $0.28 per share of Common Stock) or (2) redeem, purchase or acquire any shares of its Common Stock or other equity or capital securities, other than in connection with benefit plans consistent with past practice and certain other
circumstances specified in the Purchase Agreement with the Treasury Department.

American Recovery and Reinvestment Act of
2009. The ARRA was enacted on February 17, 2009. The ARRA includes a wide variety of programs intended to stimulate the economy and provide for extensive infrastructure, energy, health, and education needs. In addition, the ARRA imposes
certain new executive compensation and corporate governance obligations on all current and future TARP recipients, including BKFC, until the institution has redeemed the preferred stock, which TARP recipients are now permitted to do under the ARRA
without regard to the three year holding period and without the need to raise new capital, subject to approval of its primary federal regulator. The executive compensation restrictions under the ARRA (described below) are more stringent than those
in effect under the CPP, but it is yet unclear how these executive compensation standards will relate to the similar standards recently announced by the Treasury Department, or whether the standards will be considered effective immediately or only
after implementing regulations are issued by the Treasury Department.

The ARRA amends Section 111 of the EESA to require
the Secretary to adopt additional standards with respect to executive compensation and corporate governance for TARP recipients (including BKFC). The standards required to be established by the Secretary include, in part, (1) prohibitions on
making golden parachute payments to senior executive officers and the next 5 most highly-compensated employees during such time as any obligation arising from financial assistance provided under the TARP remains outstanding (the Restricted
Period), (2) prohibitions on paying or accruing bonuses or other incentive awards for certain senior executive officers and employees, except for awards of long-term restricted stock with a value equal to no greater than 1/3 of the
subject employees annual compensation that do not fully vest during the Restricted Period or unless such compensation is pursuant to a valid written employment contract prior to February 11, 2009, (3) requirements that TARP CPP
participants provide for the recovery of any bonus or incentive



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compensation paid to the 20 most highly-compensated employees based on statements of earnings, revenues, gains or other criteria later found to be materially inaccurate, with the Secretary having
authority to negotiate for reimbursement, and (4) a review by the Secretary of all bonuses and other compensation paid by TARP participants to senior executive employees and the next 20 most highly-compensated employees before the date of
enactment of the ARRA to determine whether such payments were inconsistent with the purposes of the ARRA.

The ARRA also sets
forth additional corporate governance obligations for TARP recipients, including requirements for the Secretary to establish standards that provide for semi-annual meetings of compensation committees of the board of directors to discuss and evaluate
employee compensation plans in light of an assessment of any risk posed from such compensation plans. TARP recipients are further required by the ARRA to have in place company-wide policies regarding excessive or luxury expenditures, permit
non-binding shareholder say-on-pay proposals to be included in proxy materials, as well as require written certifications by the chief executive officer and chief financial officer with respect to compliance. On June 15, 2009, the
Secretary promulgated regulations to implement the executive compensation and certain corporate governance provisions detailed in the ARRA. For more information on BKFCs obligations under the EESA, ARRA and TARP, see the Capital Purchase
Program section of Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.

Regulatory Capital Requirements. The FRB has adopted risk-based capital guidelines for bank holding companies. Such companies must maintain adequate consolidated capital to meet the minimum ratio
of total capital to risk-weighted assets (including certain off-balance-sheet items, such as standby letters of credit) (the Total Risk-Based Ratio) of 8%. At least half of the minimum-required total capital of 8% must be composed of
Tier 1 Capital, which consists of common shareholders equity, minority interests in the equity of consolidated subsidiaries and a limited amount of perpetual preferred stock, less goodwill and certain other intangibles (Tier 1 Risk-Based
Ratio). The remainder of total capital may consist of subordinated and qualifying convertible debt, other preferred stock and a limited amount of loan and lease loss allowances.

The FRB also has established minimum leverage ratio guidelines for bank holding companies. The guidelines provide for a minimum ratio of
Tier 1 Capital to average total assets (excluding the loan and lease loss allowance, goodwill and certain other intangibles, and portions of certain nonfinancial equity investments) (the Leverage Ratio) of 3% for bank holding companies
that meet specified criteria, including having the highest regulatory rating. All other bank holding companies must maintain a Leverage Ratio of 4% to 5%. The guidelines further provide that bank holding companies making acquisitions are expected to
maintain strong capital positions substantially above the minimum supervisory levels.

The Bank is subject to similar capital
requirements, and such capital requirements are imposed and enforced by the FDIC.

As part of the Dodd-Frank Act, provisions
were added that require federal banking agencies to develop capital requirements that address systemically risky activities. The effect of these capital rules are such that trust preferred securities issued by a company, such as BKFC, with total
consolidated assets of less than $15 billion before May 19, 2010 and treated as regulatory capital are grandfathered, but any such securities issued later are not eligible as regulatory capital. The banking regulators must develop
regulations setting minimum risk-based and leverage capital requirements for holding companies and banks on a consolidated basis that are no less stringent than the generally applicable requirements in effect for depository institutions under the
prompt corrective action regulations discussed below. The banking regulators also must seek to make capital standards countercyclical so that the required levels of capital increase in times of economic expansion and decrease in times of
economic contraction. The Act requires these new capital regulations to be adopted by the FRB in final form 18 months after the date of enactment of the Dodd-Frank Act.

In addition, in 2010, the Group of Governors and Heads of Supervisors of the Basel Committee on Banking Supervision, the oversight body of the Basel Committee, published its calibrated capital
standards for major banking institutions (Basel III). Under these standards, when fully phased in on January 1, 2019, banking institutions will be required to maintain heightened Tier 1 common equity, Tier 1 capital and
total capital ratios, as well as maintaining a capital conservation buffer. The Tier 1 common equity and Tier 1 capital ratio requirements will be phased in incrementally between January 1, 2013 and January 1, 2015;
the deductions from common equity made in calculating Tier 1 common equity (for example, for mortgage servicing assets, deferred tax assets and investments in unconsolidated financial institutions) will be phased in incrementally over a
four-year period commencing on January 1, 2014; and the capital conservation buffer will be phased in incrementally between January 1, 2016 and January 1, 2019. The Basel Committee also announced that a countercyclical
buffer of 0% to 2.5% of common equity or other fully loss-absorbing capital will be implemented according to national circumstances as an extension of the conservation buffer. The final package of Basel III reforms
were approved by the G20 leaders in November 2010 and are subject to individual adoption by member nations, including the United States. If the foregoing revised capital standards are adopted in their current form, BKFC



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estimates these standards would have a negligible impact on BKFCs ability to comply with the revised regulatory capital ratios based on BKFCs current understanding of the revisions to
capital qualification.

The following table sets forth the Tier 1 Risk-Based Ratio, Total Risk-Based Ratio and Leverage Ratio
for BKFC and the Bank at December 31, 2010:



|                  |  |                        |         |  |         |  |       |        |  |   |         |  |  |  |       |  
|----------------- |  | ---------------------- | ------- |  | ------- |  | ----- | ------ |  | - | ------- |  |  |  | ----- | -
|                  |  | At December 31, 2010   |        
|                  |  | BKFC                   |         |  | Bank    | 
|                  |  | Amount                 |         |  | Percent |  |       | Amount |  |   | Percent | 
|                  |  | (Dollars in thousands) |        
|Tier 1 risk-based |  | $                      | 147,361 |  |         |  | 11.02 | %      |  | $ | 143,833 |  |  |  | 10.77 | %
|Requirement       |  |                        | 53,465  |  |         |  | 4.00  |        |  |   | 53,421  |  |  |  | 4.00  |  
|                  |  |                        |         |  |         |  |       |        |  |   |         |  |  |  |       |  
|Excess            |  | $                      | 93,896  |  |         |  | 7.02  | %      |  | $ | 90,412  |  |  |  | 6.77  | %
|                  |  |                        |         |  |         |  |       |        |  |   |         |  |  |  |       |  
|Total risk-based  |  | $                      | 184,077 |  |         |  | 13.77 | %      |  | $ | 180,545 |  |  |  | 13.52 | %
|Requirement       |  |                        | 106,930 |  |         |  | 8.00  |        |  |   | 106,842 |  |  |  | 8.00  |  
|                  |  |                        |         |  |         |  |       |        |  |   |         |  |  |  |       |  
|Excess            |  | $                      | 77,147  |  |         |  | 5.77  | %      |  | $ | 73,703  |  |  |  | 5.52  | %
|                  |  |                        |         |  |         |  |       |        |  |   |         |  |  |  |       |  
|Leverage ratio    |  | $                      | 147,361 |  |         |  | 9.41  | %      |  | $ | 143,833 |  |  |  | 9.22  | %
|Requirement       |  |                        | 62,669  |  |         |  | 4.00  |        |  |   | 62,404  |  |  |  | 4.00  |  
|                  |  |                        |         |  |         |  |       |        |  |   |         |  |  |  |       |  
|Excess            |  | $                      | 84,692  |  |         |  | 5.41  | %      |  | $ | 81,429  |  |  |  | 5.22  | %
|                  |  |                        |         |  |         |  |       |        |  |   |         |  |  |  |       |  

The FDIC may require an increase in a banks risk-based capital requirements on an individualized basis
to address the banks exposure to a decline in the economic value of its capital due to a change in interest rates, among other things.

Prompt Corrective Regulatory Action. The FDIC has adopted regulations governing prompt corrective action to resolve the problems of capital deficient and otherwise troubled banks under its
regulation. For these purposes, the law establishes three categories of capital deficient institutions: undercapitalized, significantly undercapitalized and critically undercapitalized. At each successively lower defined capital category, an
institution is subject to more restrictive and numerous mandatory or discretionary regulatory actions or limits, and the FDIC has less flexibility in determining how to resolve the problems of the institution. The FDIC generally can downgrade an
institutions capital category, notwithstanding its capital level, if, after notice and opportunity for hearing, the institution is deemed to be engaging in an unsafe or unsound practice because it has not corrected deficiencies that resulted
in it receiving a less than satisfactory examination rating on matters other than capital or it is deemed to be in an unsafe or unsound condition. An undercapitalized institution must submit a capital restoration plan to the FDIC within 45 days
after it becomes undercapitalized. Such institution will be subject to increased monitoring and asset growth restrictions and will be required to obtain prior approval for acquisitions, branching and engaging in new lines of business. Furthermore,
critically undercapitalized institutions must be placed in conservatorship or receivership within 270 days of reaching that capitalization level, except under limited circumstances. At year-end 2010, the most recent regulatory notifications
categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institutions category.

The FDIC has adopted regulations to implement the prompt corrective action legislation. An institution is deemed to be well
capitalized if it has a Total Risk-Based Ratio of 10% or greater, a Tier 1 Risk-Based Ratio of 6% or greater, and a Leverage Ratio of 5% or greater. An institution is adequately capitalized if it has a Total Risk-Based Ratio of 8%
or greater, a Tier 1 Risk-Based Ratio of 4% or greater and generally a Leverage Ratio of 4% or greater. An institution is undercapitalized if it has a Total Risk-Based Ratio of less than 8%, a Tier 1 Risk-Based Ratio of less than 4%, or
generally a Leverage Ratio of less than 4% (3% or less for institutions with the highest examination rating). An institution is deemed to be significantly undercapitalized if it has a Total Risk-Based Ratio of less than 6%, a Tier 1
Risk-Based Ratio of less than 3%, or a Leverage Ratio of less than 3%. An institution is considered to be critically undercapitalized if it has a ratio of tangible equity (as defined in the regulations) to total assets that is equal to
or less than 2%. The Banks capital levels at December 31, 2010 met the standards for the highest level, a well-capitalized institution.

Federal law prohibits a financial institution from making a capital distribution to anyone or paying management fees to any person having control of the institution if, after such distribution or payment,
the institution would be undercapitalized. In addition, each holding company controlling an undercapitalized institution must guarantee that the institution will comply with its capital restoration plan until the institution has been adequately
capitalized on an average during each of the four preceding calendar quarters and must provide adequate assurances of performance. The aggregate liability pursuant to such guarantee is limited to the lesser of (i) an amount equal to 5% of the
institutions total assets at the time it became undercapitalized or (ii) the amount necessary to bring the institution into compliance with all capital standards applicable to such institution at the time the institution fails to comply
with its capital restoration plan.



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Dividend Restrictions.There are a number of statutory and regulatory requirements
applicable to the payment of dividends by banks and bank holding companies. Please see Note 18 of the financial statements for a discussion on the Banks current dividend restrictions.

As part of the CPP, any increase in BKFCs dividend level from the September 2008 semi-annual payment of $.28 per share must be
approved by the Treasury Department.

If the FRB or the FDIC determines that a bank holding company or a bank is engaged in or
is about to engage in an unsafe or unsound practice (which, depending on the financial condition of the entity, could include the payment of dividends), that regulator may require, after notice and hearing, that such bank holding company or bank
cease and desist from such practice. In addition, the FRB and the FDIC have issued policy statements, which provide that insured banks and bank holding companies should generally only pay dividends out of current operating earnings. The FDIC
prohibits the payment of any dividend by a bank that would constitute an unsafe or unsound practice. Compliance with the minimum capital requirements limits the amounts that BKFC and the Bank can pay as dividends.

In 2010, BKFC paid a cash dividend of $0.56 per share totaling approximately $3.17 million on common stock and cash dividends on the
Series A Preferred Stock of $1.79 million.

FDIC Deposit Insurance and Assessments.The FDIC is an independent federal
agency that insures deposits, up to prescribed statutory limits, of federally insured banks and thrifts and safeguards the safety and soundness of the banking and thrift industries. The Banks deposits are insured by the DIF. The DIF is the
successor to the Bank Insurance Fund and the Savings Association Insurance Fund, which were merged in 2006. The FDIC amended its risk-based assessment system to implement authority granted by the Federal Deposit Insurance Reform Act of 2005. Under
the revised system, insured institutions are assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels and certain other factors. An institutions assessment rate depends upon the category to which it
is assigned. Risk Category I, which contains the least risky depository institutions, is expected to include 90% of all institutions. Unlike the other categories, Risk Category I contains further risk differentiation based on the FDICs
analysis of financial ratios, examination component ratings and other information.

In October 2008, the basic limit on
federal deposit insurance coverage of interest bearing transaction accounts increased from $100,000 to $250,000 per depositor under the EESA. In November 2008, the FDIC offered a voluntary expanded insurance program to depository institutions, which
provides, without charge to depositors, full guarantee on all non-interest bearing transaction accounts held by any depositor, regardless of dollar amount. The Bank participates in this program. The FDIC maintains the DIF by assessing to each
depository institution an insurance premium. The amount of FDIC assessments paid by a DIF member institution is based on its relative risk of default as measured by a companys FDIC supervisory rating, and other various measures, such as the
level of brokered deposits, unsecured debt, and debt issuer ratings.

On September 29, 2009 the FDIC adopted an Amended
Restoration Plan to allow the DIF to return to a reserve ratio of 1.15% within eight years, as mandated by statute. As part of the Amended Restoration Plan, the FDIC amended its assessment regulations to require all institutions to prepay on
December 30, 2009 their estimated risk-based insurance assessments for the fourth quarter of 2009, and for all of 2010, 2011, and 2012. At that same time, institutions were also required to pay their regular quarterly assessments for the third
quarter of 2009. An institutions quarterly risk-based deposit insurance assessments thereafter would be paid from the amount the institution prepaid until that amount was exhausted or until December 31, 2014, when any amount remaining
would be returned to the institution. The prepaid assessment amount was $4.21 million and $6.69 million on December 31, 2009 and December 31, 2010, respectively.

On November 9, 2010, the FDIC issued a Final Rule implementing section 343 of the Dodd-Frank Act that provides for unlimited insurance coverage of certain non-interest bearing accounts.
Beginning December 31, 2010, through December 31, 2012, all non-interest bearing transaction accounts are fully insured, regardless of the balance of the account, at all FDIC-insured institutions. The unlimited insurance coverage is
available to all depositors, including consumers, businesses, and government entities. This unlimited insurance coverage is separate from, and in addition to, the insurance coverage provided to a depositors other deposit accounts held at an
FDIC-insured institution up to the permissible limit of $250,000.

The DIF assessment rate currently ranges from 12 to 45
cents per $100 of domestic deposits. The Dodd-Frank Act requires changes to a number of components of the FDIC insurance assessment, with an implementation date of April 1, 2011. The changes amend the current methodology used to determine the
assessments paid by institutions with assets greater



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than $10 billion, including changing the assessment base from deposits to total average assets less Tier 1 capital. Additionally, the FDIC has developed a scorecard approach to determine a
separate assessment rate for each institution with assets greater than $10 billion.

The FDIC may increase or decrease the
assessment rate schedule from one quarter to the next. An increase in the assessment rate could have a material adverse effect on BKFCs earnings, depending on the amount of the increase. The FDIC is authorized to terminate a depository
institutions deposit insurance upon a finding by the FDIC that the institutions financial condition is unsafe or unsound, or that the institution has engaged in unsafe or unsound practices, or has violated any applicable rule,
regulation, order or condition enacted or imposed by the institutions regulatory agency. The termination of deposit insurance for the Bank could have a material adverse effect on BKFCs earnings.

FRB Reserve Requirements. FRB regulations currently require banks to maintain reserves of 3% of net transaction accounts
(primarily demand and NOW accounts) up to $58.8 million of such accounts (subject to an exemption of up to $10.7 million), and of 10% of net transaction accounts in excess of $58.8 million. At December 31, 2010, the Bank was in compliance with
this reserve requirement, which was $8,122,000.

Acquisitions of Control.Acquisitions of controlling interests of BKFC
and the Bank are subject to the limitations in federal and state laws. These limits generally require regulatory approval of acquisitions of specified levels of stock of any of these entities. Acquisitions of BKFC or the Bank by merger or pursuant
to the purchase of assets also require regulatory approval.

Federal Home Loan Banks. The FHLBs provide credit to their
members in the form of advances. The Bank is a member of the FHLB of Cincinnati and must maintain an investment in the capital stock of the FHLB of Cincinnati that consists of two components, the first is the membership component which is equal to
0.15% of the Banks total assets, the second is an activity component that is equal to 2% to 4% of the Banks outstanding advances. The Bank is in compliance with this requirement with an investment in stock of the FHLB of Cincinnati of
$4,959,000 at December 31, 2010 and 2009. Generally, FHLBs are not permitted to make new advances to a member without positive tangible capital.

Federal Taxation

BKFC. BKFC and the Bank file a consolidated
federal income tax return on a calendar year basis. BKFC is subject to the federal tax laws and regulations that apply to corporations generally.

The Bank. In 2000, the Bank acquired the stock of FTFC. FTFCs wholly owned subsidiary was FTSB. Federal income tax laws provided savings banks with additional bad debt deductions through
1987, totaling $1,255,000 for FTFC. Accounting standards do not require a deferred tax liability to be recorded on this amount, which would otherwise total $427,000. Upon acquisition, this unrecorded liability was transferred to the Bank. If the
Bank was liquidated or otherwise ceased to be a bank or if tax laws were to change, the $427,000 would be recorded as a liability with an offset to income tax expense.

In 2007, BKFC consummated the acquisition of FNB Bancorporation, Inc. and its subsidiary, First Bank. The First Bank acquisition included a $13,748,000 net operating loss (NOL) carryforward
which was set up as a $4,700,000 deferred tax asset. The NOL carryforward will be deducted from income over the next 18 years in accordance to section 382 of the tax code.

Kentucky Taxation

BKFC. Kentucky corporations, such as BKFC, are
subject to the Kentucky corporation income tax and the Kentucky corporation license (franchise) tax. The income tax is imposed based on the following rates: 4% of the first $50,000 of taxable net income allocated or apportioned to Kentucky; 5% of
the next $50,000; and 6% of taxable net income over $100,000. All dividend income received by a corporation is excluded for purposes of arriving at taxable net income.

Domestic corporations are subject to state and local ad valorem taxes on tangible personal property and real property that is not otherwise exempt from taxation. The rates of taxation for tangible
personal property vary depending on the character of the property. The state rate of taxation on real property equals $0.122 per $100 of value as of January 1 each year. Thus, BKFC is subject to ad valorem taxation on its taxable tangible
personal property and real property.

The Bank. State banks are not subject to the Kentucky corporation income tax.



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The Commonwealth of Kentucky imposes both a Kentucky Bank Franchise Tax and
Local Deposits Franchise Tax. The Kentucky Bank Franchise Tax is an annual tax equal to 1.1% of net capital after apportionment if applicable. The value of net capital is calculated annually by deducting from total capital an
amount equal to the same percentage of the total as the book value of United States obligations bears to the book value of the total assets of the financial institution. The Bank pays a portion of its franchise tax to the state of Ohio based on
revenue apportioned to that state. The Local Deposits Franchise Tax is an annual tax of up to .025% imposed by each city and county on bank deposits within their jurisdictions.

The Kentucky property tax extends to bank deposits (the Deposits Tax). The tax is levied at a rate of 0.00001% of the amount
of the deposits. It is the responsibility of the bank, not the depositor, to report and pay the Deposits Tax.

State banks are
subject to state and local ad valorem taxes on tangible personal property and real property that is not otherwise exempt from taxation. The rates of taxation for tangible personal property vary depending on the character of the property. The state
rate of taxation on real property equals $0.122 per $100 of value as of January 1 each year.

The Bank, as a financial
institution, is exempt from both the corporate income and license taxes.



|Item 1A. | Risk Factors
|-------- | ------------

An
investment in the Common Stock of BKFC is subject to certain risks inherent in the business of BKFC and the Bank. The material risks and uncertainties that management believes affect BKFC and the Bank are described below. Before making an investment
decision, you should carefully consider the risks and uncertainties described below, together with all of the other information included or incorporated by reference into this Annual Report. The risks and uncertainties described below are not the
only ones facing BKFC or the Bank. Additional risks and uncertainties that management is not aware of or focused on or that management currently deems immaterial may also impair the business operations of BKFC or the Bank. This Annual Report is
qualified in its entirety by these risk factors.

If any of the following risks occur, or if any combination of the following
risks occur, the financial condition and results of operations of BKFC or the Bank could be materially and adversely affected. If this were to happen, the value of Common Stock could decline significantly.

References to we, us, and our in this Risk Factors section refer to BKFC and its
subsidiaries, including the Bank, unless otherwise specified or unless the context otherwise requires.

Our business depends upon the
general economic conditions of the northern Kentucky and greater Cincinnati, Ohio area, and may continue to be adversely affected by downturns in the local economies in which we operate.

Our business operations are limited almost exclusively to the northern Kentucky and the greater Cincinnati, Ohio area, which is a small
geographic area. As such, our business is closely tied to the general economic conditions of this area. Local economic conditions in this area have a significant impact on the demand for our products and services, as well as the ability of our
customers to repay loans, the value of the collateral securing loans and the stability of the Banks deposit funding sources.

A significant decline in general economic conditions could increase loan delinquencies, increase problem assets and foreclosure, increase claims and lawsuits, decrease the demand for the Banks
products and services, or decrease the value of collateral for loans, especially real estate, in turn reducing customers borrowing power and the value of assets associated with problem loans and collateral coverage, thereby having a material
adverse effect on our financial condition and results of operations.

A significant portion of our loans are secured by real estate and
concentrated in the northern Kentucky and greater Cincinnati area, which may adversely affect our earnings and capital if real estate values decline.

Nearly 80% of our total loans are real estate interests (residential, nonresidential including both owner occupied and investment real estate, and construction and land development) concentrated in the
northern Kentucky area and neighboring areas in greater Cincinnati, Ohio, a small geographic area. As a result, declining real estate values in the northern Kentucky and greater Cincinnati, Ohio markets as a result of the ongoing national economic
recession could negatively impact the value of the real estate collateral securing such loans. If we are required to liquidate a significant amount of collateral during a period of reduced real estate values in satisfaction of any non-performing or
defaulted loans, our earnings and capital could be adversely affected.



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We are subject to intense competition in our market area, and our business will be adversely affected if
we are unable to compete effectively.

BKFC and the Bank compete with national financial institutions, as well as numerous
state chartered banking institutions of comparable or larger size and resources, smaller community banking organizations and a variety of nonbank competitors. The Bank competes for deposits with other commercial banks, savings associations and
credit unions and with the issuers of commercial paper and other securities, such as shares in money market mutual funds. In making loans, the Bank competes with other banks, savings associations, consumer finance companies, credit unions, leasing
companies and other lenders. Many of the institutions against whom we compete are national and regional banks that are significantly larger than us and, therefore, have significantly greater resources and the ability to achieve economies of scale by
offering a broader range of products and services at more competitive prices than we can offer. We expect competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of
consolidation in the financial services industry.

Our ability to compete successfully and to maintain and grow our
profitability depends upon a number of factors, including: the ability to develop, maintain and build upon long-term customer relationships based on top-quality service, high ethical standards and safe, sound assets; the ability to continue to
expand BKFCs market position through organic growth and strategic acquisitions; the scope, relevance and pricing of products and services offered to meet customer needs and demands; the rate at which BKFC introduces new products and services
relative to our competitors; and industry and general economic trends. Failure to perform in any of these areas could significantly weaken our competitive position, which could adversely impact our financial condition and results of operations.

Our nonresidential real estate loans expose us to greater risks of nonpayment and loss than residential mortgage loans, which may cause us
to increase our allowance for loan losses which would reduce our net income.

At December 31, 2010, $482 million, or
44%, of our loan portfolio consisted of nonresidential real estate loans. Nonresidential real estate loans generally expose a lender to greater risk of non-payment and loss than residential mortgage loans because repayment of the loans often depends
on the successful operation of the property and the income stream of the borrowers. Such loans expose us to additional risks because they typically are made on the basis of the borrowers ability to make repayments from the cash flow of the
borrowers business and are secured by collateral that may depreciate over time. These loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to residential mortgage loans. Because such loans
generally entail greater risk than residential mortgage loans, we may need to increase our allowance for loan losses in the future to account for the likely increase in probable incurred credit losses associated with the growth of such loans, which
would reduce our net income. Also, many of our nonresidential real estate borrowers have more than one loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a
significantly greater risk of loss compared to an adverse development with respect to a residential mortgage loan.

We may require access
to the capital and credit markets to conduct our business operations, and the unprecedented levels of volatility that have impacted such capital and credit markets could impair our access to the same.

From 2008 through 2010, the capital and credit markets have experienced extended volatility and disruption. In the third quarter of 2008,
the volatility and disruption reached unprecedented levels. In some cases, the markets produced downward pressure on stock prices and credit capacity for certain issuers without regard to those issuers underlying financial strength. If these
levels of market disruption and volatility continue, worsen or abate and then arise at a later date, BKFCs ability to access capital could be materially impaired. BKFCs inability to access the capital markets could constrain our ability
to make new loans, to meet our existing lending commitments and, ultimately, jeopardize our overall liquidity and capitalization.

In response to financial conditions affecting the banking system and financial markets and the potential threats to the solvency of investment banks and other financial institutions, the U.S. government
has taken unprecedented actions. These actions include the government assisted acquisition of Bear Stearns by JPMorgan Chase, the federal conservatorship of Fannie Mae and Freddie Mac, and the plan of the Treasury Department to inject capital and to
purchase mortgage loans and mortgage-backed and other securities from financial institutions for the purpose of stabilizing the financial markets or particular financial institutions. Investors should not assume that these governmental actions will
necessarily benefit the financial markets in general, or BKFC in particular. BKFC could also be adversely impacted if one or more of its direct competitors are beneficiaries of selective governmental interventions (such as FDIC-assisted
transactions) and BKFC does not receive comparable assistance. Further, investors should not assume that the government will continue to intervene in the



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financial markets at all. Investors should be aware that governmental intervention (or the lack thereof) could materially and adversely affect BKFCs business, financial condition and
results of operations.

Further decline in general economic conditions could require further additions to our allowance for loan losses,
which would reduce our net income.

If our borrowers do not repay their loans or if the collateral securing their loans is
insufficient to provide for the full repayment, we may suffer credit losses. Credit losses are inherent in the lending business and could have a material adverse effect on our operating results. We make various assumptions and judgments about the
collectability of our loan portfolio and provide an allowance for loan losses based on a number of factors. If our assumptions and judgments are wrong, our allowance for loan losses may not be sufficient to cover our losses. If we determine that our
allowance for loan losses is insufficient, we would be required to take additional provisions for loan losses, which would reduce net income during the period those provisions are taken. In addition, our regulators periodically review our allowance
for loan losses and may require us to increase our allowance for loan losses or to charge off particular loans. Current economic conditions and their impact upon the northern Kentucky and greater Cincinnati, Ohio markets where our business is
concentrated have caused us to continue to increase our allowance for loan losses during 2010. If current economic trends decline, we may experience higher than normal delinquencies and credit losses, resulting in further increases to our provisions
for loan losses in the future and reduced net income.

Our accounting policies and estimates are critical to how we report our financial
condition and results of operations, and any changes to such accounting policies and estimates could materially affect how we report our financial condition and results of operations.

Accounting policies and estimates are fundamental to how we record and report our financial condition and results of operations. Our
management makes judgments and assumptions in selecting and adopting various accounting policies and in applying estimates so that such policies and estimates comply with generally accepted accounting principles in the United States
(GAAP).

Management has identified certain accounting policies as being critical because they require
managements judgment to ascertain the valuations of assets, liabilities, commitments and contingencies. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an
asset, valuing an asset or liability or reducing a liability. We have established detailed policies and control procedures that are intended to ensure that these critical accounting estimates and judgments are well controlled and applied
consistently. In addition, these policies and procedures are intended to ensure that the process for changing methodologies occurs in an appropriate manner. Because of the uncertainty surrounding our judgments and the estimates pertaining to these
matters, actual outcomes may be materially different from amounts previously estimated. For example, because of the inherent uncertainty of estimates, management cannot provide any assurance that the Bank will not significantly increase its
allowance for loan losses if actual losses are more than the amount reserved. Any increase in its allowance for loan losses or loan charge-offs could have a material adverse effect on our financial condition and results of operations. In addition,
we cannot guarantee that we will not be required to adjust accounting policies or restate prior financial statements. See Allowance for Loan Losses under Item 1. Business and Critical Accounting Policies under
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations for additional discussion regarding these critical accounting policies.

Further, from time to time, the Financial Accounting Standards Board and SEC change the financial accounting and reporting standards that
govern the preparation of our financial statements. The ongoing economic recession has resulted in increased scrutiny of accounting standards by legislators and our regulators, particularly as they relate to fair value accounting principles. In
addition, ongoing efforts to achieve convergence between GAAP and International Financial Reporting Standards may result in changes to GAAP. These changes can be hard to predict and can materially impact how we record and report our financial
condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in our restating prior period financial statements or otherwise adversely affecting our financial condition or
results of operations.

Our largest source of revenue (net interest income) is subject to interest rate risk.

The Banks financial condition and results of operations are significantly affected by changes in interest rates. The Banks
earnings depend primarily upon its net interest income, which is the difference between its interest income earned on its interest-earning assets, such as loans and investment securities, and its interest expense paid on its interest-bearing
liabilities, consisting of deposits and borrowings. Moreover, the loans included in our interest-earning assets are primarily comprised of variable and adjustable rate loans. Net interest income is subject to interest rate risk in the following
ways:



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| |  |  | In general, for a given change in interest rates, the amount of change in value (positive or negative) is larger for assets and liabilities with longer
remaining maturities. The shape of the yield curve may affect new loan yields, funding costs and investment income differently.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The remaining maturity of various assets or liabilities may shorten or lengthen as payment behavior changes in response to changes in interest rates.
For example, if interest rates decline sharply, loans may pre-pay, or pay down, faster than anticipated, thus reducing future cash flows and interest income. Conversely, if interest rates increase, depositors may cash in their certificates of
deposit prior to maturity (notwithstanding any applicable early withdrawal penalties) or otherwise reduce their deposits to pursue higher yielding investment alternatives.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Re-pricing frequencies and maturity profiles for assets and liabilities may occur at different times. For example, in a falling rate environment, if
assets re-price faster than liabilities, there will be an initial decline in earnings. Moreover, if assets and liabilities re-price at the same time, they may not be by the same increment. For instance, if the Federal Funds Rate increased 50 basis
points, rates on demand deposits may rise by 10 basis points; whereas rates on prime-based loans will instantly rise 50 basis points.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Financial instruments do not respond in a parallel fashion to rising or falling interest rates. This causes asymmetry in the magnitude of changes to net interest income, net economic value and investment
income resulting from the hypothetical increases and decreases in interest rates. Therefore, BKFCs management monitors interest rate risk and adjusts BKFCs funding strategies to mitigate adverse effects of interest rate shifts on
BKFCs balance sheet. The Banks asset and liability management strategies designed to maintain a reasonable degree of interest rate sensitivity are more fully described in Asset/Liability Management under Item 1.
Business and Asset/Liability Management and Market Risk under Item 7A. Quantitative and Qualitative Disclosure about Market Risk.

Legislative and regulatory actions taken now or in the future may significantly affect BKFCs financial condition, results of operation, liquidity or stock price.

There have been numerous actions undertaken in Congress, the Treasury Department, the FRB, the FDIC, the SEC and others in an effort to
address the recent liquidity and credit crisis in the financial industry that followed the sub-prime mortgage market meltdown, which began in late 2007. These measures include the TARP CPP (under which the Treasury Departments authority to
make new investments expired on October 3, 2010); homeowner relief that encourages loan restructuring and modification; the establishment of significant liquidity and credit facilities for financial institutions and investment banks; the
lowering of the federal funds rate; emergency action against short selling practices; a temporary guaranty program for money market funds; the establishment of a commercial paper funding facility to provide back-stop liquidity to commercial paper
issuers; a mandatory stress test requirement for banking institutions with assets in excess of $100 billion to analyze capital sufficiency and risk exposure; and coordinated international efforts to address illiquidity and other
weaknesses in the banking sector. The purpose of these legislative and regulatory actions is to help stabilize the U.S. banking system. However, the EESA, the ARRA and any current or future legislative or regulatory initiatives may not have their
desired effect, or may have an adverse effect when applied to BKFC.

The most recent of these actions was the passage into law
on July 21, 2010 of the Dodd-Frank Act. The Dodd-Frank Act represents a significant overhaul of many aspects of the regulation of the financial-services industry, addressing, among other things, systemic risk, capital adequacy, deposit
insurance assessments, consumer financial protection, interchange fees, derivatives, lending limits, and changes among the bank regulatory agencies. Many of these provisions are subject to further study, rulemaking and to the discretion of
regulatory bodies.

While many of the provisions in the Dodd-Frank Act are aimed at financial institutions that are
significantly larger than BKFC or the Bank, there are provisions with which we will have to comply now that the Dodd-Frank Act has become law. For instance, we will be subject to a new assessment model from the FDIC based on assets, not deposits,
and be subject to enhanced executive compensation and corporate governance requirements. Under the Dodd-Frank Act, our ability to count trust preferred securities in our Tier 1 regulatory capital also will be constrained. Because most aspects of
this legislation will be subject to intensive agency rulemaking, including public comment periods prior to implementation over the next six to 18 months and beyond, it is difficult to predict at this time the complete extent of the effects that the
Dodd-Frank Act will have on us. As rules and regulations are promulgated by the federal agencies responsible for implementing and enforcing the provisions in the Dodd-Frank Act, we will have to work to apply resources to ensure that we are in
compliance with all applicable provisions, which may adversely impact our earnings. Furthermore, any current or future legislative or regulatory initiatives may not have their desired effect, or may have an adverse effect when applied to us.



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Failure to meet any of the various capital adequacy guidelines which we are subject to could adversely
affect our operations and could compromise the status of BKFC as a bank holding company.

BKFC and the Bank are required to
meet certain regulatory capital adequacy guidelines and other regulatory requirements imposed by the FRB, the FDIC and the Department. If BKFC or the Bank fails to meet these minimum capital guidelines and other regulatory requirements, our
financial condition and results of operations would be materially and adversely affected and could compromise the status of BKFC as a banking holding company. See Regulatory Capital Requirements under Item 1. Business for
detailed capital guidelines for bank holding companies and banks.

Non-compliance with applicable laws and/or regulations, including the
Bank Secrecy Act and USA Patriot Act, may adversely affect BKFCs operations and financial results and could result in significant fines or sanctions.

Federal and state regulators have the ability to impose substantial sanctions, restrictions and requirements on the Bank if they determine, upon examination or otherwise, that we have violated laws or
regulations with which we must comply, or that weaknesses or failures exist with respect to general standards of safety and soundness. Such enforcement may be formal or informal and can include, among other things, orders to take certain actions or
to refrain from certain actions. The imposition of regulatory sanctions may have adverse effects on BKFC, including a material impact on its financial condition. In addition, compliance with any such action could distract managements attention
from operations, cause significant expenses, restrict BKFC from engaging in potentially profitable activities, and limit BKFCs ability to raise capital.

The USA Patriot and Bank Secrecy Acts require financial institutions to develop programs to prevent the institutions from being used for money laundering and terrorist activities. If certain activities
are detected, financial institutions are obligated to file suspicious activity reports with the Treasury Departments Financial Crimes Enforcement Network. These rules also require financial institutions to establish procedures for identifying
and verifying the identity of customers seeking to open new financial accounts or conduct transactions, and require the filing of certain reports, such as those for cash transactions above a certain threshold. Financial institutions must also
refrain from transacting business with certain countries or persons designated by the Office of Foreign Assets Control.

Non-compliance with laws and regulations such as these could result in significant fines or sanctions. These particular laws and
regulations have significant implications for all financial institutions, establish new crimes and penalties, and require the federal banking agencies, in reviewing merger and acquisition transactions, to consider the effectiveness of the parties to
such transactions in combating money laundering and terrorist activities. Even inadvertent non-compliance and technical failure to follow the regulations may result in significant fines or other penalties, which could have a material adverse impact
on BKFCs business, financial condition, results of operations or liquidity.

The Bank could be held responsible for environmental
liabilities relating to properties acquired through foreclosure, resulting in significant financial loss.

In the event the
Bank forecloses on a defaulted commercial or residential mortgage loan to recover its investment, it may be subject to environmental liabilities in connection with the underlying real property, which could significantly exceed the value of the real
property. Although the Bank exercises due diligence to discover potential environmental liabilities prior to acquiring any property through foreclosure, hazardous substances or wastes, contaminants, pollutants, or their sources may be discovered on
properties during its ownership or after a sale to a third party. BKFC cannot assure you that the Bank would not incur full recourse liability for the entire cost of any removal and cleanup on an acquired property, that the cost of removal and
cleanup would not exceed the value of the property, or that the Bank could recover any of the costs from any third party. Losses arising from environmental liabilities could have a material adverse impact on BKFCs business, financial
condition, results of operations, or liquidity.

BKFC is subject to liquidity risk, which could disrupt our ability to meet our financial
obligations.

Liquidity refers to the ability of BKFC to ensure sufficient levels of cash to fund operations, such as
meeting deposit withdrawals, funding loan commitments, paying expenses and meeting quarterly payment obligations under certain subordinated debentures issued by BKFC in connection with the issuance of floating rate redeemable trust preferred
securities issued by BKFCs unconsolidated trust subsidiary. The source of the funds for BKFCs debt obligations is dependent on the Bank. If needed, the Bank has the ability to borrow term and overnight funds from the FHLB or other
financial intermediaries. The Bank also has $245 million of securities designated as available-for-sale that can serve as sources of funds. In addition, in February 2009 BKFC issued $34 million of Series A Preferred Stock to the Treasury



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Department as part of the CPP, of which only $17 million remains outstanding after giving effect to the December 22, 2010 repayment, resulting in additional cash available to support the
Banks capital position.

While management is satisfied that BKFCs liquidity is sufficient at December 31,
2010 to meet known and potential obligations, any significant restriction or disruption of BKFCs ability to obtain funding from these or other sources could have a negative effect on BKFCs ability to satisfy its current and future
financial obligations, which could materially affect BKFCs financial condition.

BKFC is a bank holding company, and its sources of
funds are limited.

BKFC is a bank holding company and its operations are primarily conducted by the Bank, which is subject
to significant federal and state regulation. Cash available to pay dividends to shareholders of BKFC is derived primarily from dividends paid by the Bank. As a result, BKFCs ability to receive dividends or loans from its subsidiaries is
restricted. Under federal law, the payment of dividends by the Bank is subject to capital adequacy requirements. The FRB and/or the FDIC prohibit a dividend payment by BKFC or the Bank that would constitute an unsafe or unsound practice. See
Dividend Restrictions under Item 1. Business.

The inability of the Bank to generate profits and pay
such dividends to BKFC, or regulator restrictions on the payment of such dividends to BKFC even if earned, would have an adverse effect on the financial condition and results of operations of BKFC and BKFCs ability to pay dividends to its
shareholders.

In addition, since BKFC is a legal entity separate and distinct from the Bank, its right to participate in the
distribution of assets of the Bank upon the Banks liquidation, reorganization or otherwise will be subject to the prior claims of the Banks creditors, which will generally take priority over the Banks shareholders.

Our Common Stock price can be volatile.

Our Common Stock price can fluctuate widely in response to a variety of factors, making it more difficult for you to resell your Common Stock at prices you find attractive and at the time you want.
Factors include actual or anticipated variations in our quarterly operating results; changes in recommendations or projections by securities analysts; operating and stock price performance of other companies deemed to be peers; news reports and
perception in the marketplace regarding BKFC, our competitors and/or the financial services industry as a whole; results of litigation; significant acquisitions or business combinations involving BKFC or our competitors; and other factors, including
those described in this Risk Factors section. For example, the existence of the Warrant issued to the Treasury Department to purchase up to 274,784 shares of Common Stock at an exercise price of $18.56 per share and the potential for
dilution or actual dilution the Warrant may cause, as described in detail below, may create volatility in the market price of BKFCs Common Stock.

In addition, our Common Stock also has a low average daily trading volume, which limits a persons ability to quickly accumulate or quickly divest themselves of large blocks of our Common Stock.
Further, a low average trading volume can lead to significant price swings even when a relatively small number of shares are being traded.

Recent or future acquisitions by BKFC may not produce revenue enhancements or cost savings at levels or within timeframes originally anticipated and
may result in unforeseen integration difficulties.

BKFC regularly explores opportunities to acquire financial services
businesses or assets and may also consider opportunities to acquire other banks or financial institutions. In 2007, we acquired FNB Bancorporation. In 2009, we acquired certain banking offices and assumed certain deposit liabilities of Integra Bank,
as well as adding the investment professionals of TAM to the Banks trust department. Difficulty in integrating an acquired business or company such as those described above or other businesses we acquire in the future may cause BKFC not to
realize expected revenue increases, cost savings, increases in geographic or product presence, and/or other projected benefits. The integration could result in higher than expected customer deposit attrition (run-off), loss of key employees,
disruption of BKFCs business or the business of the acquired company, or otherwise adversely affect BKFCs ability to maintain relationships with customers and employees or achieve the anticipated benefits of the acquisition. Also, the
negative effect of any divestitures required by regulatory authorities in acquisitions or business combinations may be greater than expected.

Some provisions contained in BKFCs articles of incorporation and bylaws and under Kentucky law could deter a takeover attempt or delay changes
in control or management of BKFC.



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Certain provisions of BKFCs articles of incorporation and bylaws may make it more
difficult to acquire control of BKFC by means of a tender offer, open market purchase, proxy fight or otherwise. For example, the articles require the affirmative vote of a majority of the outstanding voting power of BKFC or, if the Board of
Directors recommends against the approval of certain matters, by the holders of at least 75% of the voting power to, among other things, adopt (i) an amendment to the articles or bylaws, (ii) an agreement of merger or consolidation,
(iii) a proposed combination or majority share acquisition involving the issuance of shares of BKFC and requiring shareholder approval, and (iv) a proposal to sell, exchange, transfer or otherwise dispose of all, or substantially all, of
BKFCs assets.

Additionally, certain provisions of the Kentucky Business Corporation Act that apply to BKFC limit the
ability of certain shareholders to engage in business combinations with the company in which they own shares.

Such provisions
of the articles, bylaws and Kentucky law may have the effect of deterring takeovers or delaying changes in control or management of BKFC.

The Treasury Departments investment in BKFC imposes restrictions and obligations limiting BKFCs ability to increase dividends, repurchase
Common Stock or preferred stock and access the equity capital markets.

Unless BKFC has redeemed all of the Series A
Preferred Stock issued to the Treasury Department as part of the CPP, or unless the Treasury Department has transferred all of the Series A Preferred Stock to a third party, the consent of the Treasury Department will be required for BKFC to, among
other things, increase Common Stock dividends or effect repurchases of Common Stock (with certain exceptions). BKFC has also granted registration rights to the Treasury Department pursuant to which BKFC has agreed to lock-up periods prior to and
following the effective date of an underwritten offering of the Series A Preferred Stock, the Warrant or the underlying Common Stock held by the Treasury Department, during such time when BKFC would be unable to issue equity securities.

The Treasury Departments investment in BKFC may dilute earnings, encumber earnings to pay preferred dividends and require BKFC to accrue the
related discount through earnings.

Full exercise of the Warrant issued to the Treasury Department as part of the CPP will
dilute BKFCs common shareholders by approximately 3.70%, based upon the approximately 7,432,295 shares of BKFCs Common Stock issued and outstanding as of March 1, 2010. Should the market value of BKFCs Common Stock increase
above the exercise price of $18.56 per common share prior to the exercise of the Warrant, accounting rules will require additional shares to be included in the fully diluted share count, and will effectively reduce reported diluted earnings per
share to common shareholders. If the Warrant is exercised, dividends would become payable with respect to the newly issued shares. Likewise, in a scenario in which BKFCs management might prefer to repurchase the Warrant, if the market price of
the Common Stock is significantly above the exercise price of the Warrant, the value of the Warrant would rise with the market price of the Common Stock. In such a scenario, a higher amount of cash would be needed to repurchase the Warrant, reducing
capital surplus. Furthermore, a scenario involving early redemption of the Series A Preferred Stock issued to the Treasury Department will require the acceleration of the associated discount through earnings available for common shareholders. If not
redeemed by February 15, 2014, the annual dividend payments on the Series A Preferred Stock will increase from 5.00% per annum to 9.00% per annum. If BKFC is unable to redeem the Series A Preferred Stock at or prior to
February 15, 2014, then this higher dividend rate may be financially unattractive to BKFC relative to the cost of capital under the market conditions prevailing after that date.

In addition, BKFC is required by accounting rules to accrete the deemed discount on the Series A Preferred Stock issued to the Treasury
Department through earnings available to common shareholders. The remaining discount will accrete through February 15, 2012 at an amount of approximately $183,000 annually, reducing earnings available to common shareholders. If the Series A
Preferred Stock is redeemed early by BKFC, accretion of the remaining discount will be accelerated through earnings available to common shareholders at that time.

Any future FDIC premiums or special assessments will adversely impact our earnings.

On May 22, 2009, the FDIC adopted a final rule levying a five basis point special assessment on each insured depository institutions assets minus Tier 1 capital as of June 30, 2009. BKFC
recorded an expense of $601,000 for the fiscal year ended December 31, 2009, to reflect the special assessment. Any further special assessments that the FDIC levies will be recorded as an expense during the appropriate period. In addition, the
FDIC increased the general assessment rate and, therefore, our FDIC general insurance premium expense will increase compared to prior periods.



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On November 12, 2009, the FDIC adopted regulations that require insured depository
institutions to prepay on December 30, 2009 their estimated assessments for the fourth calendar quarter of 2009, and for all of 2010, 2011 and 2012. The new regulations base the assessment rate for the fourth calendar quarter of 2009 and for
2010 on each institutions total base assessment rate for the third quarter of 2009, modified to assume that the assessment rate in effect on September 30, 2009 had been in effect for the entire third quarter, and the assessment rate
for 2011 and 2012 on the modified third quarter assessment base, adjusted quarterly for an estimated 5% annual growth rate in the assessment base through the end of 2012. Under the prepaid assessment rule, we were required to make a payment of
approximately $6.7 million to the FDIC on December 30, 2009, and to record the payment as a prepaid expense, which will be amortized to expense over three years. In addition, the FDIC is required under the Dodd-Frank Act to amend its
regulations to base deposit insurance assessments on an insured depository institutions average consolidated total assets minus its average tangible equity, rather than on its deposit base.



|Item 1B. | Unresolved Staff Comments
|-------- | -------------------------

None.



|Item 2. | Properties
|------- | ----------

BKFC
maintains its principal executive offices at 111 Lookout Farm Drive, Crestview Hills, Kentucky 41017, which is owned by BKFC. Of the 31 branch locations operated by the Bank, 17 are owned and 14 are leased. Certain of these leases are with
affiliates and affiliated entities. The Bank also leases space for its cash management operations center.

No one facility is
material to BKFC. Management believes that the facilities are generally in good condition and suitable for its banking operations. However, management continually looks for opportunities to upgrade its facilities and locations and may do so in the
future.



|Item 3. | Legal Proceedings
|------- | -----------------

From
time to time, BKFC and the Bank are involved in litigation incidental to the conduct of its business, but neither BKFC nor the Bank is presently involved in any lawsuit or proceeding which, in the opinion of management, is likely to have a material
adverse affect on BKFC.



|Item 4. | (Removed and Reserved)
|------- | ----------------------



33



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##### Table of Contents

PART II



|Item 5. | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
|------- | ------------------------------------------------------------------------------------------------------------

LOGO



|                                       |  |               |        |  |          |  |        |          |  |  |          |  |  |          |       |  |          |  |       |  |  |  |        | 
|-------------------------------------- |  | ------------- | ------ |  | -------- |  | ------ | -------- |  |  | -------- |  |  | -------- | ----- |  | -------- |  | ----- |  |  |  | ------ | 
|                                       |  | Period Ending |       
|Index                                  |  | 12/31/05      |        |  | 12/31/06 |  |        | 12/31/07 |  |  | 12/31/08 |  |  | 12/31/09 |       |  | 12/31/10 | 
|Bank of Kentucky Financial Corporation |  |               | 100.00 |  |          |  | 102.44 |          |  |  | 99.31    |  |  |          | 88.56 |  |          |  | 78.71 |  |  |  | 83.71  | 
|Russell 2000                           |  |               | 100.00 |  |          |  | 118.37 |          |  |  | 116.51   |  |  |          | 77.15 |  |          |  | 98.11 |  |  |  | 124.46 | 
|SNL Bank $1B-$5B                       |  |               | 100.00 |  |          |  | 115.72 |          |  |  | 84.29    |  |  |          | 69.91 |  |          |  | 50.11 |  |  |  | 56.81  | 

Market
Information. BKFCs Common Stock is quoted on the NASDAQ (Global Market) under the symbol BKYF. Quarterly high and low prices for the last two fiscal years (which reflect inter-dealer prices, without retail mark-up, mark-down or
commission, and may not necessarily represent actual transactions) are shown below.



|                 |  |      |       |  |     |   |       |  |  |                  |  |                |  |   |       |  |  |   |       | 
|---------------- |  | ---- | ----- |  | --- | - | ----- |  |  | ---------------- |  | -------------- |  | - | ----- |  |  | - | ----- | 
|Fiscal Year 2010 |  | High |       |  | Low |   |       |  |  | Fiscal Year 2009 |  | High           |  |   | Low   | 
|First Quarter    |  | $    | 22.44 |  |     | $ | 18.18 |  |  |                  |  | First Quarter  |  | $ | 21.99 |  |  | $ | 15.25 | 
|Second Quarter   |  |      | 20.99 |  |     |   | 14.65 |  |  |                  |  | Second Quarter |  |   | 28.24 |  |  |   | 17.49 | 
|Third Quarter    |  |      | 19.45 |  |     |   | 15.68 |  |  |                  |  | Third Quarter  |  |   | 29.98 |  |  |   | 21.16 | 
|Fourth Quarter   |  |      | 20.04 |  |     |   | 16.00 |  |  |                  |  | Fourth Quarter |  |   | 23.54 |  |  |   | 18.13 | 

Holders and
Dividends. There were 7,432,295 shares of Common Stock outstanding on December 31, 2010, which were held of record by 855 shareholders. The Board of Directors declared cash dividends of $.28 per share in March 2009, $.28 per share in
September 2009, $.28 per share in March 2010, and $.28 per share in September 2010.



34



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##### Table of Contents

Equity Compensation Plan Information. The following table reflects BKFCs equity
compensation plan information as of December 31, 2010.



|                                                           |  |                                                                       |         |  |                                                      |   |       |                                                            |  |  |           | 
|---------------------------------------------------------- |  | --------------------------------------------------------------------- | ------- |  | ---------------------------------------------------- | - | ----- | ---------------------------------------------------------- |  |  | --------- | 
|                                                           |  | Number of Securitiesto 
be Issued Upon Exerciseof Outstanding Options |         |  | Weighted AverageExercise Price
ofOutstanding Options |   |       | Number of SecuritiesRemaining Available forFuture Issuance | 
|Equity Compensation Plans Approved by Security Holders*    |  |                                                                       | 523,730 |  |                                                      | $ | 25.34 |                                                            |  |  | 1,041,155 | 
|Equity Compensation Plans Not Approved by Security Holders |  |                                                                       | N/A     |  |                                                      |   | N/A   |                                                            |  |  | N/A       | 
|Total                                                      |  |                                                                       | 523,730 |  |                                                      | $ | 25.34 |                                                            |  |  | 1,041,155 | 



|(*) | Consists of The Bank of Kentucky Financial Corporation 1997 Stock Option and Incentive Plan, approved by the shareholders of BKFC in 1997, and The Bank of Kentucky
Financial Corporation 2007 Stock Option and Incentive Plan, approved by the shareholders of BKFC.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Issuer
Purchases. As of January 1, 2010, BKFC does not have any repurchase program in place.



|Item 6. | Selected Financial Data
|------- | -----------------------

SELECTED FINANCIAL DATA

The following is a summary of selected consolidated financial data for The Bank of Kentucky Financial Corporation for the five years ended
December 31, 2010. The summary should be read in conjunction with the Financial Statements and Notes to Consolidated Financial Statements.



|                                                  |      |                              |           |      |  |   |           |   |  |      |           |   |      |   |           |   |  |   |           |  
|------------------------------------------------- | ---- | ---------------------------- | --------- | ---- |  | - | --------- | - |  | ---- | --------- | - | ---- | - | --------- | - |  | - | --------- | -
|(Dollars In Thousands Except Per Share Amounts)   |      | For Year Ended December 31st |          
|                                                  | 2010 |                              |           | 2009 |  |   | 2008      |   |  | 2007 |           |   | 2006 |  
|Earnings:                                         |      |                              |           |      |  |   |           |   |  |      |           |   |      |   |           |   |  |   |           |  
|Total Interest Income                             |      | $                            | 66,682    |      |  | $ | 62,750    |   |  | $    | 68,682    |   |      | $ | 75,713    |   |  | $ | 63,617    |  
|Total Interest Expense                            |      |                              | 13,273    |      |  |   | 17,957    |   |  |      | 28,020    |   |      |   | 38,477    |   |  |   | 29,324    |  
|                                                  |      |                              |           |      |  |   |           |   |  |      |           |   |      |   |           |   |  |   |           |  
|Net Interest Income                               |      |                              | 53,409    |      |  |   | 44,793    |   |  |      | 40,662    |   |      |   | 37,236    |   |  |   | 34,293    |  
|Provision for Loan Losses                         |      |                              | 15,500    |      |  |   | 12,825    |   |  |      | 4,850     |   |      |   | 1,575     |   |  |   | 1,700     |  
|Noninterest Income                                |      |                              | 20,714    |      |  |   | 16,616    |   |  |      | 14,768    |   |      |   | 14,043    |   |  |   | 11,788    |  
|Noninterest Expense                               |      |                              | 42,424    |      |  |   | 36,677    |   |  |      | 34,223    |   |      |   | 33,719    |   |  |   | 29,142    |  
|                                                  |      |                              |           |      |  |   |           |   |  |      |           |   |      |   |           |   |  |   |           |  
|Income Before Income Taxes                        |      |                              | 16,199    |      |  |   | 11,907    |   |  |      | 16,357    |   |      |   | 15,985    |   |  |   | 15,239    |  
|Federal Income Taxes                              |      |                              | 4,528     |      |  |   | 3,147     |   |  |      | 5,016     |   |      |   | 4,854     |   |  |   | 4,787     |  
|                                                  |      |                              |           |      |  |   |           |   |  |      |           |   |      |   |           |   |  |   |           |  
|Net Income                                        |      | $                            | 11,671    |      |  | $ | 8,760     |   |  | $    | 11,341    |   |      | $ | 11,131    |   |  | $ | 10,452    |  
|                                                  |      |                              |           |      |  |   |           |   |  |      |           |   |      |   |           |   |  |   |           |  
|Preferred stock dividend and discount accretion   |      |                              | 2,246     |      |  |   | 1,792     |   |  |      |          |   |      |   |          |   |  |   |          |  
|Net Income available to common shareholders       |      | $                            | 9,425     |      |  | $ | 6,968     |   |  | $    | 11,341    |   |      | $ | 11,131    |   |  | $ | 10,452    |  
|                                                  |      |                              |           |      |  |   |           |   |  |      |           |   |      |   |           |   |  |   |           |  
|Per Common Share Data:                            |      |                              |           |      |  |   |           |   |  |      |           |   |      |   |           |   |  |   |           |  
|Basic Earnings                                    |      | $                            | 1.61      |      |  | $ | 1.24      |   |  | $    | 2.02      |   |      | $ | 1.93      |   |  | $ | 1.79      |  
|Diluted Earnings                                  |      |                              | 1.61      |      |  |   | 1.23      |   |  |      | 2.02      |   |      |   | 1.93      |   |  |   | 1.78      |  
|Dividends Declared and Paid                       |      |                              | 0.56      |      |  |   | 0.56      |   |  |      | 0.54      |   |      |   | 0.46      |   |  |   | 0.38      |  
|Balances at December 31:                          |      |                              |           |      |  |   |           |   |  |      |           |   |      |   |           |   |  |   |           |  
|Total Investment Securities                       |      |                              | 285,226   |      |  |   | 214,567   |   |  |      | 119,212   |   |      |   | 168,299   |   |  |   | 118,954   |  
|Gross Loans                                       |      |                              | 1,106,009 |      |  |   | 1,154,984 |   |  |      | 1,026,557 |   |      |   | 949,714   |   |  |   | 814,101   |  
|Allowance for Loan Losses                         |      |                              | 17,368    |      |  |   | 15,153    |   |  |      | 9,910     |   |      |   | 8,505     |   |  |   | 6,918     |  
|Total Assets                                      |      |                              | 1,664,884 |      |  |   | 1,564,998 |   |  |      | 1,255,382 |   |      |   | 1,232,724 |   |  |   | 1,051,563 |  
|Noninterest Bearing Deposits                      |      |                              | 260,992   |      |  |   | 200,069   |   |  |      | 157,082   |   |      |   | 167,578   |   |  |   | 149,519   |  
|Interest Bearing Deposits                         |      |                              | 1,161,320 |      |  |   | 1,143,203 |   |  |      | 914,071   |   |      |   | 894,501   |   |  |   | 764,908   |  
|Total Deposits                                    |      |                              | 1,422,312 |      |  |   | 1,343,272 |   |  |      | 1,071,153 |   |      |   | 1,062,079 |   |  |   | 914,427   |  
|Total Shareholders Equity                        |      |                              | 159,370   |      |  |   | 141,133   |   |  |      | 101,448   |   |      |   | 93,485    |   |  |   | 86,883    |  
|Other Statistical Information:                    |      |                              |           |      |  |   |           |   |  |      |           |   |      |   |           |   |  |   |           |  
|Return on Average Assets                          |      |                              | .75       | %    |  |   | .65       | % |  |      | .93       | % |      |   | .99       | % |  |   | 1.08      | %
|Return on Average Equity                          |      |                              | 8.23      | %    |  |   | 6.66      | % |  |      | 11.80     | % |      |   | 12.39     | % |  |   | 12.58     | %
|Dividend Payout Ratio                             |      |                              | 34.78     | %    |  |   | 45.16     | % |  |      | 26.79     | % |      |   | 23.83     | % |  |   | 21.22     | %
|Capital Ratios at December 31:                    |      |                              |           |      |  |   |           |   |  |      |           |   |      |   |           |   |  |   |           |  
|Total Equity to Total Assets                      |      |                              | 9.57      | %    |  |   | 9.02      | % |  |      | 8.08      | % |      |   | 7.58      | % |  |   | 8.26      | %
|Tier 1 Leverage Ratio                             |      |                              | 9.41      | %    |  |   | 8.94      | % |  |      | 7.96      | % |      |   | 7.91      | % |  |   | 9.13      | %
|Tier 1 Capital to Risk-Weighted                   |      |                              | 11.02     | %    |  |   | 9.42      | % |  |      | 8.19      | % |      |   | 8.34      | % |  |   | 9.48      | %
|Total Risk-Based Capital to Risk- Weighted Assets |      |                              | 13.77     | %    |  |   | 12.02     | % |  |      | 10.73     | % |      |   | 10.12     | % |  |   | 10.20     | %
|Loan Quality Ratios:                              |      |                              |           |      |  |   |           |   |  |      |           |   |      |   |           |   |  |   |           |  
|Allowance for Loan Losses                         |      |                              |           |      |  |   |           |   |  |      |           |   |      |   |           |   |  |   |           |  
|To Total Loans at year-end                        |      |                              | 1.57      | %    |  |   | 1.31      | % |  |      | .97       | % |      |   | .90       | % |  |   | .85       | %
|Allowance for Loan Losses                         |      |                              |           |      |  |   |           |   |  |      |           |   |      |   |           |   |  |   |           |  
|To Non-performing Loans at year-end               |      |                              | 82.46     | %    |  |   | 59.28     | % |  |      | 97.77     | % |      |   | 97.33     | % |  |   | 139.11    | %
|Net Charge-Offs to Average Net Loans              |      |                              | 1.20      | %    |  |   | 0.71      | % |  |      | 0.35      | % |      |   | 0.11      | % |  |   | 0.30      | %



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|Item 7. | Managements Discussion and Analysis of Financial Condition and Results of Operation
|------- | ------------------------------------------------------------------------------------

The objective of this section is to help shareholders and potential investors understand our views on our results of operations and financial condition. You should read this discussion in conjunction with
the consolidated financial statements and notes to the consolidated financial statements that appear elsewhere in this Annual Report. References to we, us, and our in this section refer to BKFC and its
subsidiaries, including the Bank, unless otherwise specified or unless the context otherwise requires.

FORWARD LOOKING
STATEMENTS

Certain statements contained in this report which are not statements of historical fact constitute forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995. Examples of forward-looking statements include, but are not limited to, projections of revenues, income or loss, earnings or loss per share, the payment or non-payment of
dividends, capital structure and other financial items; statements of plans and objectives of us or our management or Board of Directors; and statements of future economic performance and statements of assumptions underlying such statements. Words
such as believes, anticipates, intends, and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.

Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those in such statements. Factors that
could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to, the following:



| |  |  | indications of an improving economy may prove to be premature;
| | - |  | --------------------------------------------------------------



| |  |  | general economic or industry conditions could be less favorable than expected, resulting in a deterioration in credit quality, a change in the
allowance for credit losses, or a reduced demand for credit or fee-based products and services;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes or volatility in interest rates may adversely impact the value of securities, loans, deposits and other financial instruments and the interest
rate sensitivity of our balance sheet as well as our liquidity;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to determine accurate values of certain assets and liabilities;
| | - |  | ---------------------------------------------------------------------------



| |  |  | the impact of turmoil in the financial markets and the effectiveness of governmental actions taken in response, and the effect of such governmental
actions on us, our competitors and counterparties, financial markets generally and availability of credit specifically;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | limitations on our ability to return capital to shareholders and potential dilution of our Common Stock as a result of the Treasury Departments
investment under the terms of the TARP CPP;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes in the extensive laws, regulations and policies governing financial services companies, including the Dodd-Frank Act and any regulations
promulgated thereunder;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the potential need to adapt to industry changes in information technology systems, on which the Bank is highly dependent, could present operational
issues or require significant capital spending;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | competitive pressures could intensify and affect the Banks profitability, including as a result of continued industry consolidation, the
increased availability of financial services from non-banks, technological developments or bank regulatory reform;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

| |  |  | acquisitions may not produce revenue enhancements or cost savings at levels or within timeframes originally anticipated, or may result in unforeseen
integration difficulties; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | other risks and uncertainties summarized above under Item 1A. Risk Factors, in this Annual Report.
| | - |  | ----------------------------------------------------------------------------------------------------

Any forward-looking statements made by us or on our behalf speak only as of the date they are made, and we do not undertake any obligation to update any
forward-looking statement to reflect the impact of subsequent events or circumstances. Before making an investment decision, you should carefully consider all risks and uncertainties disclosed in our other public documents on file with the SEC.

OVERVIEW

The business of BKFC consists of holding and administering its interest in the Bank. The Bank conducts basic banking operations from locations in Boone,
Kenton, Campbell, Grant and Gallatin Counties in northern Kentucky and also in greater Cincinnati, Ohio. The majority of BKFCs revenue is derived from the Banks loan portfolio. The loan portfolio is diversified and the ability of
borrowers to repay their loans is not dependent upon any single industry. The majority of the Banks loan portfolio, approximately 77%, consists of loans secured by or with real estate. Loans secured by or with real estate are further
categorized down by loan type and borrower. Included in loans secured with or by real estate as of December 31, 2010 are residential real estate loans, commercial real estate loans, and owner-occupied commercial real estate loans.

Economic Overview

Like many other
financial institutions, we have been affected by the national economic recession. The strength of the economic recovery in the geographic markets where we operate, and the United States in general, varied throughout 2010, although 2010 ended with a
positive tone. During the first quarter of 2010, gross domestic product (GDP) increased 3.7%, the second biggest quarterly increase since the recession began in December of 2007. GDP growth continued into the second and third quarters of
2010, although at a lower level. The average quarterly GDP growth of 2.7% for the first three quarters of 2010 represents a significant improvement from the 2009 average quarterly change in GDP of .25% and also outpaces the ten-year average of 1.7%.
Growth in 2010 was supported by businesses rebuilding inventory levels and capital spending on equipment and software.

Growth was also
sustained by increasing contributions from consumer spending, which grew at an average monthly rate of .3% for 2010, matching the rate of growth in 2009. Unemployment declined modestly, beginning the year at 9.9% and ending at 9.4%. Home values were
mostly stable and equities were volatile but finished the year with mid double digit gains. Double dip fears, global macro concerns, and a mid-summer soft patch of economic data led to another round of quantitative easing by the FRB. This additional
monetary easing combined with fiscal stimulus from larger than expected tax cuts, gave the economy a boost in the last few months of 2010.

Regulatory Reform Developments

As
discussed in more detail above, on July 21, 2010, President Obama signed the Dodd-Frank Act into law. The Dodd-Frank Act is intended to address perceived deficiencies and gaps in the regulatory framework for financial services in the United
States, reduce the risks of bank failures and better equip the nations regulators to guard against or mitigate any future financial crises, and manage systemic risk through increased supervision of systemically important financial companies
(including nonbank financial companies). The Dodd-Frank Act implements numerous and far-reaching changes across the financial landscape affecting financial companies, including banks and bank holding companies such as BKFC. For a review of the
various changes that the Dodd-Frank Act implements, see the Regulation and Supervision  The Dodd-Frank Act in Item 1. Business of this Annual Report. Many of the rulemakings required by the various regulatory agencies
are still in the process of being developed and/or implemented.

2010 Common Stock Offering; Partial CPP Repurchase



37



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During 2010, BKFC completed a secondary public offering of 1,765,588 shares of Common Stock at $17.00 per
share, for net proceeds of approximately $28.2 million. This offering was followed by the Companys repurchase, on December 22, 2010, of $17 million of the outstanding $34 million in Series A Preferred Stock issued in conjunction with the
TARP CPP.

The Common Stock offering and the subsequent repurchase of one-half of the Treasury Departments CPP investment was an
important step towards BKFCs complete exit out of the CPP. Management originally decided to participate in the CPP in 2009 to reinforce its strong capital position, advance the Treasury Departments efforts to facilitate additional
lending in the markets in which the Bank operates, maintain its competitive advantage over its less well-capitalized competitors, ensure sufficient capital to support future acquisitions and support its general operations. Management believes that
BKFC has achieved these goals that were established when the TARP investment was made. Subject to receiving all necessary regulatory approvals, management intends to cause BKFC to repurchase the remaining CPP investment as soon as reasonably
possible through current earnings, additional capital raising, or a combination of both. For additional information see Capital Purchase Program below.

2010 Performance Overview

While the economy continued to show signs of improvement during
2010, strong revenue growth overcame higher provisioning expense to produce a 35% increase in net income available to BKFC common shareholders in 2010 as compared to 2009. Total revenue increased 21% in 2010, offsetting a 21% increase in the
provision for loan losses and the 16% increase in non-interest expense. This revenue increase included a $8,616,000 or 19%, increase in net interest income and a $4,098,000 or 25%, increase in non-interest income.

Two acquisitions that were completed in the fourth quarter of 2009 had a significant impact on the Companys 2010 income as compared to 2009. In the
fourth quarter of 2009 the Bank completed the purchase of three banking offices of Integra Bank and a portfolio of selected commercial loans originated by Integra Banks Covington, Kentucky loan production office. This transaction added $76
million in deposits and $107 million in loans. The Bank also completed the purchase of TAM during the fourth quarter of 2009.

Although BKFC
continued to experience an increase in defaults and foreclosures during fiscal 2010, such default levels have been significantly less as compared to other regions of the country. This is due, in part, to the fact that BKFCs market in northern
Kentucky and Cincinnati did not experience as dramatic a rise in real estate values over the last several years as compared to other markets, such as Florida and California. While BKFCs local markets have not been affected as severely as other
markets, management continues to closely monitor developments in the real estate market, given that the majority of the Banks loan portfolio is real estate related.

While the level of resources devoted to the credit review function and working out problem loans continued to be high in 2010, BKFC did not make significant changes to its loan underwriting standards.
BKFCs willingness to make loans to qualified applicants that meet its traditional, prudent lending standards has not changed.

As
discussed above, current economic conditions facing the country and the region in which BKFC operates was a significant factor affecting the 2010 financial results. In particular, high unemployment and falling real estate values continued to place
significant economic strain on a majority of the Banks business partners. The Banks loan portfolio has been most significantly affected by economic conditions. The credit quality metrics of the Banks loan portfolio continued to
show the strain of these economic conditions in 2010. While charge-offs increased from 2009 due to these economic strains and falling real estate values, non-performing loans decreased in 2010, although they remained at historically high levels.
Charge-offs increased from $7,582,000 in 2009 to $13,285,000 in 2010, while non-performing loans decreased from $25,562,000 at the end of 2009 to $21,062,000 at the end of 2010. These credit quality metrics led the Bank to provide $15,500,000 in the
provision for loans losses in 2010 versus $12,825,000 in 2009. As a result, the allowance for loan losses rose from $15,153,000 at December 31, 2009 to $17,368,000 at December 31, 2010 to be directionally consistent with the economic
strains on the Banks loan portfolio. On a quarterly, sequential basis, management saw improving credit metrics throughout 2010, as net charge-offs decreased from $7,623,000 in the first half of 2010 to $5,662,000 in the second half of 2010.
However, management sees continued economic strain in 2011 despite the economic recovery, and expects continuing higher than normal credit losses and provisioning expense in the foreseeable future.

The following sections provide more detail on subjects presented in this overview.



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CAPITAL PURCHASE PROGRAM

On February 13, 2009, BKFC entered into the Purchase Agreement with the Treasury Department under the CPP, pursuant to which BKFC agreed to issue 34,000 shares of Series A Preferred Stock, for a
total price of $34 million. The Series A Preferred Stock pays cumulative dividends at a rate of 5% per year for the first five years and thereafter at a rate of 9% per year. The Series A Preferred Stock and the Warrant were originally
issued in a private placement exempt from registration pursuant to Section 4(2) of the Securities Act of 1933. BKFC is further required pursuant to the terms of the Purchase Agreement to register the resale of the Series A Preferred Stock, the
Warrant and the issuance of shares of Common Stock upon exercise of the Warrant with the SEC. The Warrant has been exercisable since February 13, 2009, its date of issuance.

BKFC chose to participate in the CPP in order to reinforce its strong capital position, advance the Treasury Departments efforts to facilitate additional lending in the markets in which the Bank
operates, maintain its competitive advantage over its less well-capitalized competitors, ensure sufficient capital to support future acquisitions and support its general operations. BKFCs decision to participate in the CPP was also affected by
discussions with its regulators, including the FDIC and the Federal Reserve Bank of Cleveland. In light of the turmoil in the banking sector, uncertainty as to government action in the future with respect to risk-based capital guidelines, as well as
the general economy as a whole, BKFC elected to request the maximum amount available for investment by the Treasury Department under the CPP (3% of the Banks risk-weighted assets) for the reasons described above.

As discussed above, on December 22, 2010, BKFC used a portion of the proceeds from its secondary Common Stock offering to repurchase $17 million of
the outstanding $34 million of Series A Preferred Stock. As a result, $17 million of Series A Preferred Stock remains outstanding, as well as the Warrant for 274,784 shares originally issued to the Treasury Department. Accordingly, BKFC remains
subject to the restrictions applicable to CPP participants.

Use of Capital

The CPP funds have not been segregated from BKFCs other funds, and thus those funds cannot be directly traced through BKFCs balance sheet.

Based on analysis of the market conditions at the time of issuance, BKFC determined that the proceeds of the Treasury Departments investment in its
Series A Preferred Stock initially would be best deployed in U.S. government agency MBS until loan demand improved. BKFC retained $9 million of the proceeds to extinguish short term debt and further augment its capital position, and invested the
remaining $25 million in the Bank. In turn, the Bank invested the $25 million of the proceeds, along with other funds obtained, to leverage the CPP investment, in MBS pending deployment in more permanent uses such as for acquisitions and to support
loan growth. With these investments, BKFC provided incremental liquidity to the residential mortgage markets and at the same time obtained products that generate cash flow. BKFC is holding the MBS assets on its balance sheet as available for sale.
BKFC intends to utilize its cash flows, including those derived from its MBS investments and the proceeds of any sale or disposition of its MBS investments, to fund commercial and residential loans that meet BKFCs long-standing prudent lending
standards as the demand for high-quality loans rises in the markets it serves and otherwise support its business.

BKFC is committed to making
credit available to the markets it serves and fulfilling the needs of its customers. To ensure that all lending growth opportunities are addressed, the Bank in 2008 implemented a new loan committee structure, adding the Banks Chief Executive
Officer to the Banks loan committee to further scrutinize credit decisions. Additionally, the Bank established a problem-asset workout group in 2009. In addition to managing distressed assets, this group provides advice and support for the
Banks lending professionals with respect to those relationships that are showing signs of stress, but have not elevated to the point of transfer to workout, to address the needs of existing clients. In certain sectors, such as commercial
lending, loan demand has diminished, consistent with the overall economy, as customers have taken a conservative direction and postponed investments. Conversely, residential mortgage activity increased in 2009 and 2010 in response to favorable
interest rates and new government



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agency programs. While the CPP funds have not been segregated, and this increased lending is not directly traceable in a dollar-for-dollar manner to the CPP, the CPP investment has strengthened
BKFCs balance sheet and capital position.

In addition, BKFC has not experienced the level of stress or deterioration in its residential
real estate portfolio that other financial institutions may be experiencing, and the Bank has not created or marketed to its customers any sub-prime loan products, does not service mortgages for other institutions and otherwise follows a strategy in
selling the majority of the Banks residential loans into the secondary market. In the majority of situations, the Bank follows the underwriting guidelines of the various government agencies on loans the Bank seeks to portfolio. For the year
ended December 31, 2010, the Banks residential real estate loan production was $166.3 million, which was 15% higher than the $144.5 million of loans originated in 2009. Of this, sold loans totaled $148.1 million, while portfolio and
construction loans totaled $7.4 million and $10.8 million, respectively. The average balance of amortizing portfolio loans during 2010 was $113.6 million compared to $109 million in 2009 and $102.4 million in 2008. Residential real estate
charge-offs in this portfolio in 2010 were .91% compared to 2009 and 2008 which were .58% and .39% respectively. Delinquencies have been moderate, and non-accruals were $3.45 million as of December 31, 2010 versus $112.7 million outstanding
(amortizing portfolio loan balances), or 3.06%. These statistics are a result of the Banks underwriting and collection practices. The Bank has also added full time equivalent resources to its collections department, allowing the Bank to make
more frequent and earlier collection calls, resulting in better working relationships with those borrowers who may have difficulty in making timely payments.

Effects of CPP Participation

The terms of the Series A Preferred Stock provide that, in
the event BKFC defaults on the payment of dividends due on the Series A Preferred Stock for an aggregate of six quarters or more, the Board of Directors of BKFC shall be automatically increased by two positions, and the holders of the Series A
Preferred Stock shall have the right to elect two directors to fill those positions. BKFC did not need to amend its bylaws to increase the maximum size of the Board of Directors in order to accommodate an election of those two directors. BKFC did
not have any other senior class of securities outstanding at the time it entered into the Purchase Agreement.

With respect to BKFCs
day-to-day operations, participation in the CPP heightened the focus on originating new loans that meet the Banks prudent lending standards and strengthened BKFCs capital ratios. For example, at December 1, 2008 (prior to the CPP
transaction), BKFCs ratios of Total Capital to Risk Weighted Assets, Tier 1 Capital to Risk Weighted Assets and Tier 1 Capital to Average Assets were 10.73%, 8.19% and 7.96%, respectively. At March 31, 2009 (following the
February 13, 2009 CPP transaction) BKFCs ratios of Total Capital to Risk Weighted Assets, Tier 1 Capital to Risk Weighted Assets and Tier 1 Capital to Average Assets were 13.57%, 11.01% and 11.05%, respectively. However, it should be
noted that, prior to BKFCs participation in the CPP, both it and the Bank were well-capitalized. At December 31, 2010, BKFCs ratios of Total Capital to Risk Weighted Assets, Tier 1 Capital to Risk Weighted Assets and Tier 1 Capital
to Average Assets were 13.77%, 11.02% and 9.41%, respectively, each of these ratios exceeded the respective ratios of 10.00%, 6.00% and 5.00%, which are the minimum ratios of regulatory capital required to be well-capitalized.

BKFCs participation in the CPP has affected, and will continue to affect (until no obligations remain outstanding under the CPP), the income
available to common shareholders in two ways: (i) BKFC agreed in the Purchase Agreement to not pay any dividend on the Common Stock prior to February 13, 2012 other than regular quarterly cash dividends of not more than $0.28 per share of
Common Stock, and (ii) the dividend payments which are due on the Series A Preferred Stock have the effect of reducing the net income otherwise available to the common shareholders. The terms of the Purchase Agreement prohibit repurchases of
Common Stock (although there was no intent, at the time of the issuance of the Series A Preferred Stock, for BKFC to buy back or otherwise repurchase any of its Common Stock).

Until such time as BKFC has completed the repurchase of the remaining $17 million of CPP investment held by the Treasury Department, BKFC will continue to comply with the executive compensation and
corporate governance requirements of each of the EESA, the ARRA and any subsequent legislation, regulations or guidance for so long as the Series A Preferred Stock or any other security acquired under the Purchase Agreement is held by the Treasury
Department. As required by the EESA and ARRA, BKFC has limited the Section 162(m) tax



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deduction for executive compensation to $500,000 per year for any senior executive officer for so long as the Series A Preferred Stock or any other security acquired under the Purchase Agreement
is held by the Treasury Department.

An executive compensation risk assessment was performed by BKFCs senior risk officers. Based on the
materials reviewed, BKFCs senior risk officers concluded that the executive compensation and incentive program as then in effect did not encourage the senior executive officers to take unnecessary and excessive risks. The findings of this risk
assessment were presented to the Compensation Committee of the Board of Directors and final conclusions were provided to the full Board of Directors. A certification statement has been included within the Compensation Committee Report of the BKFC
2010 Proxy Statement. This risk assessment will occur each year in which the Series A Preferred Stock or any other security acquired under the Purchase Agreement is held by the Treasury Department. In addition, the Compensation Committee, which is
composed entirely of independent directors, will discuss BKFCs compensation arrangements in light of such risk assessment at least semi-annually for so long as the Series A Preferred Stock or any other security acquired under the Purchase
Agreement is held by the Treasury Department. BKFCs 2010 Proxy Statement permitted a nonbinding shareholder vote to provide advisory approval of the compensation of BKFCs executives.

CRITICAL ACCOUNTING POLICIES

BKFC has prepared all of the consolidated financial information in this Annual Report in accordance with GAAP. In preparing the consolidated financial statements in accordance with GAAP, BKFC makes
estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting
period. There can be no assurances that actual results will not differ from those estimates.

We have identified the accounting policy related
to the allowance for loan losses as critical to the understanding of BKFCs results of operations, since the application of this policy requires significant management assumptions and estimates that could result in reporting materially
different amounts if conditions or underlying circumstances were to change.

The Bank maintains an allowance to absorb probable, incurred loan
losses inherent in the loan portfolio. The allowance for loan losses is maintained at a level the Bank considers to be adequate and is based upon ongoing quarterly assessments and evaluations of the collectability and historical loss experience of
loans. Loan losses are charged and recoveries are credited to the allowance for loan losses. Provisions for loan losses are based on the Banks review of its historical loan loss experience and such factors that, in managements judgment,
deserve consideration under existing economic conditions in estimating probable loan losses. The Banks strategy for credit risk management includes a combination of well-defined credit policies, uniform underwriting criteria, and ongoing risk
monitoring and review processes for all commercial and consumer credit exposures. The credit risk management strategy also includes assessments of compliance with commercial and consumer policies, risk ratings and other important credit information.
The strategy also emphasizes regular credit examinations and management reviews of loans exhibiting deterioration in credit quality. The Bank strives to identify potential problem loans early and promptly undertake the appropriate actions necessary
to mitigate or eliminate the increasing risk identified in these loans.

The allowance for loan losses consists of two components, the
specific reserve, pursuant to ASC 310, Accounting by Creditors for Impairment of a Loan, and the general reserve, pursuant to ASC 450-10, Accounting for Contingencies. A loan is considered impaired when, based upon current information
and events it is probable that the bank will be unable to collect all amounts due according to the contractual terms of the loan. The specific reserve component is an estimate of loss based upon an impairment review of larger loans that are
considered impaired. The general reserve includes an estimate of commercial and consumer loans with similar characteristics. Depending on the set of facts with respect to a particular loan, the Bank utilizes one of the following methods for
determining the proper impairment of a loan:



| |  |  | the present value of expected future cash flows of a loan;
| | - |  | ----------------------------------------------------------



| |  |  | the market price of the loan based upon readily available information for that type of loan; and
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | the fair value of collateral.
| | - |  | -----------------------------



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The allowance established for impaired loans is generally based, for all collateral-dependent loans, on the
fair market value of the collateral, less the estimated cost to liquidate. For non-collateral dependent loans (such as accruing troubled debt restructurings), the allowance is based on the present value of expected future cash flows discounted by
the loans effective interest rate. A small portion of the Banks loans which are impaired under the ASC310 process carry no specific reserve allocation. These loans were reviewed for impairment and are considered adequately collateralized
with respect to their respective outstanding principal loan balances. The majority of these loans are loans which have had their respective impairment (or specific reserve) amounts charged off, or are loans related to other impaired loans which
continue to have a specific reserve allocation. It is the Banks practice to maintain these impaired loans, as analyzed and provided for in the ASC 310 component of the allowance for loan losses, to avoid double counting of any estimated losses
that may have been included in the ASC 450-10 component of the allowance for loan losses.

Generally, the Bank orders a new or updated
appraisal on real estate properties which are subject to an impairment review. Upon completion of the impairment review, loan reserves are increased as warranted. Charge-offs, if necessary, are generally recognized in a period after the reserves
were established. Adjustments to new or updated appraisal values are not typical, but in those cases when an adjustment is necessary, it is documented with supporting information and typically results in an adjustment to decrease the propertys
value because of additional information obtained concerning the property after the appraisal or update has been received by the Bank. The Banks practice is to obtain new or updated appraisals on the loans subject to impairment review. If a new
or updated appraisal is not available at the time of a loans impairment review, the Bank typically applies a discount to the value of an old appraisal to reflect the propertys current estimated value if there is believed to be
deterioration in either (i) the physical or economic aspects of the subject property or (ii) any market conditions. Updated valuations on 1 to 4 family residential properties with small to moderate values are generally accomplished by
obtaining an Automated Valuation Model (AVM) or a Brokers Price Opinion (BPO). Generally, an as is value is utilized in most of the Banks real estate based impairment analyses. However, under certain
limited circumstances an as stabilized valuation may be utilized, provided that the as stabilized value is tied to a well-justified action plan to bring the real estate project to a stabilized occupancy under a reasonable
period of time.

If a partially charged-off loan has been restructured in a manner that is reasonably assured of repayment and performance
according to prudently modified terms, and has sustained historical payment performance for a reasonable period of time prior to and/or after the restructuring, it may be returned to accrual status and is classified as a TDR loan. However, if the
above conditions can not be reasonably met, the loan remains on non-accrual status.

In addition, the Bank evaluates the collectability of
both principal and interest when assessing the need for loans to be placed on non-accrual status. Non-accrual status denotes loans in which, in the opinion of management, the collection of additional interest is unlikely. A loan is generally placed
on non-accrual status if: (i) it becomes 90 days or more past due (120 days past due for consumer loans); or (ii) for which payment in full of both principal and interest can not be reasonably expected.

Historical loss rates are applied to all other loans not subject to specific reserve allocations. The loss rates applied to loans are derived from
analyzing a range of the loss experience sustained on loans according to their internal risk rating. These loss rates may be adjusted to account for environmental factors, if warranted. The general reserve also includes homogeneous loans, such as
consumer installment, residential mortgage and home equity loans that are not individually risk graded. For these loans that are not individually risk graded, a range of historic loss experience of the portfolio is used to determine the appropriate
allowance for the portfolios. Allocations for the allowance are established for each pool of loans based on the expected net charge-offs for one year.

A high and low range of reserve percentages is calculated to recognize the imprecision in estimating and measuring loss when evaluating reserves for pools of loans. The position of the allowance for loan
losses within the computed range may be adjusted for significant factors that, in managements judgment, reflect the impact of any current conditions of credit quality. Factors that management considers in this analysis include the effects of
the local economy, trends in the nature and volume of loans (delinquencies, charge-offs and non-accrual loans), changes in mix of loans, asset quality trends, risk management and loan administration, changes in the internal lending policies and
credit standards, and an examination of results from bank regulatory agencies and an internal review by the Banks Risk Management and Credit Administration divisions.



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Reserves on individual loans and historical loss rates are reviewed quarterly and adjusted as necessary
based on changing borrower and/or collateral conditions, as well as actual collection and charge-off experience.

Charge-offs are recognized
when it becomes evident that a loan or a portion of a loan is deemed uncollectible regardless of its delinquent status. The Bank generally charges off that portion of a loan that is determined to be unsupported by an obligors continued ability
to repay the loan from income and/or assets, both pledged and unpledged as collateral.

FINANCIAL CONDITION

Driving the changes to the BKFC balance sheet from December 31, 2009 to December 31, 2010 was continued deposit growth, slowing loan demand and
a stronger capital position. Total deposits increased $79,040,000 or 6% from the end of 2009 to the end of 2010, while total loans decreased $49,432,000 or 4% in the same period of time. As discussed above, the secondary Common Stock offering less
the partial repayment of the CPP investment added approximately $11,100,000 to our capital. As a result of these changes, the Banks total assets increased $99,886,000 or 6% from $1,564,998,000 at December 31, 2009 to $1,664,884,000 at
December 31, 2010.

On the asset side of the balance sheet, deposit growth and the proceeds from the Common Stock offering outpaced
quality loan demand. As a result, both available-for-sale securities and short term investments grew significantly from December of 2009 to December of 2010. In 2010, available-for-sale securities increased $61,603,000 or 34% from 2009, while short
term investments increased $73,942,000 from $58,307,000 at December 31, 2009 to $132,249,000 at December 31, 2010. The increase in available-for-sale securities consisted of purchases of government sponsored agency bonds and government
agency MBS. The increase in short term investments consisted of higher federal funds sold to other financial institutions. While 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 recession, the Bank intends to continue to work to make loans that meet its longstanding prudent lending standards. The decrease in total loans was distributed between construction, commercial,
and residential real estate in 2010, with decreases of $40,677,000 (27%), $6,744,000 (3%), and $7,232,000 (3%), respectively.

The largest
increase in deposits came from noninterest bearing demand deposit accounts (DDA), which increased $60,923,000, or 30%, from 2009. In addition to strong growth in corporate DDA balances, management believes that the lower level of
interest rates offered on other transaction accounts contributed to the growth in overall DDA balances.

Other changes on the asset side of
the balance sheet at December 31, 2010 relative to December 31, 2009 included an $8,481,000 (125%) increase in loans held for sale. This increase, driven by low rates, was the result of the current demand for home mortgage loan
refinancing. Other changes to liabilities included an increase of $3,980,000 (9%) in notes payable and a decrease in other liabilities of $3,121,000 (22%). The increase in notes payable was the result of an increase of $4,000,000 in FHLB
advances, which were entered into as a result of attractive rates. The decrease in other liabilities was the result of a final settlement owed to Integra Bank for the acquisition of $3,394,000 that was paid in January of 2010. Total
shareholders equity increased $18,237,000 (13%) to $159,370,000 at December 31, 2010, compared to $141,133,000 at December 31, 2009. As discussed above, approximately $11,100,000 of the increase in shareholders equity was
the result of the net increase from the Common Stock offering and the subsequent TARP repayment.

The following table illustrates the change
in the mix of average assets during 2010 as compared to 2009 and 2008. With slowing loan demand and increasing deposits, the percentage of assets invested in short term investments and securities has increased from 10.9% in 2009 to 18.9% in 2010,
while the percentage of assets invested in loans decreased from 79.9% in 2009 to 71.8% in 2010.

Table 1Average Assets 2010, 2009 and
2008

(dollars in thousands)



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|                                         |  |      |           |  |                        |  |       |      |  |  |                        |  |  |      |       |   |                        |   |           |  |  |  |       |  
|---------------------------------------- |  | ---- | --------- |  | ---------------------- |  | ----- | ---- |  |  | ---------------------- |  |  | ---- | ----- | - | ---------------------- | - | --------- |  |  |  | ----- | -
|Average Assets:                          |  | 2010 |           |  | As a % oftotal 
assets |  |       | 2009 |  |  | As a % oftotal 
assets |  |  | 2008 |       |   | As a % oftotal 
assets |  
|Cash and due from banks                  |  | $    | 42,245    |  |                        |  | 2.7   | %    |  |  | 35,361                 |  |  |      | 2.6   | % |                        | $ | 30,256    |  |  |  | 2.5   | %
|Short term investments                   |  |      | 57,663    |  |                        |  | 3.7   | %    |  |  | 29,165                 |  |  |      | 2.2   | % |                        |   | 22,740    |  |  |  | 1.9   | %
|Other interest-earning assets            |  |      | 5,059     |  |                        |  | 0.3   | %    |  |  | 5,059                  |  |  |      | 0.4   | % |                        |   | 4,963     |  |  |  | 0.4   | %
|Securities                               |  |      | 236,838   |  |                        |  | 15.2  | %    |  |  | 156,847                |  |  |      | 11.5  | % |                        |   | 110,017   |  |  |  | 9.0   | %
|Loans (net of allowance for loan losses) |  |      | 1,121,228 |  |                        |  | 71.8  | %    |  |  | 1,048,771              |  |  |      | 77.3  | % |                        |   | 971,289   |  |  |  | 79.9  | %
|Premises and equipment                   |  |      | 23,659    |  |                        |  | 1.5   | %    |  |  | 19,097                 |  |  |      | 1.4   | % |                        |   | 18,042    |  |  |  | 1.5   | %
|Goodwill and acquisition intangibles     |  |      | 26,180    |  |                        |  | 1.7   | %    |  |  | 17,521                 |  |  |      | 1.3   | % |                        |   | 18,366    |  |  |  | 1.5   | %
|Cash surrender value of life insurance   |  |      | 24,717    |  |                        |  | 1.6   | %    |  |  | 23,636                 |  |  |      | 1.7   | % |                        |   | 20,926    |  |  |  | 1.7   | %
|Other assets                             |  |      | 23,752    |  |                        |  | 1.5   | %    |  |  | 22,062                 |  |  |      | 1.6   | % |                        |   | 19,402    |  |  |  | 1.6   | %
|                                         |  |      |           |  |                        |  |       |      |  |  |                        |  |  |      |       |   |                        |   |           |  |  |  |       |  
|Total average assets                     |  | $    | 1,561,341 |  |                        |  | 100.0 | %    |  |  | 1,357,519              |  |  |      | 100.0 | % |                        | $ | 1,216,001 |  |  |  | 100.0 | %
|                                         |  |      |           |  |                        |  |       |      |  |  |                        |  |  |      |       |   |                        |   |           |  |  |  |       |  

RESULTS OF OPERATIONS

Summary

2010 vs. 2009. Driven by higher revenue, net income available to common
shareholders increased 35% from 2009 from $6,968,000 for the year ended December 31, 2009, to $9,425,000 for the year ended December 31, 2010. The growth in earnings from 2009 to 2010 was driven by increases in net interest income of
$8,616,000 (19%) and non-interest income of $4,098,000 (25%). and was offset by a higher provision for loan losses of $2,675,000 (21%) and by an increase in non-interest expense of $5,747,000 (16%). The growth in the net interest income
was driven relatively equally by growth in earning assets and by an improving net interest spread, which was the result of the cost of interest bearing liabilities falling faster than yields on earning assets and, as a result, the net interest
margin increased from 3.64% in 2009 to 3.79% in 2010. Leading the growth in non-interest income was a $1,143,000 (76%) increase in mortgage banking income and a $1,278,000 (117%) increase in trust fee income. The low interest rate
environment also led to the increase in mortgage banking income as homeowners refinanced their existing loans to lower rates. As discussed in the management overview section of this report, two acquisitions completed in the fourth quarter of 2009
had an impact on the financial comparisons between 2009 and 2010. The provision for loan losses reflected the current stressed economic conditions that has continued to put significant strains on the loan portfolio in 2010. These strains showed in
the net charge-offs that increased from $7,582,000 (.71% of average loans) in net charge-offs in 2009 to $13,285,000 (1.18% of average loans) in 2010. While charge-offs increased in 2010, non-performing loans decreased from $25,562,000 or 2.21% of
loans at December 31, 2009 versus $21,062,000 or 1.90% of loans at December 31, 2010.

2009 vs. 2008. Driven by higher loan loss
provisions, the net income available to common shareholders decreased 39% from 2008 from $11,341,000 for the year ended December 31, 2008, to $6,968,000 for the year ended December 31, 2009. Net income available to common shareholders was
also reduced in 2009 by $1,792,000 due to the payment of dividends and discount amortization from the preferred stock issued to the Treasury Department in the CPP. These preferred shares were not outstanding in 2008 and therefore had no impact on
2008.

The provision for loan losses rose by 164% in 2009, from $4,850,000 in 2008 to $12,825,000 in 2009 and was partially offset with
increases of $4,131,000 or 10% in net interest income and $1,848,000 or 13% in non-interest income from 2008 to 2009. The provision for loan losses reflected the current economic conditions that had put significant strains on the loan portfolio in
2009. These strains showed in the net charge offs that increased from $3,445,000 (.35% of average loans) in 2008 to $7,582,000 (.71% of average loans) in 2009, and in non-performing loans that were $9,561,000 or .93% of loans at December 31,
2008 versus $25,562,000 or 2.21% of loans at December 31, 2009. The growth in net interest income was driven by balance sheet growth and included a $138,193,000 or 12% growth in average earning assets for the year, $84,842,000 in loans and
$46,830,000 in available-for-sale securities. The increase in non-interest income included $728,000 in gains on the sale of securities and a $566,000 or 60% increase in mortgage banking income. While other financial institutions were hampered by
securities losses and other than temporary impairment charges in their securities portfolio, the Bank



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took advantage of the low interest rate environment and sold $35,611,000 in government sponsored agency bonds for a gain of $728,000. The low interest rate environment also led to the increase in
mortgage banking income as the demand by homeowners to refinance their existing loans to lower rates remained high throughout the year.

Net Interest Income

2010 vs. 2009. Net
interest income grew to $53,409,000 in 2010, an increase of $8,616,000 (19%), over the $44,793,000 earned in 2009. As discussed above, the increase was driven by the growth in earning assets and an improved net interest spread. As illustrated in
Table 3, both the volume and rate variances had a positive impact on net interest income in 2010 as compared with 2009. Table 3 shows the net interest income on a fully tax equivalent basis was positively impacted by the volume
additions to the balance sheet by $4,606,000 and by a positive rate variance by $4,075,000. As illustrated in Table 2, the results of this favorable rate variance was a 24 basis point increase in the net interest spread from 3.36% in 2009 to
3.60% in 2010. Also illustrated in Table 2, the net interest margin of 3.79% for 2010 was 15 basis points greater than the 3.64% net interest margin for 2009. The cost of interest-bearing liabilities decreased 60 basis points from 1.71% for
2009 to 1.11% in 2010, while the yield on earning assets only decreased 36 basis points from 5.07% for 2009 to 4.71% in 2010. Contributing to the favorable volume variance was the Integra Bank acquisition that added approximately $107,000,000 in
loans and $76,000,000 in deposits. As illustrated in Table 2, average earning assets increased $178,976,000 or 14% from 2009 to 2010, while average interest bearing liabilities only increased $146,096,000 or 14% in the same period. As further
illustrated in Table 3, the favorable rate variance was driven by the decrease in interest expense attributable to rate of $6,327,000 which was offset by a $2,252,000 decrease in interest income as a result of rate. Driving the decrease in
interest expense were time deposits, which contributed $4,420,000 or 70% of the decrease in interest expense as a result of rate. While BKFC benefited from falling rates in 2010 as compared to 2009, if rates continue to fall in 2011 the effect on
BKFC will be negative, as shown and explained below under the heading Asset/Liability Management and Market Risk.

2009 vs. 2008.
Net interest income grew to $44,793,000 in 2009, an increase of $4,131,000 (10%), over the $40,662,000 earned in 2008. As discussed above, the increase was driven by the growth in earning assets. As illustrated in Table 3, net interest income
was positively impacted by the volume additions to the balance sheet by $4,811,000. While the decline in interest rates had been dramatic over the prior three years as a result of the deep economic recession, the effect on the net interest margin of
the Bank has been nominal. This is a result of the conservative interest rate risk management program of the Bank that seeks to minimize the risk to earnings in both a falling or rising interest rate environment. As illustrated in Table 2,
the net interest margin has remained within four basis points over the prior two years at 3.64% and 3.68% in 2009 and 2008, respectively. Also illustrated in Table 2, this risk management position is reflected in the small change in the
interest rate spread, increasing 8 basis points in 2009 versus 2008 despite the significant drop in both the yield on earning assets and interest cost of interest bearing liabilities. In 2009, total average earning assets increased $138,193,000 or
12% with the growth in 2009 divided between loans, which increased $84,842,000 or 9%, and securities, which increased $46,830,000 or 43%. Despite an extremely volatile interest rate environment, BKFCs net interest spread increased from 3.28% in 2008
to 3.36% in 2009, which was offset by a reduction in the effects of free funds which decreased from .40% in 2008 to .28% in 2009. The effects of this rate environment are demonstrated in Table 2, where the yields on interest earning assets
decreased by 112 basis points from 6.19% in 2008 to 5.07% in 2009, while the cost of interest bearing liabilities decreased 120 basis points from 2.91% in 2008 to 1.71% in 2009.

Average Yield. Table 2, shown below, illustrates the Banks average balance sheet information and reflects the average yield on interest-earning assets, on a tax equivalent basis, and the
average cost of interest-bearing liabilities for the periods indicated. Such yields and costs are derived by dividing income or expense by the average monthly balance of interest-earning assets or interest-bearing liabilities, respectively, for the
years presented. Average balances are daily averages for the Bank and include nonaccruing loans in the loan portfolio, net of the allowance for loan losses.



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Table 2Average Balance Sheet Rates 2010, 2009 and 2008 (presented on a tax equivalent basis in
thousands)



|                                                                                                       |  |                           |                        |   |                     |   |        |            |  |  |                           |   |  |                     |           |   |            |   |        |                           |  |  |                     |   |  |            |           |   |  |   |        |  |  |  |      |  
|------------------------------------------------------------------------------------------------------ |  | ------------------------- | ---------------------- | - | ------------------- | - | ------ | ---------- |  |  | ------------------------- | - |  | ------------------- | --------- | - | ---------- | - | ------ | ------------------------- |  |  | ------------------- | - |  | ---------- | --------- | - |  | - | ------ |  |  |  | ---- | -
|                                                                                                       |  | Year ended December 31,   |                       
|                                                                                                       |  | 2010                      |                        |   | 2009                |   |        | 2008       | 
|                                                                                                       |  | Averageoutstandingbalance |                        |   | Interestearned/paid |   |        | Yield/rate |  |  | Averageoutstandingbalance |   |  | Interestearned/paid |           |   | Yield/rate |   |        | Averageoutstandingbalance |  |  | Interestearned/paid |   |  | Yield/rate |          
|                                                                                                       |  |                           | (Dollars in thousands) |  
|Interest-earning assets:                                                                               |  |                           |                        |   |                     |   |        |            |  |  |                           |   |  |                     |           |   |            |   |        |                           |  |  |                     |   |  |            |           |   |  |   |        |  |  |  |      |  
|Loans receivable(1)(2)                                                                                 |  | $                         | 1,137,373              |   |                     | $ | 61,535 |            |  |  | 5.41                      | % |  | $                   | 1,066,886 |   |            | $ | 58,093 |                           |  |  | 5.45                | % |  | $          | 982,044   |   |  | $ | 63,559 |  |  |  | 6.47 | %
|Securities(2)                                                                                          |  |                           | 236,838                |   |                     |   | 5,812  |            |  |  | 2.45                      |   |  |                     | 156,847   |   |            |   | 5,354  |                           |  |  | 3.41                |   |  |            | 110,017   |   |  |   | 4,881  |  |  |  | 4.44 |  
|Other interest-earning assets                                                                          |  |                           | 62,722                 |   |                     |   | 395    |            |  |  | 0.63                      |   |  |                     | 34,224    |   |            |   | 298    |                           |  |  | 0.87                |   |  |            | 27,703    |   |  |   | 820    |  |  |  | 2.96 |  
|                                                                                                       |  |                           |                        |   |                     |   |        |            |  |  |                           |   |  |                     |           |   |            |   |        |                           |  |  |                     |   |  |            |           |   |  |   |        |  |  |  |      |  
|Total interest-earning assets                                                                          |  |                           | 1,436,933              |   |                     |   | 67,742 |            |  |  | 4.71                      |   |  |                     | 1,257,957 |   |            |   | 63,745 |                           |  |  | 5.07                |   |  |            | 1,119,764 |   |  |   | 69,260 |  |  |  | 6.19 |  
|                                                                                                       |  |                           |                        |   |                     |   |        |            |  |  |                           |   |  |                     |           |   |            |   |        |                           |  |  |                     |   |  |            |           |   |  |   |        |  |  |  |      |  
|Non-interest-earning assets                                                                            |  |                           | 124,408                |   |                     |   |        |            |  |  |                           |   |  |                     | 99,562    |   |            |   |        |                           |  |  |                     |   |  |            | 96,237    |   |  |   |        |  |  |  |      |  
|                                                                                                       |  |                           |                        |   |                     |   |        |            |  |  |                           |   |  |                     |           |   |            |   |        |                           |  |  |                     |   |  |            |           |   |  |   |        |  |  |  |      |  
|Total assets                                                                                           |  | $                         | 1,561,341              |   |                     |   |        |            |  |  |                           |   |  | $                   | 1,357,519 |   |            |   |        |                           |  |  |                     |   |  | $          | 1,216,001 |   |  |   |        |  |  |  |      |  
|                                                                                                       |  |                           |                        |   |                     |   |        |            |  |  |                           |   |  |                     |           |   |            |   |        |                           |  |  |                     |   |  |            |           |   |  |   |        |  |  |  |      |  
|Interest-bearing liabilities:                                                                          |  |                           |                        |   |                     |   |        |            |  |  |                           |   |  |                     |           |   |            |   |        |                           |  |  |                     |   |  |            |           |   |  |   |        |  |  |  |      |  
|Transaction accounts                                                                                   |  |                           | 679,597                |   |                     |   | 3,012  |            |  |  | .44                       |   |  |                     | 568,135   |   |            |   | 3,924  |                           |  |  | .69                 |   |  |            | 517,302   |   |  |   | 9,244  |  |  |  | 1.79 |  
|Time deposits                                                                                          |  |                           | 450,712                |   |                     |   | 9,054  |            |  |  | 2.01                      |   |  |                     | 416,179   |   |            |   | 12,505 |                           |  |  | 3.00                |   |  |            | 370,017   |   |  |   | 15,778 |  |  |  | 4.26 |  
|Borrowings                                                                                             |  |                           | 67,628                 |   |                     |   | 1,207  |            |  |  | 1.78                      |   |  |                     | 67,527    |   |            |   | 1,528  |                           |  |  | 2.26                |   |  |            | 76,803    |   |  |   | 2,998  |  |  |  | 3.90 |  
|                                                                                                       |  |                           |                        |   |                     |   |        |            |  |  |                           |   |  |                     |           |   |            |   |        |                           |  |  |                     |   |  |            |           |   |  |   |        |  |  |  |      |  
|Total interest-bearing liabilities                                                                     |  |                           | 1,197,937              |   |                     |   | 13,273 |            |  |  | 1.11                      |   |  |                     | 1,051,841 |   |            |   | 17,957 |                           |  |  | 1.71                |   |  |            | 964,122   |   |  |   | 28,020 |  |  |  | 2.91 |  
|                                                                                                       |  |                           |                        |   |                     |   |        |            |  |  |                           |   |  |                     |           |   |            |   |        |                           |  |  |                     |   |  |            |           |   |  |   |        |  |  |  |      |  
|Non-interest-bearing liabilities                                                                       |  |                           | 215,427                |   |                     |   |        |            |  |  |                           |   |  |                     | 171,585   |   |            |   |        |                           |  |  |                     |   |  |            | 155,805   |   |  |   |        |  |  |  |      |  
|                                                                                                       |  |                           |                        |   |                     |   |        |            |  |  |                           |   |  |                     |           |   |            |   |        |                           |  |  |                     |   |  |            |           |   |  |   |        |  |  |  |      |  
|Total liabilities                                                                                      |  |                           | 1,413,364              |   |                     |   |        |            |  |  |                           |   |  |                     | 1,223,426 |   |            |   |        |                           |  |  |                     |   |  |            | 1,119,927 |   |  |   |        |  |  |  |      |  
|Shareholders equity                                                                                   |  |                           | 147,977                |   |                     |   |        |            |  |  |                           |   |  |                     | 134,093   |   |            |   |        |                           |  |  |                     |   |  |            | 96,074    |   |  |   |        |  |  |  |      |  
|                                                                                                       |  |                           |                        |   |                     |   |        |            |  |  |                           |   |  |                     |           |   |            |   |        |                           |  |  |                     |   |  |            |           |   |  |   |        |  |  |  |      |  
|Total liabilities and shareholders equity                                                             |  | $                         | 1,561,341              |   |                     |   |        |            |  |  |                           |   |  | $                   | 1,357,519 |   |            |   |        |                           |  |  |                     |   |  | $          | 1,216,001 |   |  |   |        |  |  |  |      |  
|                                                                                                       |  |                           |                        |   |                     |   |        |            |  |  |                           |   |  |                     |           |   |            |   |        |                           |  |  |                     |   |  |            |           |   |  |   |        |  |  |  |      |  
|Net interest income                                                                                    |  |                           |                        |   |                     | $ | 54,469 |            |  |  |                           |   |  |                     |           |   |            | $ | 45,788 |                           |  |  |                     |   |  |            |           |   |  | $ | 41,240 |  |  |  |      |  
|                                                                                                       |  |                           |                        |   |                     |   |        |            |  |  |                           |   |  |                     |           |   |            |   |        |                           |  |  |                     |   |  |            |           |   |  |   |        |  |  |  |      |  
|Interest rate spread                                                                                   |  |                           |                        |   |                     |   |        |            |  |  | 3.60                      | % |  |                     |           |   |            |   |        |                           |  |  | 3.36                | % |  |            |           |   |  |   |        |  |  |  | 3.28 | %
|                                                                                                       |  |                           |                        |   |                     |   |        |            |  |  |                           |   |  |                     |           |   |            |   |        |                           |  |  |                     |   |  |            |           |   |  |   |        |  |  |  |      |  
|Net interest margin (net interest income as a percent of average interest-earning assets)              |  |                           |                        |   |                     |   |        |            |  |  | 3.79                      | % |  |                     |           |   |            |   |        |                           |  |  | 3.64                | % |  |            |           |   |  |   |        |  |  |  | 3.68 | %
|                                                                                                       |  |                           |                        |   |                     |   |        |            |  |  |                           |   |  |                     |           |   |            |   |        |                           |  |  |                     |   |  |            |           |   |  |   |        |  |  |  |      |  
|Effect of net free funds (the difference between the net interest margin and the interest rate spread) |  |                           |                        |   |                     |   |        |            |  |  | 0.19                      | % |  |                     |           |   |            |   |        |                           |  |  | 0.28                | % |  |            |           |   |  |   |        |  |  |  | 0.40 | %
|                                                                                                       |  |                           |                        |   |                     |   |        |            |  |  |                           |   |  |                     |           |   |            |   |        |                           |  |  |                     |   |  |            |           |   |  |   |        |  |  |  |      |  
|Average interest-earning assets to interest-bearing liabilities                                        |  |                           | 119.95                 | % |                     |   |        |            |  |  |                           |   |  |                     | 119.60    | % |            |   |        |                           |  |  |                     |   |  |            | 116.14    | % |  |   |        |  |  |  |      |  
|                                                                                                       |  |                           |                        |   |                     |   |        |            |  |  |                           |   |  |                     |           |   |            |   |        |                           |  |  |                     |   |  |            |           |   |  |   |        |  |  |  |      |  



|(1) | Includes non-accrual loans.
|--- | ---------------------------

|(2) | Income presented on a tax equivalent basis using a 34.62% tax rate in 2010, 34.35% in 2009 and 34.40% in 2008. The tax equivalent adjustment was $1,060,000, $995,000
and $578,000, in 2010, 2009, and 2008, respectively.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Volume/Rate Analysis. Table 3 below illustrates the extent to which changes in interest rates and
changes in volume of interest-earning assets and interest-bearing liabilities have affected the Banks interest income and expense during the periods indicated. For each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to: (i) changes in volume (change in volume multiplied by prior year rate); (ii) changes in rate (change in rate multiplied by prior year volume); and (iii) a combination of changes in
rate and volume. The combined effects of changes in both volume and rate, which cannot be separately identified, have been allocated proportionately to the change due to volume and the change due to rate.

Table 3Volume/Rate Analysis (in thousands)



|                                           |  |                            |       |  |                            |   |        |       |  |   |        |   |  |      |       |   |       |   |         |   |  |   |         |  
|------------------------------------------ |  | -------------------------- | ----- |  | -------------------------- | - | ------ | ----- |  | - | ------ | - |  | ---- | ----- | - | ----- | - | ------- | - |  | - | ------- | -
|                                           |  | Year ended December 31,    |      
|                                           |  | 2010 vs. 2009              |       |  | 2009 vs. 2008              |  
|                                           |  | Increase (Decrease) Due to |       |  | Increase (Decrease) Due to |  
|                                           |  | Volume                     |       |  | Rate                       |   |        | Total |  |   | Volume |   |  | Rate |       |   | Total |  
|Interest income attributable to:           |  |                            |       |  |                            |   |        |       |  |   |        |   |  |      |       |   |       |   |         |   |  |   |         |  
|Loans receivable                           |  | $                          | 3,816 |  |                            | $ | (374   | )     |  | $ | 3,442  |   |  | $    | 5,184 |   |       | $ | (10,651 | ) |  | $ | (5,467  | )
|Securities                                 |  |                            | 2,236 |  |                            |   | (1,778 | )     |  |   | 458    |   |  |      | 1,767 |   |       |   | (1,294  | ) |  |   | 473     |  
|Other interest-earning assets(1)           |  |                            | 197   |  |                            |   | (100   | )     |  |   | 97     |   |  |      | 159   |   |       |   | (680    | ) |  |   | (521    | )
|                                           |  |                            |       |  |                            |   |        |       |  |   |        |   |  |      |       |   |       |   |         |   |  |   |         |  
|Total interest-earning assets              |  |                            | 6,249 |  |                            |   | (2,252 | )     |  |   | 3,997  |   |  |      | 7,110 |   |       |   | (12,625 | ) |  |   | (5,515  | )
|                                           |  |                            |       |  |                            |   |        |       |  |   |        |   |  |      |       |   |       |   |         |   |  |   |         |  
|Interest expense attributable to:          |  |                            |       |  |                            |   |        |       |  |   |        |   |  |      |       |   |       |   |         |   |  |   |         |  
|Transaction accounts                       |  | $                          | 672   |  |                            |   | (1,584 | )     |  |   | (912   | ) |  | $    | 831   |   |       |   | (6,151  | ) |  |   | (5,320  | )
|Time deposits                              |  |                            | 969   |  |                            |   | (4,420 | )     |  |   | (3,451 | ) |  |      | 1,796 |   |       |   | (5,069  | ) |  |   | (3,273  | )
|Borrowings                                 |  |                            | 2     |  |                            |   | (323   | )     |  |   | (321   | ) |  |      | (328  | ) |       |   | (1,142  | ) |  |   | (1,470  | )
|                                           |  |                            |       |  |                            |   |        |       |  |   |        |   |  |      |       |   |       |   |         |   |  |   |         |  
|Total interest-bearing liabilities         |  |                            | 1,643 |  |                            |   | (6,327 | )     |  |   | (4,684 | ) |  |      | 2,299 |   |       |   | (12,362 | ) |  |   | (10,063 | )
|                                           |  |                            |       |  |                            |   |        |       |  |   |        |   |  |      |       |   |       |   |         |   |  |   |         |  
|Increase (decrease) in net interest income |  | $                          | 4,606 |  |                            | $ | 4,075  |       |  | $ | 8,681  |   |  | $    | 4,811 |   |       | $ | (263    | ) |  | $ | 4,548   |  
|                                           |  |                            |       |  |                            |   |        |       |  |   |        |   |  |      |       |   |       |   |         |   |  |   |         |  



|(1) | Includes short-term investments and interest-bearing deposits in other financial institutions.
|--- | ----------------------------------------------------------------------------------------------

Provision for Loan Losses

Like many other financial institutions, the Bank
has been significantly affected by the national economic recession, and the continued challenging economic environment. While the Bank experienced an increase in defaults and foreclosures in fiscal years 2009 and 2010, the levels of such activity
has been significantly less than other regions in the country due, in part, to the fact that the Banks market in the northern Kentucky and greater Cincinnati area did not experience as dramatic a rise in real estate values over the last
several years as other markets.

Management believes that with the continuing economic uncertainty, high unemployment rates
and falling real estate values, negative trends in credit metrics and the resulting pressure on earnings will remain above historical levels. This will include continuing higher levels of charge-offs in the loan portfolio, and as a result, higher
provisions for loan losses and a higher reserve for loan losses on the balance sheet. Higher provisions for loan losses will lead to lower earnings and slower capital growth. Management also believes that the current economic conditions will lead to
lower demand for loans within all loan types, specifically, real estate related requests.

As discussed above, the provision
for loan losses reflected the current challenging economic environment facing the country and the region. Although the credit metrics have deteriorated significantly since the beginning of the current economic downturn, there were signs of
improvement in 2010. The level of non-performing loans decreased from 2009, which allowed on a quarterly sequential basis for the provision expense to decrease as 2010 progressed. On a sequential basis, the provision for loan losses of $3,000,000 in
the fourth quarter of 2010 was $1,500,000 lower than the provision recorded in the first and second quarters of 2010, and the net charge-offs



47



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##### Table of Contents

percentage decreased from 1.41% and 1.26% in the first and second quarters of 2010 to 1.00% by the fourth quarter of 2010.

2010 vs. 2009. As discussed above under Management Overview, the provision for loan losses reflected the current economic conditions facing the country and the region. The provision for loan
losses was $15,500,000 for the year ended December 31, 2010, compared to $12,825,000 for 2009. The increase of $2,675,000 (21%) reflected an increase in the level of charge-offs in 2010 and managements continuing concerns of the
effect that the current economic conditions will have on the Banks loan customers. For the year ended December 31, 2010, net charge-offs were $13,285,000 or 1.18% of average loan balances compared to 2009 figures of $7,582,000 or .71% of
average loan balances. As illustrated in Table 5 below, total non-accrual loans plus loans past due 90 days or more were $21,062,000 (1.90% of loans outstanding) at December 31, 2010, compared to $25,562,000 (2.21% of loans outstanding)
at December 31, 2009. Managements evaluation of the inherent risk in the loan portfolio considers both historic losses and information regarding specific borrowers. Management continues to monitor the non-performing relationships and has
established appropriate reserves.

Non-performing assets, which include non-performing loans, other real estate owned and repossessed assets,
totaled $21,857,000 at December 31, 2010 and $26,943,000 at December 31, 2009. This represents 1.31% of total assets at December 31, 2010 compared to 1.72% at December 31, 2009.

2009 vs. 2008. The provision for loan losses was $12,825,000 for the year ended December 31, 2009, compared to $4,850,000 for 2008. The increase of
$7,975,000 (164%) reflected an increase in the level of charge-offs and non-performing loans in 2009. For the year ended December 31, 2009, net charge-offs were $7,582,000 or .71% of average loan balances compared to 2008 figures of
$3,445,000 or .35% of average loan balances. As illustrated in Table 5 below, total non-accrual loans plus loans past due 90 days or more were $25,562,000 (2.21% of loans outstanding) at December 31, 2009, compared to $9,561,000 (.93% of
loans outstanding) at December 31, 2008.

Non-performing assets, which include non-performing loans, other real estate owned and
repossessed assets, totaled $26,943,000 at December 31, 2009 and $10,273,000 at December 31, 2008. This represents 1.72% of total assets at December 31, 2009 compared to .82% at December 31, 2008.

Accruing Troubled Debt Restructurings. In certain circumstances, the Bank may modify the terms of a loan to maximize the collection of amounts due. In
cases where the borrower is experiencing financial difficulties or is expected to experience difficulties in the near-term, concessionary modification is granted to minimize or eliminate the economic loss and to avoid foreclosure or repossession of
the collateral. Modifications may include interest rate reductions, extension of the maturity date or a reduction in the principal balance. Restructured loans accrue interest as long as the borrower complies with the revised terms. Total accruing
TDRs were $6,135,000 at December 31, 2010 versus $3,568,000 at December 31, 2009. The Bank expects increases in TDRs as the Bank works with relationships that show signs of stress, in order to proactively manage and resolve problem loans.

Allowance for Loan Losses (ALL). The increase in the ALL was directionally consistent in 2010 with the deteriorating credit
metrics and the current challenging economic conditions. The ALL increased 15%, from $15,153,000 at December 31, 2009 to $17,368,000 at December 31, 2010, which increased the allowance for loan losses as a percentage of total loans from
1.31% at December 31, 2009, to 1.57% at December 31, 2010. The amount of the allowance allocated to impaired loans at year end 2010 was $5,744,000, which was down 3% from the $5,916,000 at year end 2009. The impairment process is described
in the critical accounting policies section of this report. Contributing to both the increase in charge-offs in 2010 and the increase in the allowance for loan losses was the significant decrease in real estate values experienced in the current
economic environment. Management believes the current level of the ALL is sufficient to absorb probable incurred losses in the loan portfolio. Management continues to monitor the loan portfolio closely and believes the provision for loan losses is
directionally consistent with the changes in the probable losses inherent in the loan portfolio from 2009 to 2010. The Bank does not originate or purchase sub-prime loans for its portfolio. Management will continue to monitor and evaluate the
effects of the slumping housing market conditions and any signs of further deterioration in credit quality on the Banks loan portfolio. Management believes these economic strains will continue into 2011 and expects continuing higher than
normal credit losses and provisioning expense in the foreseeable future.



48



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Monitoring loan quality and maintaining an adequate allowance is an ongoing process overseen by senior
management and the loan review function. On at least a quarterly basis, a formal analysis of the adequacy of the ALL is prepared and reviewed by management and the Board of Directors. This analysis serves as a point in time assessment of the level
of the ALL and serves as a basis for provisions for loan losses. The loan quality monitoring process includes assigning loan grades and the use of a watch list to identify loans of concern.

For additional information on the ALL, see the critical accounting policies section of this discussion.

Table 4Analysis of the allowance for loan losses for the periods indicated



|                                                        |  |                        |         |   |      |   |        |      |  |   |        |   |  |      |       |   |  |   |        |  
|------------------------------------------------------- |  | ---------------------- | ------- | - | ---- | - | ------ | ---- |  | - | ------ | - |  | ---- | ----- | - |  | - | ------ | -
|                                                        |  | At December 31         |        
|                                                        |  | 2010                   |         |   | 2009 |   |        | 2008 |  |   | 2007   |   |  | 2006 |      
|                                                        |  | (dollars in thousands) |        
|Balance of allowance at beginning of period             |  | $                      | 15,153  |   |      | $ | 9,910  |      |  | $ | 8,505  |   |  | $    | 6,918 |   |  | $ | 7,581  |  
|Recoveries of loans previously charged off:             |  |                        |         |   |      |   |        |      |  |   |        |   |  |      |       |   |  |   |        |  
|Commercial loans                                        |  |                        | 229     |   |      |   | 140    |      |  |   | 212    |   |  |      | 369   |   |  |   | 41     |  
|Consumer loans                                          |  |                        | 487     |   |      |   | 309    |      |  |   | 249    |   |  |      | 106   |   |  |   | 40     |  
|Mortgage loans                                          |  |                        | 5       |   |      |   | 2      |      |  |   | 2      |   |  |      | 23    |   |  |   | 0      |  
|                                                        |  |                        |         |   |      |   |        |      |  |   |        |   |  |      |       |   |  |   |        |  
|Total recoveries                                        |  |                        | 721     |   |      |   | 451    |      |  |   | 463    |   |  |      | 498   |   |  |   | 81     |  
|                                                        |  |                        |         |   |      |   |        |      |  |   |        |   |  |      |       |   |  |   |        |  
|Loans charged off:                                      |  |                        |         |   |      |   |        |      |  |   |        |   |  |      |       |   |  |   |        |  
|Commercial loans                                        |  |                        | 11,499  |   |      |   | 6,310  |      |  |   | 2,675  |   |  |      | 1,097 |   |  |   | 2,208  |  
|Consumer loans                                          |  |                        | 2,101   |   |      |   | 1,276  |      |  |   | 1,065  |   |  |      | 368   |   |  |   | 185    |  
|Mortgage loans                                          |  |                        | 406     |   |      |   | 447    |      |  |   | 168    |   |  |      | 31    |   |  |   | 51     |  
|                                                        |  |                        |         |   |      |   |        |      |  |   |        |   |  |      |       |   |  |   |        |  
|Total charge-offs                                       |  |                        | 14,006  |   |      |   | 8,033  |      |  |   | 3,908  |   |  |      | 1,496 |   |  |   | 2,444  |  
|                                                        |  |                        |         |   |      |   |        |      |  |   |        |   |  |      |       |   |  |   |        |  
|Net charge-offs                                         |  |                        | (13,285 | ) |      |   | (7,582 | )    |  |   | (3,445 | ) |  |      | (998  | ) |  |   | (2,363 | )
|Provision for loan losses                               |  |                        | 15,500  |   |      |   | 12,825 |      |  |   | 4,850  |   |  |      | 1,575 |   |  |   | 1,700  |  
|Merger adjustment                                       |  |                        | 0       |   |      |   | 0      |      |  |   | 0      |   |  |      | 1,010 |   |  |   | 0      |  
|                                                        |  |                        |         |   |      |   |        |      |  |   |        |   |  |      |       |   |  |   |        |  
|Balance of allowance at end of period                   |  | $                      | 17,368  |   |      | $ | 15,153 |      |  | $ | 9,910  |   |  | $    | 8,505 |   |  | $ | 6,918  |  
|                                                        |  |                        |         |   |      |   |        |      |  |   |        |   |  |      |       |   |  |   |        |  
|Net charge-offs to average loans outstanding for period |  |                        | 1.18    | % |      |   | 0.71   | %    |  |   | 0.35   | % |  |      | 0.11  | % |  |   | 0.30   | %
|                                                        |  |                        |         |   |      |   |        |      |  |   |        |   |  |      |       |   |  |   |        |  
|Allowance at end of period to loans at end of period    |  |                        | 1.57    | % |      |   | 1.31   | %    |  |   | 0.97   | % |  |      | 0.90  | % |  |   | .85    | %
|                                                        |  |                        |         |   |      |   |        |      |  |   |        |   |  |      |       |   |  |   |        |  
|Allowance to non-performing loans at end of period      |  |                        | 82.46   | % |      |   | 59.28  | %    |  |   | 103.65 | % |  |      | 94.01 | % |  |   | 139.11 | %
|                                                        |  |                        |         |   |      |   |        |      |  |   |        |   |  |      |       |   |  |   |        |  



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Table 5Analysis of non-performing loans for the periods indicated



|                                                                 |  |                        |        |   |      |   |        |      |  |   |       |   |  |      |       |   |  |   |       |  
|---------------------------------------------------------------- |  | ---------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ----- | - |  | ---- | ----- | - |  | - | ----- | -
|                                                                 |  | At December 31         |       
|                                                                 |  | 2010                   |        |   | 2009 |   |        | 2008 |  |   | 2007  |   |  | 2006 |      
|                                                                 |  | (dollars in thousands) |       
|Loans accounted for on a non-accrual basis:                      |  |                        |        |   |      |   |        |      |  |   |       |   |  |      |       |   |  |   |       |  
|Nonresidential real estate                                       |  | $                      | 6,311  |   |      | $ | 8,588  |      |  | $ | 2,401 |   |  | $    | 1,391 |   |  | $ | 318   |  
|Residential real estate                                          |  |                        | 4,208  |   |      |   | 5,113  |      |  |   | 2,325 |   |  |      | 1,731 |   |  |   | 1,630 |  
|Construction                                                     |  |                        | 5,329  |   |      |   | 7,302  |      |  |   | 2,778 |   |  |      | 2,281 |   |  |   | 601   |  
|Commercial                                                       |  |                        | 4,749  |   |      |   | 2,712  |      |  |   | 588   |   |  |      | 851   |   |  |   | 356   |  
|Consumer and other                                               |  |                        | 51     |   |      |   | 111    |      |  |   | 119   |   |  |      | 135   |   |  |   |      |  
|                                                                 |  |                        |        |   |      |   |        |      |  |   |       |   |  |      |       |   |  |   |       |  
|Total                                                            |  |                        | 20,648 |   |      |   | 23,826 |      |  |   | 8,211 |   |  |      | 6,389 |   |  |   | 2,905 |  
|                                                                 |  |                        |        |   |      |   |        |      |  |   |       |   |  |      |       |   |  |   |       |  
|Accruing loans which are contractually past due 90 days or more: |  |                        |        |   |      |   |        |      |  |   |       |   |  |      |       |   |  |   |       |  
|Nonresidential real estate                                       |  | $                      | 68     |   |      | $ | 220    |      |  | $ | 86    |   |  | $    | 297   |   |  | $ | 271   |  
|Residential real estate                                          |  |                        | 263    |   |      |   | 758    |      |  |   | 812   |   |  |      | 1,739 |   |  |   | 799   |  
|Construction                                                     |  |                        |       |   |      |   | 682    |      |  |   | 0     |   |  |      | 205   |   |  |   |      |  
|Commercial                                                       |  |                        |       |   |      |   | 34     |      |  |   | 291   |   |  |      | 360   |   |  |   | 959   |  
|Consumer and other loans                                         |  |                        | 83     |   |      |   | 42     |      |  |   | 161   |   |  |      | 57    |   |  |   | 39    |  
|                                                                 |  |                        |        |   |      |   |        |      |  |   |       |   |  |      |       |   |  |   |       |  
|Total                                                            |  |                        | 414    |   |      |   | 1,736  |      |  |   | 1,350 |   |  |      | 2,658 |   |  |   | 2,068 |  
|                                                                 |  |                        |        |   |      |   |        |      |  |   |       |   |  |      |       |   |  |   |       |  
|Total non-performing loans                                       |  | $                      | 21,062 |   |      | $ | 25,562 |      |  | $ | 9,561 |   |  | $    | 9,047 |   |  | $ | 4,973 |  
|                                                                 |  |                        |        |   |      |   |        |      |  |   |       |   |  |      |       |   |  |   |       |  
|Non-performing loans as a percentage of total loans              |  |                        | 1.90   | % |      |   | 2.21   | %    |  |   | 0.93  | % |  |      | 0.95  | % |  |   | 0.61  | %
|Accruing Troubled Debt Restructuring (TDRs)                      |  | $                      | 6,135  |   |      | $ | 3,568  |      |  | $ | 575   |   |  | $    |      |   |  | $ |      |  
|Other real estate owned                                          |  | $                      | 795    |   |      | $ | 1,381  |      |  | $ | 712   |   |  | $    | 4,117 |   |  | $ | 2,981 |  

Non-Interest Income

The following table shows the components of non-interest income and the percentage changes from 2010 to 2009 and from 2009 to 2008.

Table 6Major Components of non-interest income (dollars in thousands)



|                                      |  |                        |        |   |                                |   |        |      |  |   |           |   |  |           |      |   |  |  |     |  
|------------------------------------- |  | ---------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | --------- | - |  | --------- | ---- | - |  |  | --- | -
|                                      |  | Year ended December 31 |        |   | Percentage Increase/(Decrease) |  
|Non-interest income:                  |  | 2010                   |        |   | 2009                           |   |        | 2008 |  |   | 2010/2009 |   |  | 2009/2008 |     
|                                      |  | (dollars in thousands) |       
|Service charges and fees              |  | $                      | 9,889  |   |                                | $ | 9,156  |      |  | $ | 8,918     |   |  |           | 8    | % |  |  | 3   | %
|Mortgage banking income               |  |                        | 2,646  |   |                                |   | 1,503  |      |  |   | 937       |   |  |           | 76   |   |  |  | 60  |  
|Trust fee income                      |  |                        | 2,373  |   |                                |   | 1,095  |      |  |   | 1,111     |   |  |           | 117  |   |  |  | (1  | )
|Bankcard transaction revenue          |  |                        | 2,921  |   |                                |   | 2,225  |      |  |   | 1,924     |   |  |           | 31   |   |  |  | 16  |  
|Company owned life insurance earnings |  |                        | 959    |   |                                |   | 923    |      |  |   | 794       |   |  |           | 4    |   |  |  | 16  |  
|Net securities gains                  |  |                        |       |   |                                |   | 728    |      |  |   |          |   |  |           | (100 | ) |  |  | 100 |  
|Losses on other real estate owned     |  |                        | (65    | ) |                                |   | (528   | )    |  |   | (380      | ) |  |           | 88   |   |  |  | 39  |  
|Other                                 |  |                        | 1,991  |   |                                |   | 1,514  |      |  |   | 1,464     |   |  |           | 32   |   |  |  | 3   |  
|                                      |  |                        |        |   |                                |   |        |      |  |   |           |   |  |           |      |   |  |  |     |  
|Total non-interest income             |  | $                      | 20,714 |   |                                | $ | 16,616 |      |  | $ | 14,768    |   |  |           | 25   | % |  |  | 13  | %
|                                      |  |                        |        |   |                                |   |        |      |  |   |           |   |  |           |      |   |  |  |     |  

2010 vs. 2009. The lower rates associated with the current economic cycle and the impact from the two acquisitions
completed in 2009 contributed to the $4,098,000 or 25% increase in non-interest income in 2010 from $16,616,000 in 2009 to $20,714,000 in 2010. Mortgage banking income increased $1,143,000 or 76% from 2009 to 2010 as attractive rates on fixed rate
residential mortgage loans led to a significant increase in the refinancing market. Other increases for 2010 included trust fee income (up $1,278,000, or 117%), bankcard transaction revenue (up $696,000, or 31%), and service charges and fees (up
$733,000, or 8%). Contributing to the increase in trust fee income, bankcard transaction revenue and service charges and fees was the TAM and Integra Bank acquisitions described above. Management expects overdraft charges to decrease significantly
in 2011 as a result of the full year



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effect of the new banking regulations limiting fees charged on overdrafts initiated by electronic transactions, which began in August of 2009. Management also expects bankcard revenue to decrease
significantly in 2011 as a result of proposed rules under the Dodd-Frank Act, anticipated to become effective during 2011, that will govern the interchange fees that merchants pay to banks for certain debit card transactions.

2009 vs. 2008. The lower rates associated with the current economic cycle contributed to the $1,848,000 or 13% increase in non-interest income in 2009
from $14,768,000 in 2008 to $16,616,000 in 2009. Mortgage banking income increased $566,000 or 60% from 2008 to 2009 as attractive rates on fixed rate residential mortgage loans led to a significant increase in the refinancing market. Also, lower
interest rates led to higher values of the Banks security portfolio and allowed the Bank to sell $35,611,000 of available-for-sale securities for a $728,000 gain. The Banks available-for-sale security portfolio is made up of high quality
government sponsored agency bonds which are implicitly guaranteed by the Treasury Department and therefore their credit quality was not negatively affected by the current economic recession. Other increases for 2009 included service charges and fees
(up $238,000, or 3%), bankcard transaction revenue (up $301,000, or 16%), and company owned life insurance earnings (up $129,000, or 16%). Contributing to the increase in company owned life insurance was the purchase of $2,000,000 in additional
policies in 2009. The losses on the sale of other real estate owned included a loss of $462,000 on one property in the third quarter of 2009. Contributing to the increase in service charges and fees were the continued growth in cash management
products, which offset a $209,000 or 4% decrease in overdraft charges.

The increase in bankcard transaction revenue reflected consumers
continued acceptance of electronic forms of payment and the resulting growth in usage of the Banks debit and credit card products.

Non-Interest Expense

The following
table shows the components of non-interest expense and the percentage changes from 2010 to 2009 and from 2009 to 2008.

Table 7Major
Components of non-interest expense (in thousands)



|                                          |  |                        |        |  |                                |   |        |      |  |   |           |  |  |           |    |   |  |  |     |   
|----------------------------------------- |  | ---------------------- | ------ |  | ------------------------------ | - | ------ | ---- |  | - | --------- |  |  | --------- | -- | - |  |  | --- | --
|                                          |  | Year ended December 31 |        |  | Percentage Increase/(Decrease) |  
|Non-interest expense:                     |  | 2010                   |        |  | 2009                           |   |        | 2008 |  |   | 2010/2009 |  |  | 2009/2008 |   
|                                          |  | (Dollars in thousands) |       
|Salaries and employee benefits            |  | $                      | 19,398 |  |                                | $ | 16,139 |      |  | $ | 16,385    |  |  |           | 20 | % |  |  | (2  | )%
|Occupancy and equipment                   |  |                        | 5,017  |  |                                |   | 4,703  |      |  |   | 4,718     |  |  |           | 7  |   |  |  | 0   |   
|Data processing                           |  |                        | 1,830  |  |                                |   | 1,597  |      |  |   | 1,365     |  |  |           | 15 |   |  |  | 17  |   
|Advertising                               |  |                        | 1,168  |  |                                |   | 1,039  |      |  |   | 840       |  |  |           | 12 |   |  |  | 24  |   
|Electronic banking processing fees        |  |                        | 1,161  |  |                                |   | 1,013  |      |  |   | 1,030     |  |  |           | 15 |   |  |  | (2  | ) 
|Outside service fees                      |  |                        | 1,484  |  |                                |   | 1,439  |      |  |   | 1,322     |  |  |           | 3  |   |  |  | 9   |   
|State bank taxes                          |  |                        | 1,966  |  |                                |   | 1,797  |      |  |   | 1,576     |  |  |           | 9  |   |  |  | 14  |   
|Other real estate owned & loan collection |  |                        | 1,436  |  |                                |   | 788    |      |  |   | 641       |  |  |           | 82 |   |  |  | 23  |   
|Amortization of intangible assets         |  |                        | 1,472  |  |                                |   | 1,094  |      |  |   | 1,278     |  |  |           | 35 |   |  |  | (14 | ) 
|FDIC insurance                            |  |                        | 2,242  |  |                                |   | 2,407  |      |  |   | 764       |  |  |           | (7 | ) |  |  | 215 |   
|Other                                     |  |                        | 5,250  |  |                                |   | 4,661  |      |  |   | 4,304     |  |  |           | 12 |   |  |  | 8   |   
|                                          |  |                        |        |  |                                |   |        |      |  |   |           |  |  |           |    |   |  |  |     |   
|Total non-interest expense                |  | $                      | 42,424 |  |                                | $ | 36,677 |      |  | $ | 34,223    |  |  |           | 16 | % |  |  | 7   | % 
|                                          |  |                        |        |  |                                |   |        |      |  |   |           |  |  |           |    |   |  |  |     |   

2010 vs. 2009. Non-interest expense increased $5,747,000 (16%), to $42,424,000 for 2010, compared to $36,677,000
for 2009. As discussed previously, 2010 included the effect of both the Integra Bank and TAM acquisitions. The largest increase in non-interest expense was in the salaries and benefits expense, which increased $3,259,000 (20%) in 2010 compared
to 2009. Contributing to this increase was the added staff from both the Integra Bank and TAM acquisitions. The next largest increase in non-interest expense was other real estate owned and loan collection expense, which increased $648,000
(82%) in 2010 compared to 2009, as a result of the legal and collection costs associated with the higher levels of charge-offs discussed above in 2010 as compared to 2009. Contributing to the $165,000 (7%) decrease in FDIC insurance
expense was the special assessment charged to all FDIC insured institutions in 2009. The FDIC special assessment and higher assessment had been imposed to increase the DIFs reserve ratio, which has been impacted by an increased number of bank
failures. The salaries and



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benefits in 2010 included an increase of $285,000 (69%) in commissions as compared to the same period in 2009. These added commissions were associated with the increase in mortgage banking
income.

2009 vs. 2008. The largest increase in non-interest expense in 2009 was the FDIC insurance expense, which increased $1,643,000 or
215% from 2008. Higher numbers of bank failures in 2009, brought on by the current economic recession, forced the FDIC to replenish its reserve for bank failures and as a result it more than doubled the assessment it charged banks in 2009 as
compared to 2008. In total, non-interest expense increased $2,454,000 (7%), to $36,677,000 for 2009, compared to $34,223,000 for 2008. The largest overhead expense in BKFC is salaries and benefits which accounted for 44% of the total non-interest
expense and decreased $246,000 or 2% from 2008. For 2009, the bonus and profit sharing expense decreased $139,000 (49%) from 2008. As in 2008, no bonuses were paid to the senior management of the Bank. The increase in advertising was the result
of a full year of amortization of the naming rights for the Bank of Kentucky Center at Northern Kentucky University and the Bank of Kentucky Field at Thomas More College, as these naming rights increased $227,000 or 200% from 2008. The increase of
$232,000 in data processing was the result of the increasing number of items processed as a result of the Banks growing deposit base and overall activity. As a result of current economic conditions facing the banking industry, management
expects continued high FDIC insurance expense for the foreseeable future.

Tax Expense

2010 vs. 2009. As a result of higher income before taxes, the federal income tax expense increased $1,381,000 (44%) to $4,528,000 for 2010 compared
to $3,147,000 for 2009. The effective tax rate was 27.9% for 2010, which was an increase of 1.5% from 26.4% in 2009. The increase in effective tax rate is a result of income before taxes increasing by 36%, while tax exempt income increased by 6%.

2009 vs. 2008. As a result of lower income before taxes, the federal income tax expense decreased $1,869,000 (37%) to $3,147,000 for
2009 compared to $5,016,000 for 2008. The effective tax rate was 26.4% for 2009, which was a decrease of 4.3% from 30.7% in 2008. The decrease in effective tax rate is a result of income before taxes decreasing by 27%, while tax exempt income
increased by 49%.

Contractual Obligations and Off-Balance Sheet Arrangements

The Bank enters into certain contractual obligations in the ordinary course of operations. Table 8 presents, as of December 31, 2010, the Banks significant fixed and determinable
contractual obligations by payment date. The required payments under these contracts represent future cash requirements of the Bank. The payment amounts represent those amounts due to the recipient.

Table 8Contractual obligations (dollars in thousands)



|                                                 |  |                    |         |  |                 |   |         |            |  |   |            |  |  |                  |        |  |  |   |        | 
|------------------------------------------------ |  | ------------------ | ------- |  | --------------- | - | ------- | ---------- |  | - | ---------- |  |  | ---------------- | ------ |  |  | - | ------ | 
|                                                 |  | Maturity by Period |        
|                                                 |  | Total              |         |  | Less than1 year |   |         | 1 - 3years |  |   | 3 - 5years |  |  | More than5 years |       
|Certificates of Deposit                          |  | $                  | 442,360 |  |                 | $ | 314,324 |            |  | $ | 124,565    |  |  | $                | 3,471  |  |  | $ |       | 
|FHLB advances                                    |  |                    | 10,000  |  |                 |   |        |            |  |   |           |  |  |                  | 10,000 |  |  |   |       | 
|Subordinated debentures                          |  |                    | 38,557  |  |                 |   |        |            |  |   |           |  |  |                  |       |  |  |   | 38,557 | 
|Other notes payable                              |  |                    | 204     |  |                 |   | 12      |            |  |   | 25         |  |  |                  | 25     |  |  |   | 142    | 
|Northern Kentucky University arena naming rights |  |                    | 3,428   |  |                 |   | 857     |            |  |   | 1,714      |  |  |                  | 857    |  |  |   |       | 
|Thomas More College athletic field naming rights |  |                    | 400     |  |                 |   | 200     |            |  |   | 200        |  |  |                  |       |  |  |   |       | 
|Lease commitments                                |  |                    | 2,227   |  |                 |   | 655     |            |  |   | 1,062      |  |  |                  | 414    |  |  |   | 96     | 
|                                                 |  |                    |         |  |                 |   |         |            |  |   |            |  |  |                  |        |  |  |   |        | 
|Total                                            |  | $                  | 497,176 |  |                 | $ | 316,048 |            |  | $ | 127,566    |  |  | $                | 14,767 |  |  | $ | 38,795 | 
|                                                 |  |                    |         |  |                 |   |         |            |  |   |            |  |  |                  |        |  |  |   |        | 



|(1) | Lease commitments represent the total minimum lease payments under non-cancelable leases.
|--- | -----------------------------------------------------------------------------------------

In order to meet the financing needs of its customers, the Bank is also a party to certain financial instruments with off-balance sheet risk in the normal course of business. These financial instruments
include



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commitments to extend credit and standby letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in BKFCs
consolidated balance sheets. Table 9 presents, as of December 31, 2010, the Banks significant off-balance sheet commitments.

Table 9Significant Off-Balance Sheet Commitments (in thousands)



|                                            |  |                    |         |  |                 |   |         |            |  |   |            |  |  |                  |       |  |  |   |        | 
|------------------------------------------- |  | ------------------ | ------- |  | --------------- | - | ------- | ---------- |  | - | ---------- |  |  | ---------------- | ----- |  |  | - | ------ | 
|                                            |  | Maturity by Period |        
|                                            |  | Total              |         |  | Less than1 year |   |         | 1 - 3years |  |   | 3 - 5years |  |  | More than5 years |      
|Unused lines of credit and loan commitments |  | $                  | 288,321 |  |                 | $ | 178,584 |            |  | $ | 34,616     |  |  | $                | 5,069 |  |  | $ | 70,052 | 
|Standby letters of credit                   |  |                    | 52,859  |  |                 |   | 47,902  |            |  |   | 2,349      |  |  |                  | 1     |  |  |   | 2,607  | 
|FHLB letters of credit                      |  |                    | 113,300 |  |                 |   | 113,300 |            |  |   |           |  |  |                  |      |  |  |   |       | 

Unused lines of credit and loan
commitments assure a borrower of financing for a specified period of time at a specified rate. The risk to the Bank under such commitments is limited to the terms of the contracts. For example, the Bank may not be obligated to advance funds if the
customers financial condition deteriorates or if the customer fails to meet specific covenants. An approved, but unfunded, loan commitment represents a potential credit risk once the funds are advanced to the customer. The unused lines of
credit and loan commitments also represent a future cash requirement, but this cash requirement will be limited since many commitments are expected to expire or only be used partially.

Standby letters of credit represent commitments by the Bank to repay a third-party beneficiary when a customer fails to repay a loan or debt instrument. The terms and risk of loss involved in issuing
standby letters of credit are similar to those involved in issuing loan commitments and extending credit. In addition to credit risk, the letters of credit could present an immediate cash requirement if the obligations require funding.

The Bank maintains letters of credit from the FHLB to collateralize public funds deposits. These letters of credit reduce the Banks available
borrowing line at the FHLB.

On March 3, 2005, the Bank entered into an agreement with Northern Kentucky University (the
University) whereby the University granted to the Bank the naming rights for the new Northern Kentucky University Arena constructed on the campus of the University for a term commencing immediately upon execution of the agreement and
expiring twenty years after the opening of the Arena. In consideration therefore, the Bank paid the lesser of 10% of the total construction cost of the Arena or $6,000,000, such sum to be paid in seven equal annual installments beginning after
substantial completion and opening of the Arena. The cost of the naming rights will be amortized over the life of the contract commencing on the opening of the Arena, which took place in September 2008.

In the second quarter of 2007, the Bank and Thomas More College announced a naming rights agreement for the new athletic field constructed on Thomas
Mores campus. The Bank committed $1 million to the project, such sum to be paid in five equal annual installments beginning after substantial completion of the field, which is named The Bank of Kentucky Field. The cost of the naming rights
will be amortized over the twenty-five year life of the agreement commencing on the opening of the field, which took place in September 2008.

Further discussion of the Banks contractual obligations and off-balance sheet activities is included in Note 16 of BKFCs consolidated
financial statements.

Liquidity and Capital Resources

Liquidity refers to the availability of sufficient levels of cash to fund operations, such as meeting deposit withdrawals, funding loan commitments, paying expenses, meeting its quarterly payment
obligations under certain subordinated debentures issued by BKFC in connection with the issuance of floating rate redeemable trust preferred securities issued by BKFCs unconsolidated trust subsidiary and meeting its quarterly dividend payment
for the preferred stock associated with the CPP. The source of the funds for BKFCs debt obligations is dependent on the Bank. During 2010, as discussed in the financial condition section of this report, the growth in the short-term investments
and securities were funded by the growth in deposits, the reduction in loans and the net funding from the issuance of the Common Stock in the 2010 Common Stock offering, less the partial repayment of the Treasury Departments CPP investment. At
December 31, 2010, the Banks customers had available $326,277,000 in unused lines and letters of credit, and the Bank has further extended loan commitments totaling $19,967,000. Historically, many such commitments have expired without
being drawn and, accordingly, do not necessarily represent future cash commitments.

In 2009 BKFC filed a universal shelf registration
statement on Form S-3 that was declared effective in November, 2010. This registration statement permits BKFC to engage in offerings of up to $50 million aggregate principal amount of debt securities, Common Stock, preferred stock, purchase
contracts, units, warrants, rights and any combination of the foregoing. BKFC utilized the shelf registration to offer Common Stock in connection with the $28.1 million Common Stock offering completed in December, 2010. As of the date of this
report, $21.9 million of unused capacity remains available for future use. We may in the future utilize the unused portion of our existing shelf registration statement, or any future registration statements that we may file with the SEC, to conduct
subsequent registered debt or equity offerings.

If needed, the Bank has the ability to borrow term and overnight funds from the FHLB or other
financial intermediaries. Further, the Bank also has $245,448,000 of securities designated as available-for-sale and an additional $2,431,000 of held-to-maturity securities that mature within one year that can serve as sources of funds. Management
is satisfied that BKFCs liquidity is sufficient at December 31, 2010 to meet known and potential obligations.

As illustrated in
BKFCs statement of cash flows, the net change in cash and cash equivalents from 2010 as compared to 2009 was an increase of $73,926,000. Net income provided $11,671,000 of the $21,082,000 in the Banks cash flows from operating
activities, while the largest cash outflow from investing activities was in the form of an increase in available-for-sale securities of $61,603,000. As discussed in the financial condition section of this report, the largest source of cash from
financing activities came from the increase in deposits.

Both BKFC and the Bank are required to comply with capital requirements promulgated
by their primary regulators. These regulations and other regulatory requirements limit the amount of dividends that may be paid by the Bank to BKFC and by BKFC to its shareholders. In 2010, BKFC paid cash dividends of $.56 per share totaling
$3,174,000 on Common Stock and a total of $1,787,000 for dividends on preferred stock.

The FDIC has issued regulations relating a banks
deposit insurance assessment and certain aspects of its operations to specified capital levels. A well-capitalized bank, one with a leverage ratio of 5% or more and a Total Risk-Based Ratio of 10% or more, and no particular areas of
supervisory concern, pays the lowest premium and is subject to the fewest restrictions. The Banks capital levels and ratios exceed the regulatory definitions of well-capitalized institutions. At December 31, 2010, BKFCs Leverage
Ratio and Total Risk-Based Ratios were 9.41% and 13.77%, respectively, which exceed all required ratios established for bank holding companies.

Effect of Inflation and Changing Prices

The financial statements and related financial data presented in this Annual Report have been prepared in accordance with GAAP, which require the
measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is
reflected in increased operating costs. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial
institutions performance than do general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

Adoption of New Accounting Standards

In April 2009, the FASB issued guidance impacting ASC
320-10, Recognition and Presentation of Other-Than-Temporary Impairments,which amends existing guidance for determining whether an impairment is other-than-temporary for debt securities. The additional guidance requires an entity to assess
whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of these criteria is met, the entire difference between
amortized cost and fair value is recognized in earnings. For securities that do not meet the aforementioned criteria, the amount of impairment recognized in earnings is limited to the amount related to credit losses, while impairment related to
other factors is recognized in other comprehensive income. Additionally, the guidance expands and increases the frequency of existing disclosures about other-than-temporary impairments for debt and equity securities. This guidance is effective for
interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company adopted this guidance in the second quarter of 2009. The adoption of this guidance did not
have a material effect on the results of operations or financial condition.

In June 2009, the FASB issued Statement of Financial
Accounting Standards No. 166, Accounting for Transfers of Financial Assets, an Amendment of FASB Statement No. 140(ASC 810). The new accounting requirement amends previous guidance relating to the transfers of financial assets and
eliminates the concept of a qualifying special purpose entity. This Statement must be applied as of the beginning of each reporting entitys first annual reporting period that begins after November 15, 2009, for interim periods within that
first annual reporting period and for interim and annual reporting periods thereafter. This Statement must be applied to transfers occurring on or after the effective date. Additionally, on and after the effective date, the concept of a qualifying
special-purpose entity is no longer relevant for accounting purposes. Therefore, formerly qualifying special-purpose entities should be evaluated for consolidation by reporting entities on and after the effective date in accordance with the
applicable consolidation guidance. Additionally, the disclosure provisions of this Statement were also amended and apply to transfers that occurred both before and after the effective date of this Statement. The adoption of this new guidance did not
have a material affect on the Companys results of operations or financial position.



|Item 7A. | Quantitative and Qualitative Disclosure about Market Risk
|-------- | ---------------------------------------------------------

Asset/Liability Management and Market Risk

Market risk is the risk of loss arising from
adverse changes in the fair value of financial instruments due to interest rate risk, exchange rate risk, equity price risk or commodity price risk. The Bank does not maintain a trading account for any class of financial instrument and is not
currently subject to foreign currency exchange rate risk, equity price risk or commodity price risk. The Banks market risk is composed primarily of interest rate risk.

The Bank utilizes an earnings simulation model to measure and define the amount of interest rate risk it assumes. Interest rate risk is the potential for economic losses due to future interest rate
changes. These economic



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losses can be reflected as a loss of future net interest income and/or a decline in fair market values. Interest rate risk results from the fact that the interest sensitive assets and liabilities
can adjust their rates at different times and by different amounts. The goal of asset/liability management is to maintain a high, yet stable, net interest margin and to manage the effect that changes in market interest rates will have on net
interest income. A common measure of interest rate risk is interest rate gap measurement. The gap is the difference, in dollars, between the amount of interest-earning assets and interest-bearing liabilities that will reprice within a
certain time frame. Repricing can occur when an asset or liability matures or, if an adjustable rate instrument, when it can be adjusted. Typically, the measurement will focus on the interest rate gap position over the next 12 months. An institution
is said to have a negative gap position when more interest-bearing liabilities reprice within a certain period than interest-earning assets, and a positive gap position when more interest-earning assets reprice than interest-bearing liabilities.
Interest rate gap is considered an indicator of the effect that changing rates may have on net interest income. Generally, an institution with a negative gap will benefit from declining market interest rates and be negatively impacted by rising
interest rates. The Bank currently is in a negative gap position, $37,836,000 (2.27%), and as a result would, without considering other factors, generally benefit from lower rates and be negatively impacted by higher interest rates. The ability to
benefit from the Banks liability-sensitive position would depend on a number of factors, including: the competitive pressures on consumer deposit and loan pricing; the movement of certain deposit rate indices in relationship to asset rate
indices; and the extent of the decrease in the rate environment.

At December 31, 2010, BKFCs 12-month interest rate gap position,
as measured by the Banks asset/liability model, was negative. Over the preceding 12 months, interest rate sensitive liabilities exceeded interest rate sensitive assets by $37,836,000 (2.27% of total assets). At December 31, 2009, interest
rate sensitive liabilities exceeded interest rate sensitive assets by $186,363,000 (11.91% of total assets). Contributing to the decreased liability sensitive position from 2009 to 2010 was higher levels of short-term investments. Contributing to
the increase in short-term investments was the deposit growth experienced in 2010 and the decrease in total loans. An assumption, based on historical behavior, contributing to BKFCs gap position is that the balances in NOW and savings accounts
react within a two-year timeframe to market rate changes, rather than reacting immediately. These instruments are not tied to specific indices and are only influenced by market conditions and other factors. The Banks experience with NOW and
savings accounts has been that they have repriced at a pace equal to approximately 25% of a prime change. Accordingly, a general movement in interest rates may not have an immediate effect on the rates paid on those deposit accounts.

The Banks asset/liability management policy establishes guidelines governing the amount of interest income at risk, market value at risk and
parameters for the gap position. Management continually monitors these risks through the use of gap analysis and the earnings simulation model. The simulation model is used to estimate and evaluate the impact of changing interest rates on earnings
and market value. The model projects the effect of instantaneous movements in interest rates of both 100 and 200 basis points. The assumptions used in the simulation are inherently uncertain and, as a result, the model cannot precisely measure
future net interest income. The results of the model are used by management to approximate the results of rate changes and do not indicate actual expected results. Actual results will differ from the models simulated results due to timing,
frequency of interest rate changes as well as changes in various management strategies and market conditions. Additionally, actual results can differ materially from the model if interest rates do not move equally across the yield curve.

The changes in the estimates of an increasing rate scenario on the net interest income change, as shown below, between 2009 to 2010 were a result of the
same influences that increased the liability sensitivity of BKFCs gap position, and show that risk to income from rate changes is in a neutral range. Although the gap position is slightly negative, the results of the simulation show income
would rise slightly in a rising rate environment, as a result of the timing of the repricing of assets and liabilities within that 12-month time frame. The exaggerated effects of the estimates for a decreasing rate environment are the results of the
current rate environment. In December of 2008, the FRB lowered the targeted federal funds rate to .25%, and as a result most short-term deposit interest rates cannot drop 100 basis points while earning assets could in theory decrease by these
amounts. The result of this extreme low rate environment is a declining rate scenario which produces a negative impact on earnings.



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Net interest income estimates are summarized below.



|                |  |                            |       |   |      |  |       |   
|--------------- |  | -------------------------- | ----- | - | ---- |  | ----- | --
|                |  | Net Interest Income Change |      
|                |  | 2010                       |       |   | 2009 | 
|Increase 200 bp |  |                            | .36   | % |      |  | (3.12 | )%
|Increase 100 bp |  |                            | .28   |   |      |  | (1.36 | ) 
|Decrease 100 bp |  |                            | (4.08 | ) |      |  | (1.50 | ) 

The table below provides information about
the quantitative market risk of interest sensitive instruments at December 31, 2010 (dollars in thousands) and shows the contractual repricing intervals, and related average interest rates, for each of the next five years and thereafter. As
discussed above, while this table uses the contractual repricing intervals for NOW and savings accounts and therefore reflects the Banks ability to adjust rates on those accounts at any time, the Banks interest rate risk model
incorporates assumptions based on historical behavior to determine the expected repricing of these deposits. The amounts included in loans exclude ALL, deferred fees, in process accounts and purchase accounting adjustments:

Table 10Balance sheet repricing data (in thousands)



|                          |  |      |         |   |      |   |         |      |  |   |         |   |  |      |        |   |            |   |        |       |  |   |            |   |  |   |           |  |  |   |           | 
|------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------ | - | ---------- | - | ------ | ----- |  | - | ---------- | - |  | - | --------- |  |  | - | --------- | 
|                          |  | 2011 |         |   | 2012 |   |         | 2013 |  |   | 2014    |   |  | 2015 |        |   | Thereafter |   |        | Total |  |   | Fair Value |  
|Repricing in:             |  |      |         |   |      |   |         |      |  |   |         |   |  |      |        |   |            |   |        |       |  |   |            |   |  |   |           |  |  |   |           | 
|Federal Funds Sold        |  | $    | 132,249 |   |      |   |        |      |  |   |        |   |  |      |       |   |            |   |       |       |  |   |           |   |  | $ | 132,249   |  |  | $ | 132,249   | 
|Average Interest Rate     |  |      | .25     | % |      |   |        |      |  |   |        |   |  |      |       |   |            |   |       |       |  |   |           |   |  |   |          |  |  |   |          | 
|Interest Bearing Deposits |  | $    | 100     |   |      |   |        |      |  |   |        |   |  |      |       |   |            |   |       |       |  |   |           |   |  | $ | 100       |  |  | $ | 100       | 
|Average Interest Rate     |  |      | 2.08    | % |      |   |        |      |  |   |        |   |  |      |       |   |            |   |       |       |  |   |           |   |  |   |          |  |  |   |          | 
|Securities                |  | $    | 59,695  |   |      | $ | 42,918  |      |  | $ | 21,056  |   |  | $    | 42,082 |   |            | $ | 46,023 |       |  | $ | 73,452     |   |  | $ | 285,226   |  |  | $ | 285,710   | 
|Average Interest Rate     |  |      | 1.78    | % |      |   | 2.27    | %    |  |   | 3.18    | % |  |      | 2.43   | % |            |   | 2.01   | %     |  |   | 4.24       | % |  |   |          |  |  |   |          | 
|FHLB Stock                |  | $    | 4,959   |   |      |   |        |      |  |   |        |   |  |      |       |   |            |   |       |       |  |   |           |   |  | $ | 4,959     |  |  | $ | 4,959     | 
|Average Dividend Rate     |  |      | 4.00    | % |      |   |        |      |  |   |        |   |  |      |       |   |            |   |       |       |  |   |           |   |  |   |          |  |  |   |          | 
|Loans                     |  | $    | 707,482 |   |      | $ | 162,400 |      |  | $ | 176,715 |   |  | $    | 48,685 |   |            | $ | 16,791 |       |  | $ | 12,351     |   |  | $ | 1,124,424 |  |  | $ | 1,122,657 | 
|Average Interest Rate     |  |      | 4.72    | % |      |   | 5.77    | %    |  |   | 5.56    | % |  |      | 5.89   | % |            |   | 5.46   | %     |  |   | 4.86       | % |  |   |          |  |  |   |          | 
|                          |  |      |         |   |      |   |         |     
|Liabilities               |  |      |         |   |      |   |         |      |  |   |         |   |  |      |        |   |            |   |        |       |  |   |            |   |  |   |           |  |  |   |           | 
|Savings, NOW, MMA         |  | $    | 718,960 |   |      |   |        |      |  |   |        |   |  |      |       |   |            |   |       |       |  |   |           |   |  | $ | 718,960   |  |  | $ | 718,960   | 
|Average Interest Rate     |  |      | .42     | % |      |   |        |      |  |   |        |   |  |      |       |   |            |   |       |       |  |   |           |   |  |   |          |  |  |   |          | 
|CDs and IRAs              |  | $    | 314,324 |   |      | $ | 108,703 |      |  | $ | 15,862  |   |  | $    | 1,584  |   |            | $ | 1,887  |       |  |   |           |   |  | $ | 442,360   |  |  | $ | 448,715   | 
|Average Interest Rate     |  |      | 1.64    | % |      |   | 1.65    | %    |  |   | 2.13    | % |  |      | 3.39   | % |            |   | 2.40   | %     |  |   |           |   |  |   |          |  |  |   |          | 
|Borrowings                |  | $    | 23,419  |   |      |   |        |      |  |   |        |   |  |      |       |   |            |   |       |       |  |   |           |   |  | $ | 23,419    |  |  | $ | 23,419    | 
|Average Interest Rate     |  |      | .53     | % |      |   |        |      |  |   |        |   |  |      |       |   |            |   |       |       |  |   |           |   |  |   |          |  |  |   |          | 
|Notes Payable             |  | $    | 38,000  |   |      |   |        |      |  |   |        |   |  | $    | 5,000  |   |            | $ | 5,000  |       |  | $ | 761        |   |  | $ | 48,761    |  |  | $ | 42,897    | 
|Average Interest Rate     |  |      | 1.92    | % |      |   |        |      |  |   |        |   |  |      | 1.35   | % |            |   | 1.70   | %     |  |   | 2.91       | % |  |   |          |  |  |   |          | 



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|Item 8. | Financial Statements and Supplementary Data
|------- | -------------------------------------------

THE BANK OF KENTUCKY

FINANCIAL CORPORATION

FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008



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THE BANK OF KENTUCKY FINANCIAL CORPORATION

Crestview Hills, Kentucky

FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008

CONTENTS



|                                                           |  |  |    | 
|---------------------------------------------------------- |  |  | -- | 
|REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM    |  |  | 60 | 
|                                                           | 
|CONSOLIDATED FINANCIAL STATEMENTS                          |  |  |    | 
|                                                           | 
|CONSOLIDATED BALANCE SHEETS                                |  |  | 62 | 
|                                                           | 
|CONSOLIDATED STATEMENTS OF INCOME                          |  |  | 63 | 
|                                                           | 
|CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY |  |  | 64 | 
|                                                           | 
|CONSOLIDATED STATEMENTS OF CASH FLOWS                      |  |  | 66 | 
|                                                           | 
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 |  |  | 67 | 



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders

The Bank
of Kentucky Financial Corporation

Crestview Hills, Kentucky

We have audited the accompanying consolidated balance sheets of The Bank of Kentucky Financial Corporation as of December 31, 2010 and 2009 and the related consolidated statements of income, changes
in shareholders equity, and cash flows for each of the three years in the period ended December 31, 2010. We also have audited The Bank of Kentucky Financial Corporations internal control over financial reporting as of
December 31, 2010, based on criteria established inInternal Control  Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Bank of Kentucky Financial Corporations
management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Managements
Report on Internal Control over Financial Reporting included in item 9A. Our responsibility is to express an opinion on these financial statements and an opinion on the companys internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists,
and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions.

A companys internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial
reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could
have a material effect on the financial statements.



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Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of The Bank of Kentucky Financial Corporation as of December 31, 2010 and 2009, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2010, in conformity with accounting
principles generally accepted in the United States of America. Also in our opinion The Bank of Kentucky Financial Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010,
based on criteria established in Internal Control  Integrated Frameworkissued by the COSO.



|                      |  |  |  |                      
|--------------------- |  |  |  | ---------------------
|                      |  |  |  | /s/ Crowe Horwath LLP
|Indianapolis, Indiana |  |  |  |                      
|March 10, 2011        |  |  |  |                      



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THE BANK OF KENTUCKY FINANCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS

December 31, 2010 and 2009

(Dollar amounts in thousands, except per share amounts)



|                                                                                                                                                                                       |  |      |           |  |      |   |           | 
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | --------- |  | ---- | - | --------- | 
|                                                                                                                                                                                       |  | 2010 |           |  | 2009 |  
|ASSETS                                                                                                                                                                                 |  |      |           |  |      |   |           | 
|Cash and due from banks                                                                                                                                                                |  | $    | 40,415    |  |      | $ | 40,431    | 
|Federal funds sold and other short-term investments                                                                                                                                    |  |      | 132,249   |  |      |   | 58,307    | 
|                                                                                                                                                                                       |  |      |           |  |      |   |           | 
|Total cash and cash equivalents                                                                                                                                                        |  |      | 172,664   |  |      |   | 98,738    | 
|Interest bearing deposits with banks                                                                                                                                                   |  |      | 100       |  |      |   | 100       | 
|Available-for-sale securities                                                                                                                                                          |  |      | 245,448   |  |      |   | 183,845   | 
|Held-to-maturity securities                                                                                                                                                            |  |      |           |  |      |   |           | 
|(Fair value of $40,262 and $31,275)                                                                                                                                                    |  |      | 39,778    |  |      |   | 30,722    | 
|Loans held for sale                                                                                                                                                                    |  |      | 15,279    |  |      |   | 6,798     | 
|Loans, net of allowance ($17,368 and $15,153)                                                                                                                                          |  |      | 1,088,641 |  |      |   | 1,139,831 | 
|Premises and equipment-net                                                                                                                                                             |  |      | 23,170    |  |      |   | 23,588    | 
|Federal Home Loan Bank stock, at cost                                                                                                                                                  |  |      | 4,959     |  |      |   | 4,959     | 
|Goodwill                                                                                                                                                                               |  |      | 21,889    |  |      |   | 21,889    | 
|Acquisition intangibles                                                                                                                                                                |  |      | 3,575     |  |      |   | 5,047     | 
|Company owned life insurance                                                                                                                                                           |  |      | 25,199    |  |      |   | 24,240    | 
|Accrued interest receivable and other assets                                                                                                                                           |  |      | 24,182    |  |      |   | 25,241    | 
|                                                                                                                                                                                       |  |      |           |  |      |   |           | 
|                                                                                                                                                                                       |  | $    | 1,664,884 |  |      | $ | 1,564,998 | 
|                                                                                                                                                                                       |  |      |           |  |      |   |           | 
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                   |  |      |           |  |      |   |           | 
|Liabilities                                                                                                                                                                            |  |      |           |  |      |   |           | 
|Deposits                                                                                                                                                                               |  |      |           |  |      |   |           | 
|Noninterest bearing deposits                                                                                                                                                           |  | $    | 260,992   |  |      | $ | 200,069   | 
|Interest bearing deposits                                                                                                                                                              |  |      | 1,161,320 |  |      |   | 1,143,203 | 
|                                                                                                                                                                                       |  |      |           |  |      |   |           | 
|Total deposits                                                                                                                                                                         |  |      | 1,422,312 |  |      |   | 1,343,272 | 
|Short-term borrowings                                                                                                                                                                  |  |      | 23,419    |  |      |   | 21,669    | 
|Notes payable                                                                                                                                                                          |  |      | 48,761    |  |      |   | 44,781    | 
|Accrued expenses and other liabilities                                                                                                                                                 |  |      | 11,022    |  |      |   | 14,143    | 
|                                                                                                                                                                                       |  |      |           |  |      |   |           | 
|                                                                                                                                                                                       |  |      | 1,505,514 |  |      |   | 1,423,865 | 
|Commitments and contingent liabilities                                                                                                                                                 |  |      |           |  |      |   |          | 
|Shareholders equity                                                                                                                                                                   |  |      |           |  |      |   |           | 
|Preferred stock, no par value, $17,000 liquidation value, 34,000 shares authorized and 17,000 issued (2010) and $ 34,000
liquidation value, 34,000 shares authorized and issued (2009) |  |      | 16,790    |  |      |   | 33,226    | 
|Common stock, no par value, 15,000,000 shares authorized, 7,432,295 (2010) and 5,666,707 (2009) shares
issued                                                                          |  |      | 3,098     |  |      |   | 3,098     | 
|Additional paid-in capital                                                                                                                                                             |  |      | 33,903    |  |      |   | 5,423     | 
|Retained earnings                                                                                                                                                                      |  |      | 104,683   |  |      |   | 98,432    | 
|Accumulated other comprehensive income                                                                                                                                                 |  |      | 896       |  |      |   | 954       | 
|                                                                                                                                                                                       |  |      |           |  |      |   |           | 
|                                                                                                                                                                                       |  |      | 159,370   |  |      |   | 141,133   | 
|                                                                                                                                                                                       |  |      |           |  |      |   |           | 
|                                                                                                                                                                                       |  | $    | 1,664,884 |  |      | $ | 1,564,998 | 
|                                                                                                                                                                                       |  |      |           |  |      |   |           | 

See accompanying notes.



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THE BANK OF KENTUCKY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

Years ended December 31, 2010, 2009 and 2008

(Dollar amounts in thousands, except
per share amounts)



|                                                    |  |      |        |  |      |   |        |      |  |   |        | 
|--------------------------------------------------- |  | ---- | ------ |  | ---- | - | ------ | ---- |  | - | ------ | 
|                                                    |  | 2010 |        |  | 2009 |   |        | 2008 | 
|Interest income                                     |  |      |        |  |      |   |        |      |  |   |        | 
|Loans, including related fees                       |  | $    | 61,023 |  |      | $ | 57,738 |      |  | $ | 63,375 | 
|Securities                                          |  |      |        |  |      |   |        |      |  |   |        | 
|Taxable                                             |  |      | 4,229  |  |      |   | 3,493  |      |  |   | 3,737  | 
|Tax exempt                                          |  |      | 1,035  |  |      |   | 1,221  |      |  |   | 750    | 
|Other                                               |  |      | 395    |  |      |   | 298    |      |  |   | 820    | 
|                                                    |  |      |        |  |      |   |        |      |  |   |        | 
|                                                    |  |      | 66,682 |  |      |   | 62,750 |      |  |   | 68,682 | 
|Interest expense                                    |  |      |        |  |      |   |        |      |  |   |        | 
|Deposits                                            |  |      | 12,066 |  |      |   | 16,429 |      |  |   | 25,022 | 
|Borrowings                                          |  |      | 1,207  |  |      |   | 1,528  |      |  |   | 2,998  | 
|                                                    |  |      |        |  |      |   |        |      |  |   |        | 
|                                                    |  |      | 13,273 |  |      |   | 17,957 |      |  |   | 28,020 | 
|                                                    |  |      |        |  |      |   |        |      |  |   |        | 
|Net interest income                                 |  |      | 53,409 |  |      |   | 44,793 |      |  |   | 40,662 | 
|                                                    |  |      |       
|Provision for loan losses                           |  |      | 15,500 |  |      |   | 12,825 |      |  |   | 4,850  | 
|                                                    |  |      |        |  |      |   |        |      |  |   |        | 
|Net interest income after provision for loan losses |  |      | 37,909 |  |      |   | 31,968 |      |  |   | 35,812 | 
|                                                    |  |      |       
|Non-interest income                                 |  |      |        |  |      |   |        |      |  |   |        | 
|Service charges and fees                            |  |      | 9,889  |  |      |   | 9,156  |      |  |   | 8,918  | 
|Mortgage banking income                             |  |      | 2,646  |  |      |   | 1,503  |      |  |   | 937    | 
|Trust fee income                                    |  |      | 2,373  |  |      |   | 1,095  |      |  |   | 1,111  | 
|Bankcard transaction revenue                        |  |      | 2,921  |  |      |   | 2,225  |      |  |   | 1,924  | 
|Company owned life insurance earnings               |  |      | 959    |  |      |   | 923    |      |  |   | 794    | 
|Net securities gains                                |  |      |       |  |      |   | 728    |      |  |   |       | 
|Other                                               |  |      | 1,926  |  |      |   | 986    |      |  |   | 1,084  | 
|                                                    |  |      |        |  |      |   |        |      |  |   |        | 
|                                                    |  |      | 20,714 |  |      |   | 16,616 |      |  |   | 14,768 | 
|Non-interest expense                                |  |      |        |  |      |   |        |      |  |   |        | 
|Salaries and employee benefits                      |  |      | 19,398 |  |      |   | 16,139 |      |  |   | 16,385 | 
|Occupancy and equipment                             |  |      | 5,017  |  |      |   | 4,703  |      |  |   | 4,718  | 
|Data processing                                     |  |      | 1,830  |  |      |   | 1,597  |      |  |   | 1,365  | 
|Advertising                                         |  |      | 1,168  |  |      |   | 1,039  |      |  |   | 840    | 
|Electronic banking processing fees                  |  |      | 1,161  |  |      |   | 1,013  |      |  |   | 1,030  | 
|Outside service fees                                |  |      | 1,484  |  |      |   | 1,439  |      |  |   | 1,322  | 
|State bank taxes                                    |  |      | 1,966  |  |      |   | 1,797  |      |  |   | 1,576  | 
|Amortization of intangible assets                   |  |      | 1,472  |  |      |   | 1,094  |      |  |   | 1,278  | 
|FDIC insurance                                      |  |      | 2,242  |  |      |   | 2,407  |      |  |   | 764    | 
|Other                                               |  |      | 6,686  |  |      |   | 5,449  |      |  |   | 4,945  | 
|                                                    |  |      |        |  |      |   |        |      |  |   |        | 
|                                                    |  |      | 42,424 |  |      |   | 36,677 |      |  |   | 34,223 | 
|                                                    |  |      |        |  |      |   |        |      |  |   |        | 
|Income before income taxes                          |  |      | 16,199 |  |      |   | 11,907 |      |  |   | 16,357 | 
|                                                    |  |      |       
|Federal income taxes                                |  |      | 4,528  |  |      |   | 3,147  |      |  |   | 5,016  | 
|                                                    |  |      |        |  |      |   |        |      |  |   |        | 
|Net income                                          |  | $    | 11,671 |  |      | $ | 8,760  |      |  | $ | 11,341 | 
|                                                    |  |      |        |  |      |   |        |      |  |   |        | 
|Preferred stock dividend and discount accretion     |  |      | 2,246  |  |      |   | 1,792  |      |  |   |       | 
|                                                    |  |      |        |  |      |   |        |      |  |   |        | 
|Net income available to common shareholders         |  | $    | 9,425  |  |      | $ | 6,968  |      |  | $ | 11,341 | 
|                                                    |  |      |        |  |      |   |        |      |  |   |        | 
|Per share data                                      |  |      |        |  |      |   |        |      |  |   |        | 
|Earnings per share                                  |  | $    | 1.61   |  |      | $ | 1.24   |      |  | $ | 2.02   | 
|                                                    |  |      |        |  |      |   |        |      |  |   |        | 
|Earnings per share, assuming dilution               |  | $    | 1.61   |  |      | $ | 1.23   |      |  | $ | 2.02   | 
|                                                    |  |      |        |  |      |   |        |      |  |   |        | 

See accompanying notes.



63



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THE BANK OF KENTUCKY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY

Years ended December 31, 2010, 2009 and 2008

(Dollar amounts in thousands, except per share amounts)



|                                                 |  |                |        |  |        |  |           |             |  |   |                          |  |  |                  |        |   |                                            |   |        |       |  |   |       |   |  |   |         |  
|------------------------------------------------ |  | -------------- | ------ |  | ------ |  | --------- | ----------- |  | - | ------------------------ |  |  | ---------------- | ------ | - | ------------------------------------------ | - | ------ | ----- |  | - | ----- | - |  | - | ------- | -
|                                                 |  | PreferredStock |        |  | Shares |  |           | CommonStock |  |   | AdditionalPaid-inCapital |  |  | RetainedEarnings |        |   | AccumulatedOtherComprehensiveIncome (Loss) |   |        | Total | 
|Balance January 1, 2008                          |  | $              |       |  |        |  | 5,684,207 |             |  | $ | 3,098                    |  |  | $                | 3,880  |   |                                            | $ | 86,305 |       |  | $ | 202   |   |  | $ | 93,485  |  
|                                                 |  |                |        |  |        |  |          
|Comprehensive income                             |  |                |        |  |        |  |           |             |  |   |                          |  |  |                  |        |   |                                            |   |        |       |  |   |       |   |  |   |         |  
|Net income                                       |  |                |        |  |        |  |           |             |  |   |                          |  |  |                  |        |   |                                            |   | 11,341 |       |  |   |       |   |  |   | 11,341  |  
|Change in net unrealized gain (loss), net of tax |  |                |        |  |        |  |           |             |  |   |                          |  |  |                  |        |   |                                            |   |        |       |  |   | 832   |   |  |   | 832     |  
|                                                 |  |                |        |  |        |  |           |             |  |   |                          |  |  |                  |        |   |                                            |   |        |       |  |   |       |   |  |   |         |  
|Total comprehensive income                       |  |                |        |  |        |  |           |             |  |   |                          |  |  |                  |        |   |                                            |   |        |       |  |   |       |   |  |   | 12,173  |  
|Cash dividends - $.54 per share                  |  |                |        |  |        |  |           |             |  |   |                          |  |  |                  |        |   |                                            |   | (3,038 | )     |  |   |       |   |  |   | (3,038  | )
|Stock-based compensation expense                 |  |                |        |  |        |  |           |             |  |   |                          |  |  |                  | 642    |   |                                            |   |        |       |  |   |       |   |  |   | 642     |  
|Exercise of stock options, including tax benefit |  |                |        |  |        |  | 2,700     |             |  |   |                          |  |  |                  | 51     |   |                                            |   |        |       |  |   |       |   |  |   | 51      |  
|Repurchase and retirement of common shares       |  |                |        |  |        |  | (80,300   | )           |  |   |                          |  |  |                  | (1,865 | ) |                                            |   |        |       |  |   |       |   |  |   | (1,865  | )
|                                                 |  |                |        |  |        |  |           |             |  |   |                          |  |  |                  |        |   |                                            |   |        |       |  |   |       |   |  |   |         |  
|Balance December 31, 2008                        |  |                |       |  |        |  | 5,606,607 |             |  |   | 3,098                    |  |  |                  | 2,708  |   |                                            |   | 94,608 |       |  |   | 1,034 |   |  |   | 101,448 |  
|                                                 |  |                |        |  |        |  |          
|Comprehensive income                             |  |                |        |  |        |  |           |             |  |   |                          |  |  |                  |        |   |                                            |   |        |       |  |   |       |   |  |   |         |  
|Net income                                       |  |                |        |  |        |  |           |             |  |   |                          |  |  |                  |        |   |                                            |   | 8,760  |       |  |   |       |   |  |   | 8,760   |  
|Change in net unrealized gain (loss), net of tax |  |                |        |  |        |  |           |             |  |   |                          |  |  |                  |        |   |                                            |   |        |       |  |   | (80   | ) |  |   | (80     | )
|                                                 |  |                |        |  |        |  |           |             |  |   |                          |  |  |                  |        |   |                                            |   |        |       |  |   |       |   |  |   |         |  
|Total comprehensive income                       |  |                |        |  |        |  |           |             |  |   |                          |  |  |                  |        |   |                                            |   |        |       |  |   |       |   |  |   | 8,680   |  
|Cash dividends - $.56 per share                  |  |                |        |  |        |  |           |             |  |   |                          |  |  |                  |        |   |                                            |   | (3,144 | )     |  |   |       |   |  |   | (3,144  | )
|Dividends paid and accrued on preferred stock    |  |                |        |  |        |  |           |             |  |   |                          |  |  |                  |        |   |                                            |   | (1,497 | )     |  |   |       |   |  |   | (1,497  | )
|Issuance of preferred stock                      |  |                | 32,931 |  |        |  |           |             |  |   |                          |  |  |                  |        |   |                                            |   |        |       |  |   |       |   |  |   | 32,931  |  
|Issuance of a warrant to purchase common shares  |  |                |        |  |        |  |           |             |  |   |                          |  |  |                  | 1,015  |   |                                            |   |        |       |  |   | 1,015 |   |  |   | 1,015   |  
|Stock-based compensation expense                 |  |                |        |  |        |  |           |             |  |   |                          |  |  |                  | 494    |   |                                            |   |        |       |  |   |       |   |  |   | 494     |  
|Exercise of stock options, including tax benefit |  |                |        |  |        |  | 10,100    |             |  |   |                          |  |  |                  | 206    |   |                                            |   |        |       |  |   |       |   |  |   | 206     |  
|Issuance of common shares                        |  |                |        |  |        |  | 50,000    |             |  |   |                          |  |  |                  | 1,000  |   |                                            |   |        |       |  |   |       |   |  |   | 1,000   |  
|Accretion of preferred stock discount            |  |                | 295    |  |        |  |           |             |  |   |                          |  |  |                  |        |   |                                            |   | (295   | )     |  |   |       |   |  |   |        |  
|                                                 |  |                |        |  |        |  |           |             |  |   |                          |  |  |                  |        |   |                                            |   |        |       |  |   |       |   |  |   |         |  
|Balance December 31, 2009                        |  | $              | 33,226 |  |        |  | 5,666,707 |             |  | $ | 3,098                    |  |  | $                | 5,423  |   |                                            | $ | 98,432 |       |  | $ | 954   |   |  | $ | 141,133 |  
|                                                 |  |                |        |  |        |  |           |             |  |   |                          |  |  |                  |        |   |                                            |   |        |       |  |   |       |   |  |   |         |  

See accompanying notes.



64



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##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY

Years ended December 31, 2010, 2009 and 2008

(Dollar amounts in thousands, except
per share amounts)



|                                                 |  |                |         |   |        |  |           |             |  |   |                          |  |  |                  |        |  |                                            |   |         |       |  |   |     |   |  |   |         |  
|------------------------------------------------ |  | -------------- | ------- | - | ------ |  | --------- | ----------- |  | - | ------------------------ |  |  | ---------------- | ------ |  | ------------------------------------------ | - | ------- | ----- |  | - | --- | - |  | - | ------- | -
|                                                 |  | PreferredStock |         |   | Shares |  |           | CommonStock |  |   | AdditionalPaid-inCapital |  |  | RetainedEarnings |        |  | AccumulatedOtherComprehensiveIncome (Loss) |   |         | Total | 
|Balance December 31, 2009                        |  | $              | 33,226  |   |        |  | 5,666,707 |             |  | $ | 3,098                    |  |  | $                | 5,423  |  |                                            | $ | 98,432  |       |  | $ | 954 |   |  | $ | 141,133 |  
|                                                 |  |                |         |   |        |  |          
|Comprehensive income                             |  |                |         |   |        |  |           |             |  |   |                          |  |  |                  |        |  |                                            |   |         |       |  |   |     |   |  |   |         |  
|Net income                                       |  |                |         |   |        |  |           |             |  |   |                          |  |  |                  |        |  |                                            |   | 11,671  |       |  |   |     |   |  |   | 11,671  |  
|Change in net unrealized gain (loss), net of tax |  |                |         |   |        |  |           |             |  |   |                          |  |  |                  |        |  |                                            |   |         |       |  |   | (58 | ) |  |   | (58     | )
|                                                 |  |                |         |   |        |  |           |             |  |   |                          |  |  |                  |        |  |                                            |   |         |       |  |   |     |   |  |   |         |  
|Total comprehensive income                       |  |                |         |   |        |  |           |             |  |   |                          |  |  |                  |        |  |                                            |   |         |       |  |   |     |   |  |   | 11,613  |  
|Cash dividends - $.56 per share                  |  |                |         |   |        |  |           |             |  |   |                          |  |  |                  |        |  |                                            |   | (3,174  | )     |  |   |     |   |  |   | (3,174  | )
|Dividends paid and accrued on preferred stock    |  |                |         |   |        |  |           |             |  |   |                          |  |  |                  |        |  |                                            |   | (1,682  | )     |  |   |     |   |  |   | (1,682  | )
|Preferred stock repurchased                      |  |                | (17,000 | ) |        |  |           |             |  |   |                          |  |  |                  |        |  |                                            |   |         |       |  |   |     |   |  |   | (17,000 | )
|Stock-based compensation expense                 |  |                |         |   |        |  |           |             |  |   |                          |  |  |                  | 307    |  |                                            |   |         |       |  |   |     |   |  |   | 307     |  
|Issuance of common shares                        |  |                |         |   |        |  | 1,765,588 |             |  |   |                          |  |  |                  | 28,173 |  |                                            |   |         |       |  |   |     |   |  |   | 28,173  |  
|Accretion of preferred stock discount            |  |                | 564     |   |        |  |           |             |  |   |                          |  |  |                  |        |  |                                            |   | (564    | )     |  |   |     |   |  |   |        |  
|                                                 |  |                |         |   |        |  |           |             |  |   |                          |  |  |                  |        |  |                                            |   |         |       |  |   |     |   |  |   |         |  
|Balance December 31, 2010                        |  | $              | 16,790  |   |        |  | 7,432,295 |             |  | $ | 3,098                    |  |  | $                | 33,903 |  |                                            | $ | 104,683 |       |  | $ | 896 |   |  | $ | 159,370 |  
|                                                 |  |                |         |   |        |  |           |             |  |   |                          |  |  |                  |        |  |                                            |   |         |       |  |   |     |   |  |   |         |  

See accompanying notes.



65



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##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended December 31, 2010, 2009 and 2008

(Dollar amounts in thousands)



|                                                                                 |  |      |          |   |      |   |          |      |  |   |          |  
|-------------------------------------------------------------------------------- |  | ---- | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                                                 |  | 2010 |          |   | 2009 |   |          | 2008 | 
|Cash flows from operating activities                                             |  |      |          |   |      |   |          |      |  |   |          |  
|Net income                                                                       |  | $    | 11,671   |   |      | $ | 8,760    |      |  | $ | 11,341   |  
|Adjustments to reconcile net income to net cash from operating activities        |  |      |          |   |      |   |          |      |  |   |          |  
|Depreciation and amortization                                                    |  |      | 822      |   |      |   | 1,578    |      |  |   | 1,459    |  
|Net amortization (accretion) on securities                                       |  |      | 2,300    |   |      |   | 1,188    |      |  |   | 34       |  
|Provision for loan losses                                                        |  |      | 15,500   |   |      |   | 12,825   |      |  |   | 4,850    |  
|Federal Home Loan Bank stock dividend                                            |  |      |         |   |      |   |         |      |  |   | (193     | )
|Amortization of acquisition intangibles                                          |  |      | 1,472    |   |      |   | 1,094    |      |  |   | 1,278    |  
|Earnings on life insurance                                                       |  |      | (959     | ) |      |   | (924     | )    |  |   | (788     | )
|Loss on sale/write-down of other real estate                                     |  |      | 67       |   |      |   | 528      |      |  |   | 380      |  
|Mortgage banking income                                                          |  |      | (2,646   | ) |      |   | (1,503   | )    |  |   | (937     | )
|Proceeds from loans sold                                                         |  |      | 142,219  |   |      |   | 119,405  |      |  |   | 60,061   |  
|Origination of loans held for sale                                               |  |      | (148,054 | ) |      |   | (122,075 | )    |  |   | (59,076  | )
|Net securities gains                                                             |  |      |         |   |      |   | (728     | )    |  |   |         |  
|Stock based compensation expense                                                 |  |      | 307      |   |      |   | 494      |      |  |   | 642      |  
|Net change in:                                                                   |  |      |          |   |      |   |          |      |  |   |          |  
|Accrued interest receivable and other assets                                     |  |      | 473      |   |      |   | (8,386   | )    |  |   | 788      |  
|Accrued expenses and other liabilities                                           |  |      | (2,987   | ) |      |   | (372     | )    |  |   | (2,609   | )
|                                                                                 |  |      |          |   |      |   |          |      |  |   |          |  
|Net cash from operating activities                                               |  |      | 20,185   |   |      |   | 11,884   |      |  |   | 17,230   |  
|Cash flows from investing activities                                             |  |      |          |   |      |   |          |      |  |   |          |  
|Proceeds from maturities and principal reductions of held-to-maturity securities |  |      | 4,909    |   |      |   | 6,967    |      |  |   | 5,217    |  
|Purchase of held-to-maturity securities                                          |  |      | (13,979  | ) |      |   | (3,972   | )    |  |   | (22,723  | )
|Proceeds from maturities and sales of available-for-sale securities              |  |      | 180,770  |   |      |   | 131,451  |      |  |   | 189,473  |  
|Purchase of available-for-sale securities                                        |  |      | (244,746 | ) |      |   | (230,382 | )    |  |   | (121,674 | )
|Purchase of company owned life insurance                                         |  |      |         |   |      |   | (2,000   | )    |  |   |         |  
|Loans made to customers, net of principal collections                            |  |      | 34,297   |   |      |   | (34,317  | )    |  |   | (82,039  | )
|Purchase of loans                                                                |  |      |         |   |      |   | (56,213  | )    |  |   |         |  
|Property and equipment expenditures, net                                         |  |      | (1,363   | ) |      |   | (5,309   | )    |  |   | (2,668   | )
|Proceeds from the sale of other real estate                                      |  |      | 2,671    |   |      |   | 1,613    |      |  |   | 4,920    |  
|Net payments in acquisition                                                      |  |      |         |   |      |   | 18,089   |      |  |   |         |  
|                                                                                 |  |      |          |   |      |   |          |      |  |   |          |  
|Net cash from investing activities                                               |  |      | (37,441  | ) |      |   | (174,073 | )    |  |   | (29,494  | )
|Cash flows from financing activities                                             |  |      |          |   |      |   |          |      |  |   |          |  
|Net change in deposits                                                           |  |      | 79,240   |   |      |   | 199,048  |      |  |   | 9,074    |  
|Net change in short-term borrowings                                              |  |      | 1,750    |   |      |   | (6,484   | )    |  |   | 5,364    |  
|Advances on notes payable                                                        |  |      | 10,000   |   |      |   |         |      |  |   | 20,000   |  
|Proceeds from issuance of preferred stock and warrant, net                       |  |      |         |   |      |   | 33,946   |      |  |   |         |  
|Redemption of preferred stock                                                    |  |      | (17,000  | ) |      |   |         |      |  |   |         |  
|Payments on notes payable                                                        |  |      | (6,020   | ) |      |   | (17      | )    |  |   | (17,542  | )
|Dividends paid on common stock                                                   |  |      | (3,174   | ) |      |   | (3,144   | )    |  |   | (3,038   | )
|Stock repurchase and retirement                                                  |  |      |         |   |      |   |         |      |  |   | (1,865   | )
|Proceeds from issuance of common stock                                           |  |      | 28,173   |   |      |   |         |      |  |   |         |  
|Dividends paid on preferred stock                                                |  |      | (1,787   | ) |      |   | (1,284   | )    |  |   |         |  
|Proceeds from exercise of stock options                                          |  |      |         |   |      |   | 206      |      |  |   | 51       |  
|                                                                                 |  |      |          |   |      |   |          |      |  |   |          |  
|Net cash from financing activities                                               |  |      | 91,182   |   |      |   | 222,271  |      |  |   | 12,044   |  
|                                                                                 |  |      |          |   |      |   |          |      |  |   |          |  
|Net change in cash and cash equivalents                                          |  |      | 73,926   |   |      |   | 60,082   |      |  |   | (220     | )
|Cash and cash equivalents at beginning of year                                   |  |      | 98,738   |   |      |   | 38,656   |      |  |   | 38,876   |  
|                                                                                 |  |      |          |   |      |   |          |      |  |   |          |  
|Cash and cash equivalents at end of year                                         |  | $    | 172,664  |   |      | $ | 98,738   |      |  | $ | 38,656   |  
|                                                                                 |  |      |          |   |      |   |          |      |  |   |          |  
|Supplemental cash flow information:                                              |  |      |          |   |      |   |          |      |  |   |          |  
|Cash paid for interest                                                           |  | $    | 14,418   |   |      | $ | 18,858   |      |  | $ | 30,171   |  
|Cash paid for income taxes                                                       |  |      | 5,000    |   |      |   | 4,815    |      |  |   | 5,220    |  
|Supplemental noncash disclosures:                                                |  |      |          |   |      |   |          |      |  |   |          |  
|Transfers from loans to other real estate                                        |  | $    | 2,152    |   |      | $ | 2,810    |      |  | $ | 1,895    |  

See note 6 regarding assets acquired
and liabilities assumed in acquisitions.

See accompanying notes.



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##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008

(Dollar amounts in thousands, except share and
per share amounts)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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). Intercompany transactions are eliminated in consolidation.

Description of Business: The Company
provides financial services through its subsidiary, which operates primarily in Boone, Campbell, Grant, Gallatin and Kenton counties in northern Kentucky and also in Greater Cincinnati, Ohio. Operations consist of generating commercial, mortgage and
consumer loans and accepting deposits from customers. The loan portfolio is diversified and the ability of debtors to repay loans is not dependent upon any single industry. The majority of the institutions loans are secured by specific items
of collateral including business assets, real property and consumer assets.

Use of Estimates: To prepare financial statements in
conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial
statements and the disclosures provided, and future results could differ. The allowance for loan losses and the fair values of financial instruments are particularly subject to change.

Cash Flows: Cash and cash equivalents include cash on hand, amounts due from banks, and federal funds sold. The Company reports net cash flows for customer loan and deposit transactions,
interest-bearing balances with banks and short-term borrowings with maturities of 90 days or less.

Interest-Bearing Deposits in Other
Financial Institutions: Interest-bearing deposits in other financial institutions mature within one year and are carried at cost.

Securities: Securities are classified as held-to-maturity and carried at amortized cost when management has the positive intent and ability to
hold them to maturity. Securities are classified as available-for-sale when they might be sold before maturity. Available-for-sale securities are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income,
net of tax.

Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the
level-yield method without anticipating prepayments except for mortgage backed securities where prepayments are anticipated. Gains and losses on sales are based on the amortized cost of the security sold.

Management evaluates securities for other-than-temporary impairment (OTTI) at least on a quarterly basis, and more frequently when economic
or market conditions warrant such an evaluation.

In determining OTTI, management considers many factors, including: (1) the length of
time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the
entity has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than temporary decline exists involves a high degree of
subjectivity and judgment and is based on the information available to management at a point in time.

When OTTI occurs, the amount of the
OTTI recognized in earnings depends on whether an entity intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss. If an entity intends
to sell or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the OTTI shall be recognized in earnings equal to the entire difference between the



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67



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##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008

(Dollar amounts in thousands, except share and
per share amounts)



NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)



investments amortized cost basis and its fair value at the balance sheet date. Otherwise, the OTTI shall be separated into the amount representing the credit loss and the amount related to
all other factors. The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total OTTI related to other factors shall be
recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings shall become the new amortized cost basis of the investment.

Loans Held For Sale: The Bank originates loans for sale to secondary market brokers. Loans held for sale are loans which have been closed and are
awaiting delivery to these brokers. They are reported at the lower of cost or fair value, on an aggregate basis. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings. Most loans are sold servicing released
such that there would be no servicing asset recognized upon the sale.

Loans: Loans that management has the intent and ability to hold
for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, purchase premiums and discounts, deferred loan fees and costs, and an allowance for loan losses. Interest income is accrued on the unpaid
principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method without anticipating prepayments.



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68



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##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008

(Dollar amounts in thousands, except share and
per share amounts)



NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)



Interest income on mortgage and commercial loans is discontinued at the time the loan is 90 days
delinquent unless the loan is well-secured and in process of collection. Interest income is not reported when full loan repayment is in doubt, typically when the loan is impaired or payments are significantly past due. Past due status is based on
the contractual terms of the loan.

All interest accrued but not received for loans placed on nonaccrual is reversed against interest income.
Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought
current and future payments are reasonably assured.

Concentration of Credit Risk: Most of the Companys business activity is with
customers located within Northern Kentucky and the Cincinnati metropolitan area. Therefore, the Companys exposure to credit risk is significantly affected by changes in the economy in this area.

Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable incurred credit losses, increased by the provision
for loan losses and decreased by charge-offs less recoveries. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated
collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in managements judgment, should be charged off. Loan losses are
charged against the allowance when management believes the uncollectibility of a loan balance is confirmed.

The allowance consists of
specific and general components. The specific component relates to loans that are individually classified as impaired. The general component covers both classified and non-classified loans and is based on historical loss experience adjusted for
current factors.

The general component covers non-impaired loans and is based on historical loss experience adjusted for current factors. For
loans that are risk rated, the historical loss experience is determined based on the actual loss history experienced by the Company over the most recent 5 years. These loss ratios are calculated from a migration analysis of the charge offs over this
period, but excludes the ratios from the most recent six month period as they are not appropriately seasoned. Prior to 2010, the ratio excluded the most recent twelve month period. Such change was made given the current market environment which
accelerated charge-offs and therefore indicated a six-month seasoning was appropriate. The loss ratios for loans designated as belonging to homogeneous pools, including smaller balance consumer loans, are calculated for a five year period and a one
year period, with the lower of the two loss ratios representing the lower end of the reserve range and the higher calculated ratio representing the reserve percentage for the higher end of the reserve range. These actual loss experiences are
supplemented with other economic factors based on the risks present for each portfolio segment. These economic factors include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in
charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management
and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations. The following portfolio segments have been identified: commercial, residential real estate, non
residential real estate, construction, consumer and municipal obligations.

A loan is impaired when, based on current information and events,
it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans, for



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69



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##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008

(Dollar amounts in thousands, except share and
per share amounts)



NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)



which the terms have been modified, and for which the borrower is experiencing financial difficulties,
are considered troubled debt restructurings and classified as impaired.

Impairment is evaluated in total for smaller-balance loans of similar
nature such as residential mortgage, consumer, and credit card loans, and on an individual loan basis for other loans. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans, are collectively evaluated
for impairment, and accordingly, they are not separately identified for impairment disclosures. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present

value of estimated future cash flows using the loans existing rate or at the fair value of collateral if repayment is expected solely from the
collateral. Troubled debt restructurings are measured at the present value of estimated future cash flows using the loans effective rate at inception.

Premises and Equipment: Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Buildings and related components are depreciated using the straight-line
method with useful lives ranging from 10 to 25 years. Leasehold improvements are depreciated using the straight-line method over the lesser of the useful life of the asset or the length of the lease. Furniture, fixtures and equipment are depreciated
using the straight-line method with useful lives ranging from 3 to 10 years.

Other Real Estate: Other real estate acquired through or
instead of foreclosure is initially recorded at fair value less cost to sell when acquired, establishing a new cost basis. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Expenses incurred in
carrying other real estate are charged to operations as incurred. A total of $795 and $1,381 of other real estate was owned on December 31, 2010 and 2009, respectively, and included in other assets.

Federal Home Loan Bank (FHLB) Stock: The Bank is a member of the FHLB system. Members are required to own a certain amount of stock based on the
level of borrowings and other factors, and may invest in additional amounts. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock
dividends are reported as income.

Company Owned Life Insurance: The Company has purchased life insurance policies on certain
key executives. Company owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable
at settlement.

Goodwill and Other Intangible Assets:Goodwill resulting from business combinations prior to
January 1, 2009 represents the excess of the purchase price over the fair value of the net assets of businesses acquired. Goodwill resulting from business combinations after January 1, 2009 is generally determined as the excess of the fair
value of the consideration transferred plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in
a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually. The Company has selected June 30 as the date to perform the annual impairment test. Intangible
assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Goodwill is the only intangible asset with an indefinite life on our balance sheet.

Other intangible assets consist of core deposit, acquired customer relationship, trade name and noncompete agreement intangible assets arising from whole
bank, branch and asset management



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70



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##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008

(Dollar amounts in thousands, except share and
per share amounts)



NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)



business acquisitions. They are initially measured at fair value and then are amortized either on the straight-line method or an accelerated method over their estimated useful lives of four to
ten years.

Prepaid FDIC Insurance: On September 29, 2009 the Federal Deposit Insurance Corporation (FDIC) adopted an
Amended Restoration Plan to allow the Deposit Insurance Fund to return to a reserve ratio of 1.15% within eight years, as mandated by statute. As part of the Amended Restoration Plan, the FDIC amended its assessment regulations to require all
institutions to prepay on December 30, 2009 their estimated risk-based insurance assessments for the fourth quarter of 2009, and for all of 2010, 2011, and

2012. At that same time, institutions were also required to pay their regular quarterly assessments for the third quarter of 2009. An institutions quarterly risk-based deposit insurance assessments
thereafter would be paid from the amount the institution prepaid until that amount was exhausted or until December 31, 2014, when any amount remaining would be returned to the institution. The prepaid assessment amount was $4,210 and $6,694 on
December 30, 2010 and 2009, and is included in other assets.

Repurchase Agreements: Substantially all repurchase agreement
liabilities represent amounts advanced by various customers. Securities are pledged to cover these liabilities, which are not covered by federal deposit insurance.

Stock-Based Compensation: Compensation cost is recognized for stock options issued to directors and officers, based on the fair value of these awards at the date of grant. A Black-Scholes model is
utilized to estimate the fair value of stock options. Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis
over the requisite service period for the entire award.

Income Taxes: Income tax expense is the amount of taxes payable for the
current year plus or minus the change in deferred taxes. Deferred tax liabilities and assets are the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities, computed using
enacted tax rates. Recognition of deferred tax assets is limited by the establishment of a valuation allowance unless management concludes that they are more likely than not to result in future tax benefits to the Company.

A tax position is recognized as a benefit only if it is more likely than not that the tax position would be sustained in a tax examination,
with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the more likely than not test, no
tax benefit is recorded.

Loan Commitments and Related Financial Instruments: Financial instruments include credit instruments, such as
commitments to make loans and standby letters of credit, issued to meet customer financing needs. The face amount of these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments
are recorded when they are funded. Instruments, such as standby letters of credit that are considered financial guarantees are recorded at fair value.

Fair Value of Financial Instruments: Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair
value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market
conditions could significantly affect the estimates.



(Continued)

71



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##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008

(Dollar amounts in thousands, except share and
per share amounts)



NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)



Loss Contingencies: Loss contingencies, including claims and legal actions arising in the
ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there are currently such matters that will have a material
effect on the financial statements.

Comprehensive Income: Comprehensive income consists of net income and other comprehensive income.
Other comprehensive income includes unrealized gains and losses on securities available for sale which are also recognized as separate components of equity.

Dividend Restriction: Banking regulations require the maintenance of certain capital levels and may limit the amount of dividends which may be paid by the Bank to the Company or by the Company to
its shareholders. See Note 19 for further discussion.

Long-term Assets: These assets are reviewed for impairment when events indicate
their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.

Restrictions on Cash: Cash on hand or on deposit with the Federal Reserve Bank was required to meet regulatory reserve and clearing requirements.

Business Segment: Internal financial information is reported and aggregated in one line of business, banking. While the chief
decision-makers monitor the revenue streams of the various products and services, the identifiable segments are not material and operations are managed and financial performance is evaluated on a Company-wide basis. Accordingly, all of the financial
service operations are considered by management to be aggregated in one reportable operating segment.

Reclassifications: Some items in
the prior year financial statements were reclassified to conform to the current presentation. Reclassifications had no material effect on the financial statements.

Derivative Financial Instruments: As a result of loans acquired through the Integra Bank N.A. (Integra Bank) acquisition in the fourth quarter of 2009, the Bank initiated an
interest rate protection program in which the Bank earns a fee by providing the Banks commercial loan customers the ability to swap from variable to fixed, or fixed to variable interest rates. Under these agreements, the Bank enters into a
variable or fixed rate loan agreement with its customer in addition to a swap agreement. The swap agreement effectively swaps the customers variable rate to a fixed rate or vice versa. The Bank then enters into a corresponding swap agreement
with a third party in order to swap its exposure on the variable to fixed rate swap with the Banks customer. The agreements are considered stand alone derivatives and changes in the fair value of derivatives are reported in earnings as non
interest income.

The Bank is exposed to losses if a counterparty fails to make its payments under a contract in which the Bank is in
the receiving status. In this situation, the Bank receives collateral from the counterparty for the fair market value of the derivative. Also, the Bank minimizes, its credit risk by monitoring the credit standing of the counterparties. We anticipate
the counterparties will be able to fully satisfy their obligations under these agreements.

Earnings Per Common Share: Basic earnings
per common share is net income available to common shareholders divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share includes the dilutive effect of additional potential common
shares



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72



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##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008

(Dollar amounts in thousands, except share and
per share amounts)



NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)



issuable under stock options. Earnings and dividends per share are restated for all stock splits and stock dividends through the date of issuance of the financial statements.

Retirement Plans: Employee 401(k) and profit sharing plan expense is the amount of matching contributions. Deferred compensation and supplemental
retirement plan expense allocates the benefits over years of service.

Adoption of New Accounting Standards: In June 2009, the
FASB issued Statement of Financial Accounting Standards No. 166, Accounting for Transfers of Financial Assets, an Amendment of FASB Statement No. 140 (ASC 810). The new accounting requirement amends previous guidance relating to the
transfers of financial assets and eliminates the concept of a qualifying special purpose entity. This Statement was applied as of the beginning of each reporting entitys first annual reporting period that begins after November 15, 2009
for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. This Statement is applied to transfers occurring on or after the effective date. Additionally, on and after the effective date,
the concept of a qualifying special-purpose entity is no longer relevant for accounting purposes. Therefore, formerly qualifying special-purpose entities are evaluated for consolidation by reporting entities on and after the effective date in
accordance with the applicable consolidation guidance. Additionally, the disclosure provisions of this Statement were also amended and apply to transfers that occurred both before and after the effective date of this Statement. The effect of
adopting this new guidance did not have a material affect on the Companys results of operations or financial position.



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##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008

(Dollar amounts in thousands, except share and
per share amounts)



NOTE 2 - SECURITIES

The fair value of available for sale securities and the related gains and losses recognized in accumulated other comprehensive income (loss) was as follows:



|                                                                       |  |               |         |  |                      |   |       |                       |  |   |           |   |  |   |         | 
|---------------------------------------------------------------------- |  | ------------- | ------- |  | -------------------- | - | ----- | --------------------- |  | - | --------- | - |  | - | ------- | 
|Available-for-Sale                                                     |  | AmortizedCost |         |  | GrossUnrealizedGains |   |       | GrossUnrealizedLosses |  |   | FairValue |  
|2010                                                                   |  |               |         |  |                      |   |       |                       |  |   |           |   |  |   |         | 
|U.S. Government, federal agencies and Government sponsored enterprises |  | $             | 145,536 |  |                      |   | 407   |                       |  |   | (876      | ) |  |   | 145,067 | 
|U.S. Government mortgage-backed                                        |  |               | 97,429  |  |                      |   | 2,095 |                       |  |   | (268      | ) |  |   | 99,256  | 
|Corporate                                                              |  |               | 1,125   |  |                      |   |      |                       |  |   |          |   |  |   | 1,125   | 
|                                                                       |  |               |         |  |                      |   |       |                       |  |   |           |   |  |   |         | 
|                                                                       |  | $             | 244,090 |  |                      |   | 2,502 |                       |  |   | (1,144    | ) |  |   | 245,448 | 
|                                                                       |  |               |         |  |                      |   |       |                       |  |   |           |   |  |   |         | 
|                                                                       |  | AmortizedCost |         |  | GrossUnrealizedGains |   |       | GrossUnrealizedLosses |  |   | FairValue |  
|2009                                                                   |  |               |         |  |                      |   |       |                       |  |   |           |   |  |   |         | 
|U.S. Government, federal agencies and Government sponsored enterprises |  | $             | 99,400  |  |                      | $ | 239   |                       |  | $ | (77       | ) |  | $ | 99,562  | 
|U.S. Government mortgage-backed                                        |  |               | 81,815  |  |                      |   | 1,485 |                       |  |   | (202      | ) |  |   | 83,098  | 
|Corporate                                                              |  |               | 1,185   |  |                      |   |      |                       |  |   |          |   |  |   | 1,185   | 
|                                                                       |  |               |         |  |                      |   |       |                       |  |   |           |   |  |   |         | 
|                                                                       |  | $             | 182,400 |  |                      | $ | 1,724 |                       |  | $ | (279      | ) |  | $ | 183,845 | 
|                                                                       |  |               |         |  |                      |   |       |                       |  |   |           |   |  |   |         | 

All mortgage-backed securities are secured by residential properties.

The amortized cost, unrecognized gains and losses, and fair value of securities held to maturity were as follows:



|                                |  |               |        |  |                        |   |     |                         |  |   |           |   |  |   |        | 
|------------------------------- |  | ------------- | ------ |  | ---------------------- | - | --- | ----------------------- |  | - | --------- | - |  | - | ------ | 
|Held-to-Maturity                |  | AmortizedCost |        |  | GrossUnrecognizedGains |   |     | GrossUnrecognizedLosses |  |   | FairValue |  
|2010                            |  |               |        |  |                        |   |     |                         |  |   |           |   |  |   |        | 
|Municipal and other obligations |  | $             | 39,778 |  |                        | $ | 713 |                         |  | $ | (229      | ) |  | $ | 40,262 | 
|                                |  |               |        |  |                        |   |     |                         |  |   |           |   |  |   |        | 
|2009                            |  |               |        |  |                        |   |     |                         |  |   |           |   |  |   |        | 
|Municipal and other obligations |  | $             | 30,722 |  |                        | $ | 556 |                         |  | $ | (3        | ) |  | $ | 31,275 | 
|                                |  |               |        |  |                        |   |     |                         |  |   |           |   |  |   |        | 

The fair value of debt securities and amortized cost, if different, at year-end 2010 by contractual maturity were as
follows, with securities not due at a single maturity date, primarily mortgage backed securities, shown separately.



|                                       |  |                    |         |  |                  |   |         |               |  |   |           |  |  |   |        | 
|-------------------------------------- |  | ------------------ | ------- |  | ---------------- | - | ------- | ------------- |  | - | --------- |  |  | - | ------ | 
|                                       |  | Available-for-Sale |         |  | Held-to-Maturity |  
|                                       |  | AmortizedCost      |         |  | FairValue        |   |         | AmortizedCost |  |   | FairValue | 
|Due in one year or less                |  | $                  |        |  |                  | $ |        |               |  | $ | 2,431     |  |  | $ | 2,446  | 
|Due after one year through five years  |  |                    | 129,560 |  |                  |   | 129,243 |               |  |   | 16,045    |  |  |   | 16,353 | 
|Due after five years through ten years |  |                    | 15,976  |  |                  |   | 15,824  |               |  |   | 15,042    |  |  |   | 15,203 | 
|Due after ten years                    |  |                    | 1,125   |  |                  |   | 1,125   |               |  |   | 6,260     |  |  |   | 6,260  | 
|Mortgage-backed                        |  |                    | 97,429  |  |                  |   | 99,256  |               |  |   |          |  |  |   |       | 
|                                       |  |                    |         |  |                  |   |         |               |  |   |           |  |  |   |        | 
|                                       |  | $                  | 244,090 |  |                  | $ | 245,448 |               |  | $ | 39,778    |  |  | $ | 40,262 | 
|                                       |  |                    |         |  |                  |   |         |               |  |   |           |  |  |   |        | 

At December 31, 2010 and 2009, securities with a carrying value of $244,220 and $200,882 were pledged to secure public
deposits and repurchase agreements.

The proceeds from sales and calls of securities and the associated gains are listed below:



|             |  |      |   |  |      |   |        |      |  |   |   | 
|------------ |  | ---- | - |  | ---- | - | ------ | ---- |  | - | - | 
|             |  | 2010 |   |  | 2009 |   |        | 2008 | 
|Proceeds     |  | $    |  |  |      | $ | 90,558 |      |  | $ |  | 
|Gross gains  |  |      |  |  |      |   | 728    |      |  |   |  | 
|Gross losses |  |      |  |  |      |   |       |      |  |   |  | 

The tax provision related to these
net realized gains and losses was $0, $250, and $0, respectively.



(Continued)

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##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008

(Dollar amounts in thousands, except share and
per share amounts)



NOTE 2 - SECURITIES(Continued)



Securities with unrealized losses at year-end 2010 and 2009, aggregated by investment category and
length of time that individual securities have been in a continuous unrealized loss position, were as follows:



|                                                                   |  |                     |        |  |                   |   |        |           |  |   |                |  |  |           |    |   |                |   |        |  |  |   |        |  
|------------------------------------------------------------------ |  | ------------------- | ------ |  | ----------------- | - | ------ | --------- |  | - | -------------- |  |  | --------- | -- | - | -------------- | - | ------ |  |  | - | ------ | -
|                                                                   |  | Less than 12 Months |        |  | 12 Months or More |   |        | Total     | 
|Description of Securities                                          |  | FairValue           |        |  | UnrealizedLoss    |   |        | FairValue |  |   | UnrealizedLoss |  |  | FairValue |    |   | UnrealizedLoss |  
|2010                                                               |  |                     |        |  |                   |   |        |           |  |   |                |  |  |           |    |   |                |   |        |  |  |   |        |  
|U.S. Govt., federal agencies and Government sponsored enterprises |  | $                   | 63,952 |  |                   | $ | (876   | )         |  | $ |               |  |  | $         |   |   |                | $ | 63,952 |  |  | $ | (876   | )
|U.S Govt. mortgage-backed                                         |  |                     | 15,899 |  |                   |   | (268   | )         |  |   |               |  |  |           |   |   |                |   | 15,899 |  |  |   | (268   | )
|Municipal & other obligations                                      |  |                     | 12,813 |  |                   |   | (229   | )         |  |   |               |  |  |           |   |   |                |   | 12,813 |  |  |   | (229   | )
|                                                                   |  |                     |        |  |                   |   |        |           |  |   |                |  |  |           |    |   |                |   |        |  |  |   |        |  
|Total temporarily impaired                                         |  | $                   | 92,664 |  |                   | $ | (1,373 | )         |  | $ |               |  |  | $         |   |   |                | $ | 92,664 |  |  | $ | (1,373 | )
|                                                                   |  |                     |        |  |                   |   |        |           |  |   |                |  |  |           |    |   |                |   |        |  |  |   |        |  
|2009                                                               |  |                     |        |  |                   |   |        |           |  |   |                |  |  |           |    |   |                |   |        |  |  |   |        |  
|U.S. Govt., federal agencies and Government sponsored enterprises |  | $                   | 20,920 |  |                   | $ | (77    | )         |  | $ |               |  |  | $         |   |   |                | $ | 20,920 |  |  | $ | (77    | )
|U.S Govt. mortgage-backed                                         |  |                     | 52,662 |  |                   |   | (202   | )         |  |   |               |  |  |           |   |   |                |   | 52,662 |  |  |   | (202   | )
|Municipal & other obligations                                      |  |                     |       |  |                   |   |       |           |  |   | 852            |  |  |           | (3 | ) |                |   | 852    |  |  |   | (3     | )
|                                                                   |  |                     |        |  |                   |   |        |           |  |   |                |  |  |           |    |   |                |   |        |  |  |   |        |  
|Total temporarily impaired                                         |  | $                   | 73,582 |  |                   | $ | (279   | )         |  | $ | 852            |  |  | $         | (3 | ) |                | $ | 74,434 |  |  | $ | (282   | )
|                                                                   |  |                     |        |  |                   |   |        |           |  |   |                |  |  |           |    |   |                |   |        |  |  |   |        |  

As of December 31, 2010, the Banks security portfolio consisted of 164 securities, 45 of which were in an
unrealized loss position; of $1,373. There was no other-than-temporary-impairment of securities as of or for the year ended December 31, 2010. Unrealized losses have not been recognized into income because the issuers bonds are of high
credit quality (U.S. government agencies and government sponsored enterprises and A rated or better Kentucky municipalities), management does not have the intent to sell these securities and it is not likely that it will be required to
sell the securities before their anticipated recovery.

NOTE 3 - LOANS

Year-end loans were as follows:



|                                                  |  |      |           |   |      |   |           |  
|------------------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | -
|                                                  |  | 2010 |           |   | 2009 |  
|Commercial                                        |  | $    | 216,660   |   |      | $ | 223,404   |  
|Residential real estate                           |  |      | 260,625   |   |      |   | 267,857   |  
|Nonresidential real estate                        |  |      | 482,173   |   |      |   | 476,089   |  
|Construction                                      |  |      | 107,611   |   |      |   | 148,288   |  
|Consumer                                          |  |      | 16,546    |   |      |   | 20,750    |  
|Municipal obligations                             |  |      | 23,573    |   |      |   | 20,232    |  
|                                                  |  |      |           |   |      |   |           |  
|Gross loans                                       |  |      | 1,107,188 |   |      |   | 1,156,620 |  
|Less: Deferred loan origination fees and discount |  |      | (1,179    | ) |      |   | (1,636    | )
|Allowance for loan losses                         |  |      | (17,368   | ) |      |   | (15,153   | )
|                                                  |  |      |           |   |      |   |           |  
|Net loans                                         |  | $    | 1,088,641 |   |      | $ | 1,139,831 |  
|                                                  |  |      |           |   |      |   |           |  



(Continued)



75



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##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008

(Dollar amounts in thousands, except share and
per share amounts)



NOTE 3 - LOANS(Continued)



Certain of the Companys directors are loan customers of the Bank. A schedule of the aggregate
activity in these loans follows:



|                                          |  |      |         |  
|----------------------------------------- |  | ---- | ------- | -
|                                          |  | 2010 |        
|Beginning balance                         |  | $    | 3,095   |  
|Effect of change in composition of board  |  |      | 1,039   |  
|New loans and advances on lines of credit |  |      | 10,164  |  
|Loan payments                             |  |      | (11,883 | )
|                                          |  |      |         |  
|Ending balance                            |  | $    | 2,415   |  
|                                          |  |      |         |  

Activity in the allowance for loan losses was as follows:



|                                |  |      |         |   |      |   |        |      |  |   |        |  
|------------------------------- |  | ---- | ------- | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                |  | 2010 |         |   | 2009 |   |        | 2008 | 
|Beginning balance               |  | $    | 15,153  |   |      | $ | 9,910  |      |  | $ | 8,505  |  
|Provision charged to operations |  |      | 15,500  |   |      |   | 12,825 |      |  |   | 4,850  |  
|Loans charged off               |  |      | (14,006 | ) |      |   | (8,033 | )    |  |   | (3,908 | )
|Recoveries                      |  |      | 721     |   |      |   | 451    |      |  |   | 463    |  
|                                |  |      |         |   |      |   |        |      |  |   |        |  
|Ending balance                  |  | $    | 17,368  |   |      | $ | 15,153 |      |  | $ | 9,910  |  
|                                |  |      |         |   |      |   |        |      |  |   |        |  



(Continued)



76



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##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008

(Dollar amounts in thousands, except share and
per share amounts)



NOTE 3 - LOANS(Continued)



The following table presents the balance in the allowance for loan losses and the recorded investment in
loans by portfolio segment and based on impairment method as of December 31, 2010.



|                                               |  |            |         |  |                        |   |         |                           |  |   |              |  |  |          |         |  |                      |   |        |       |  |   |        |  |  |   |           | 
|---------------------------------------------- |  | ---------- | ------- |  | ---------------------- | - | ------- | ------------------------- |  | - | ------------ |  |  | -------- | ------- |  | -------------------- | - | ------ | ----- |  | - | ------ |  |  | - | --------- | 
|                                               |  | Commercial |         |  | ResidentialReal estate |   |         | NonResidentialReal
estate |  |   | Construction |  |  | Consumer |         |  | MunicipalObligations |   |        | Total | 
|Allowance for loan losses                      |  |            |         |  |                        |   |         |                           |  |   |              |  |  |          |         |  |                      |   |        |       |  |   |        |  |  |   |           | 
|Ending allowance balance attributable to loans |  |            |         |  |                        |   |         |                           |  |   |              |  |  |          |         |  |                      |   |        |       |  |   |        |  |  |   |           | 
|Individually evaluated for impairment          |  | $          | 595     |  |                        | $ | 399     |                           |  | $ | 3,365        |  |  | $        | 1,385   |  |                      | $ |       |       |  | $ |       |  |  | $ | 5,744     | 
|Collectively evaluated for impairment          |  |            | 2,845   |  |                        |   | 2,032   |                           |  |   | 4,764        |  |  |          | 1,765   |  |                      |   | 166    |       |  |   | 55     |  |  |   | 11,624    | 
|                                               |  |            |         |  |                        |   |         |                           |  |   |              |  |  |          |         |  |                      |   |        |       |  |   |        |  |  |   |           | 
|                                               |  | $          | 3,440   |  |                        | $ | 2,431   |                           |  | $ | 8,126        |  |  | $        | 3,150   |  |                      | $ | 166    |       |  | $ | 55     |  |  | $ | 17,368    | 
|                                               |  |            |         |  |                        |   |         |                           |  |   |              |  |  |          |         |  |                      |   |        |       |  |   |        |  |  |   |           | 
|Loans                                          |  |            |         |  |                        |   |         |                           |  |   |              |  |  |          |         |  |                      |   |        |       |  |   |        |  |  |   |           | 
|Loans individually evaluated for impairment    |  | $          | 1,769   |  |                        | $ | 2,828   |                           |  | $ | 15,583       |  |  | $        | 5,776   |  |                      | $ |       |       |  | $ |       |  |  | $ | 25,956    | 
|Loans collectively evaluated for impairment    |  |            | 214,891 |  |                        |   | 257,797 |                           |  |   | 466,590      |  |  |          | 101,835 |  |                      |   | 16,546 |       |  |   | 23,573 |  |  |   | 1,081,232 | 
|                                               |  |            |         |  |                        |   |         |                           |  |   |              |  |  |          |         |  |                      |   |        |       |  |   |        |  |  |   |           | 
|Total ending allowance balance                 |  | $          | 216,660 |  |                        | $ | 260,625 |                           |  | $ | 482,173      |  |  | $        | 107,611 |  |                      | $ | 16,546 |       |  | $ | 23,573 |  |  | $ | 1,107,188 | 
|                                               |  |            |         |  |                        |   |         |                           |  |   |              |  |  |          |         |  |                      |   |        |       |  |   |        |  |  |   |           | 



(Continued)



77



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##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008

(Dollar amounts in thousands, except share and
per share amounts)



NOTE 3 - LOANS (Continued)



Nonperforming and impaired loans were as follows



|                                                                  |  |      |        |  |      |   |        |      |  |   |        | 
|----------------------------------------------------------------- |  | ---- | ------ |  | ---- | - | ------ | ---- |  | - | ------ | 
|                                                                  |  | 2010 |        |  | 2009 |   |        | 2008 | 
|Nonaccrual loans at year end                                      |  | $    | 20,648 |  |      | $ | 23,826 |      |  | $ | 8,211  | 
|Loans past due over 90 days, still accruing at year-end           |  |      | 414    |  |      |   | 1,736  |      |  |   | 1,350  | 
|Accruing restructured loans                                       |  |      | 6,135  |  |      |   | 3,568  |      |  |   | 575    | 
|Average impaired loans during the year                            |  |      | 30,076 |  |      |   | 28,244 |      |  |   | 10,798 | 
|Interest income recognized during impairment                      |  |      | 640    |  |      |   | 738    |      |  |   | 266    | 
|Interest income received during impairment                        |  |      | 728    |  |      |   | 742    |      |  |   | 234    | 
|Loans designated as impaired at year end with allowance allocated |  |      | 22,524 |  |      |   | 32,142 |      |  |   | 13,956 | 
|Impaired loans with no allowance allocated                        |  |      | 3,432  |  |      |   | 3,922  |      |  |   |       | 
|Allowance allocated to impaired loans at year end                 |  |      | 5,744  |  |      |   | 5,916  |      |  |   | 3,432  | 

Nonperforming loans include both
smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans that are not performing.

The Company has allocated $1,436 and $719 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of December 31, 2010 and 2009. The Company has
committed to lend additional amounts totaling up to $0 and $0 as of December 31, 2010 and 2009 to customers with outstanding loans that are classified as troubled debt restructurings.



(Continued)



78



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##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008

(Dollar amounts in thousands, except share and
per share amounts)



NOTE 3 - LOANS (Continued)



The following table presents loans individually evaluated for impairment by class of loans as of
December 31, 2010:



|                                   |  |                        |        |  |                    |   |        |                                    |  |   |       | 
|---------------------------------- |  | ---------------------- | ------ |  | ------------------ | - | ------ | ---------------------------------- |  | - | ----- | 
|                                   |  | UnpaidPrincipalBalance |        |  | RecordedInvestment |   |        | Allowance forLoan 
LossesAllocated | 
|With no related allowance recorded |  |                        |        |  |                    |   |        |                                    |  |   |       | 
|Commercial                         |  | $                      | 310    |  |                    | $ | 310    |                                    |  | $ |      | 
|Residential real estate            |  |                        |        |  |                    |   |        |                                    |  |   |       | 
|Home equity lines of credit        |  |                        |       |  |                    |   |       |                                    |  |   |      | 
|Multifamily properties             |  |                        | 34     |  |                    |   | 34     |                                    |  |   |      | 
|Other                              |  |                        | 259    |  |                    |   | 259    |                                    |  |   |      | 
|Nonresidential real estate         |  |                        |        |  |                    |   |        |                                    |  |   |       | 
|Owner occupied properties          |  |                        | 725    |  |                    |   | 725    |                                    |  |   |      | 
|Non owner occupied properties      |  |                        | 1,495  |  |                    |   | 1,495  |                                    |  |   |      | 
|Construction                       |  |                        | 609    |  |                    |   | 609    |                                    |  |   |      | 
|With an allowance recorded         |  |                        |        |  |                    |   |        |                                    |  |   |       | 
|Commercial                         |  |                        | 1,459  |  |                    |   | 1,459  |                                    |  |   | 595   | 
|Residential real estate            |  |                        |        |  |                    |   |        |                                    |  |   |       | 
|Home equity lines of credit        |  |                        |       |  |                    |   |       |                                    |  |   |      | 
|Multifamily properties             |  |                        | 1,180  |  |                    |   | 1,180  |                                    |  |   | 57    | 
|Other                              |  |                        | 1,355  |  |                    |   | 1,355  |                                    |  |   | 342   | 
|Nonresidential real estate         |  |                        |        |  |                    |   |        |                                    |  |   |       | 
|Owner occupied properties          |  |                        | 1,946  |  |                    |   | 1,946  |                                    |  |   | 460   | 
|Non owner occupied properties      |  |                        | 11,417 |  |                    |   | 11,417 |                                    |  |   | 2,905 | 
|Construction                       |  |                        | 5,167  |  |                    |   | 5,167  |                                    |  |   | 1,385 | 
|                                   |  |                        |        |  |                    |   |        |                                    |  |   |       | 
|Total                              |  | $                      | 25,956 |  |                    | $ | 25,956 |                                    |  | $ | 5,744 | 
|                                   |  |                        |        |  |                    |   |        |                                    |  |   |       | 



(Continued)



79



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##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008

(Dollar amounts in thousands, except share and
per share amounts)



NOTE 3 - LOANS(Continued)



The following table presents the recorded investment in nonaccrual and loans past due over 90 days still
on accrual by class of loans as of December 31, 2010:



|                              |  |            |        |  |                           |   |     | 
|----------------------------- |  | ---------- | ------ |  | ------------------------- | - | --- | 
|                              |  | Nonaccrual |        |  | LoansOver 90 DaysPast Due |  
|Commercial                    |  | $          | 4,749  |  |                           | $ |    | 
|Residential real estate       |  |            |        |  |                           |   |     | 
|Home equity lines of credit   |  |            | 728    |  |                           |   |    | 
|Multifamily properties        |  |            | 34     |  |                           |   |    | 
|Other residential real estate |  |            | 3,446  |  |                           |   | 263 | 
|Nonresidential real estate    |  |            |        |  |                           |   |     | 
|Owner occupied properties     |  |            | 984    |  |                           |   | 68  | 
|Non owner occupied properties |  |            | 5,327  |  |                           |   |    | 
|Construction                  |  |            | 5,329  |  |                           |   |    | 
|Consumer                      |  |            |        |  |                           |   |     | 
|Credit card balances          |  |            |       |  |                           |   | 83  | 
|Other consumer                |  |            | 51     |  |                           |   |    | 
|Municipal obligations         |  |            |       |  |                           |   |    | 
|                              |  |            |        |  |                           |   |     | 
|Total                         |  | $          | 20,648 |  |                           | $ | 414 | 
|                              |  |            |        |  |                           |   |     | 

The following table presents the aging of the recorded investment in past due loans as of December 31, 2010 by class of
loans:



|                                    |  |                         |        |   |                           |   |     |            |  |   |                   |         |  |       |           |         |  |   |           | 
|----------------------------------- |  | ----------------------- | ------ | - | ------------------------- | - | --- | ---------- |  | - | ----------------- | ------- |  | ----- | --------- | ------- |  | - | --------- | 
|                                    |  | Loans30-90 dayspast due |        |   | Loans over90 dayspast
due |   |     | Nonaccrual |  |   | Loans notpast due |         |  | Total |          
|Commercial                          |  | $                       | 1,836  |   |                           | $ |    |            |  | $ | 4,749             |         |  | $     | 210,075   |         |  | $ | 216,660   | 
|Residential real estate             |  |                         |        |   |                           |   |     |            |  |   |                   |         |  |       |           |         |  |   |           | 
|Home equity lines of credit         |  |                         | 141    |   |                           |   |    |            |  |   | 728               |         |  |       | 93,317    |         |  |   | 94,186    | 
|Multifamily properties              |  |                         |       |   |                           |   |    |            |  |   | 34                |         |  |       | 37,663    |         |  |   | 37,697    | 
|Other residential real estate       |  |                         | 3,571  |   |                           |   | 263 |            |  |   | 3,446             |         |  |       | 121,462   |         |  |   | 128,742   | 
|Nonresidential real estate          |  |                         |        |   |                           |   |     |            |  |   |                   |         |  |       |           |         |  |   |           | 
|Owner occupied properties           |  |                         | 1,352  |   |                           |   | 68  |            |  |   | 984               |         |  |       | 231,870   |         |  |   | 234,274   | 
|Non owner occupied properties 4,525 |  |                         |        |  |                           |   |     | 5,327      |  |   |                   | 238,047 |  |       |           | 247,899 | 
|Construction                        |  |                         | 220    |   |                           |   |    |            |  |   | 5,329             |         |  |       | 102,062   |         |  |   | 107,611   | 
|Consumer                            |  |                         |        |   |                           |   |     |            |  |   |                   |         |  |       |           |         |  |   |           | 
|Credit card balances                |  |                         | 102    |   |                           |   | 83  |            |  |   |                  |         |  |       | 5,852     |         |  |   | 6,037     | 
|Other consumer                      |  |                         | 67     |   |                           |   |    |            |  |   | 51                |         |  |       | 10,391    |         |  |   | 10,509    | 
|Municipal obligations               |  |                         |       |   |                           |   |    |            |  |   |                  |         |  |       | 23,573    |         |  |   | 23,573    | 
|                                    |  |                         |        |   |                           |   |     |            |  |   |                   |         |  |       |           |         |  |   |           | 
|Total                               |  | $                       | 11,814 |   |                           | $ | 414 |            |  | $ | 20,648            |         |  | $     | 1,074,312 |         |  | $ | 1,107,188 | 
|                                    |  |                         |        |   |                           |   |     |            |  |   |                   |         |  |       |           |         |  |   |           | 



(Continued)



80



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##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008

(Dollar amounts in thousands, except share and
per share amounts)



NOTE 3 - LOANS(Continued)



Credit Quality Indicators:

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, including: current financial information, historical payment
experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis includes loans with an outstanding balance
greater than $100 and non-homogeneous loans, such as commercial and commercial real estate loans. This analysis is performed on a quarterly basis. The Company uses the following definitions for risk ratings:

Special Mention.Loans classified as special mention have a potential weakness that deserves managements close attention. If
left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institutions credit position at some future date.

Substandard.Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor
or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the
deficiencies are not corrected.

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those
classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

As of December 31, 2010, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:



|                              |  |      |         |  |                |   |        |             |  |   |          |  |  |           |   |  |       |   |         |  |  |   |           | 
|----------------------------- |  | ---- | ------- |  | -------------- | - | ------ | ----------- |  | - | -------- |  |  | --------- | - |  | ----- | - | ------- |  |  | - | --------- | 
|                              |  | Pass |         |  | SpecialMention |   |        | Substandard |  |   | Doubtful |  |  | Not Rated |   |  | Total |  
|Commercial                    |  | $    | 191,690 |  |                | $ | 9,415  |             |  | $ | 15,555   |  |  | $         |  |  |       |   |        |  |  | $ | 216,660   | 
|Residential real estate       |  |      |         |  |                |   |        |             |  |   |          |  |  |           |   |  |       |   |         |  |  |   |           | 
|Home equity lines of credit   |  |      |        |  |                |   |       |             |  |   | 871      |  |  |           | 6 |  |       |   | 93,309  |  |  |   | 94,186    | 
|Multifamily properties        |  |      | 35,483  |  |                |   | 1,303  |             |  |   | 911      |  |  |           |  |  |       |   |        |  |  |   | 37,697    | 
|Other residential real estate |  |      | 40,975  |  |                |   | 137    |             |  |   | 9,186    |  |  |           |  |  |       |   | 78,444  |  |  |   | 128,742   | 
|Nonresidential real estate    |  |      |         |  |                |   |        |             |  |   |          |  |  |           |   |  |       |   |         |  |  |   |           | 
|Owner occupied properties     |  |      | 207,137 |  |                |   | 5,052  |             |  |   | 22,085   |  |  |           |  |  |       |   |        |  |  |   | 234,274   | 
|Non owner occupied properties |  |      | 224,111 |  |                |   | 5,117  |             |  |   | 1 8,671  |  |  |           |  |  |       |   |        |  |  |   | 247,899   | 
|Construction                  |  |      | 86,524  |  |                |   | 4,350  |             |  |   | 16,737   |  |  |           |  |  |       |   |        |  |  |   | 107,611   | 
|Consumer                      |  |      |         |  |                |   |        |             |  |   |          |  |  |           |   |  |       |   |         |  |  |   |           | 
|Credit card balances          |  |      |        |  |                |   |       |             |  |   |         |  |  |           |  |  |       |   | 6,037   |  |  |   | 6,037     | 
|Other consumer                |  |      |        |  |                |   |       |             |  |   | 14       |  |  |           | 2 |  |       |   | 10,493  |  |  |   | 10,509    | 
|Municipal obligations         |  |      | 23,573  |  |                |   |       |             |  |   |         |  |  |           |  |  |       |   |         |  |  |   | 23,573    | 
|                              |  |      |         |  |                |   |        |             |  |   |          |  |  |           |   |  |       |   |         |  |  |   |           | 
|Total                         |  | $    | 809,493 |  |                | $ | 25,374 |             |  | $ | 84,030   |  |  | $         | 8 |  |       | $ | 188,283 |  |  | $ | 1,017,188 | 
|                              |  |      |         |  |                |   |        |             |  |   |          |  |  |           |   |  |       |   |         |  |  |   |           | 

Not rated loans represent the homogenous pools risk category.



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##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008

(Dollar amounts in thousands, except share and
per share amounts)



NOTE 4 - PREMISES AND EQUIPMENT



Year-end premises and equipment were as follows:



|                                  |  |      |         |   |      |   |         |  
|--------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                  |  | 2010 |         |   | 2009 |  
|Land and improvements             |  | $    | 7,818   |   |      | $ | 7,818   |  
|Leasehold improvements            |  |      | 1,792   |   |      |   | 1,748   |  
|Buildings                         |  |      | 18,770  |   |      |   | 18,455  |  
|Furniture, fixtures and equipment |  |      | 10,720  |   |      |   | 9,815   |  
|                                  |  |      |         |   |      |   |         |  
|Total                             |  |      | 39,100  |   |      |   | 37,836  |  
|Accumulated depreciation          |  |      | (15,930 | ) |      |   | (14,248 | )
|                                  |  |      |         |   |      |   |         |  
|Net premises and equipment        |  | $    | 23,170  |   |      | $ | 23,588  |  
|                                  |  |      |         |   |      |   |         |  

Depreciation expense was $1,781, $1,673, and $1,602 for 2010, 2009, and 2008, respectively. Year-end depreciation expense
included an additional $100 impairment expense for the Walton banking center that is no longer in use. This property is currently held for sale.

NOTE 5 - ACQUISITIONS

On December 11, 2009, the Bank completed the purchase of three
banking offices of Integra Bank Corporations wholly-owned bank subsidiary, Integra Bank, located in Crittenden, Dry Ridge and Warsaw, Kentucky and a portfolio of selected commercial loans originated by Integra Banks Covington, Kentucky
loan production office. This acquisition was consistent with the Banks strategy to strengthen and expand its northern Kentucky market share. The acquisition offers the Bank the opportunity to increase profitability by introducing our existing
retail and commercial products and services to the acquired customer base, as well as to add new customers in the expanded market. This transaction also included the deposits of two additional branches in northern Kentucky where the banking offices
were excluded. This transaction added $76 million in deposits and $51 million in loans. The deposits were purchased at a premium of 6.50%, while the loans were purchased at an approximate 1% discount. The acquisition included a core deposit
intangible asset of $1,579 and goodwill of $5,310. The results of operations for this acquisition have been included since the transaction date of December 11, 2009. In a separate transaction, the Bank also bought an additional $49 million in
loans from Integra Bank in the third quarter and $7 million in the fourth quarter of 2009 at an approximate 1% discount. None of these purchased loans have shown evidence of credit deterioration since origination. Expenses associated with this
transaction, approximately $200, were included in the other non-interest expense category on the income statement.

On December 31, 2009,
the Bank completed the purchase of the Tapke Asset Management, LLC (TAM). TAM was an independent investment advisory firm, headquartered in Fort Wright, Kentucky. TAM was one of northern Kentuckys largest independent investment
advisory firms managing each clients individual portfolios focused on their core equity, fixed income or balanced objectives. The purchase was consistent with the Banks strategy to strengthen and grow the Trust Department revenue and to
give the Banks current customers access to more products and services backed by a team of investment professionals. The entire staff of TAM joined the Banks current team of investment associates, and will service the combined portfolio
and clients going forward. As a result, the Bank oversees in excess of $676 million in client assets for year ended December 31, 2010. The expenses related to this transaction were not material to the financial statements.



(Continued)



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##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008

(Dollar amounts in thousands, except share and
per share amounts)



NOTE 5 - ACQUISITIONS (Continued)



The asset management company was purchased for $3,000, which consisted of $2,000 in cash and $1,000 in
Company stock, with an additional $500 in contingent consideration payable in three years based on revenue retention which has a fair value of $395. The acquisition included a customer relationship intangible of $1,525, a noncompete agreement
intangible of $320 and a trade name intangible of $165, and goodwill of $1,370.

NOTE 6 - GOODWILL AND ACQUISITION INTANGIBLES

Goodwill

Goodwill did
not change in 2010. The Integra Bank transaction included $5,310 in additional goodwill and the TAM transaction included $1,370 in additional goodwill in 2009. Further details of these transactions are included in Note 5.

Acquisition Intangibles

Acquisition
intangibles were as follows as of year-end:



|                                        |  |                     |        |  |                         |   |       |                     |  |   |                         |  |  |   |       | 
|--------------------------------------- |  | ------------------- | ------ |  | ----------------------- | - | ----- | ------------------- |  | - | ----------------------- |  |  | - | ----- | 
|                                        |  | 2010                |        |  | 2009                    |  
|                                        |  | GrossCarryingAmount |        |  | AccumulatedAmortization |   |       | GrossCarryingAmount |  |   | AccumulatedAmortization | 
|Amortized intangible assets:            |  |                     |        |  |                         |   |       |                     |  |   |                         |  |  |   |       | 
|Core deposit intangibles                |  | $                   | 5,947  |  |                         | $ | 4,034 |                     |  | $ | 5,947                   |  |  | $ | 3,240 | 
|Trade name intangibles                  |  |                     | 165    |  |                         |   | 95    |                     |  |   | 165                     |  |  |   |      | 
|Noncompete agreement intangibles        |  |                     | 320    |  |                         |   | 184   |                     |  |   | 320                     |  |  |   |      | 
|Other customer relationship intangibles |  |                     | 4,695  |  |                         |   | 3,239 |                     |  |   | 4,695                   |  |  |   | 2,840 | 
|                                        |  |                     |        |  |                         |   |       |                     |  |   |                         |  |  |   |       | 
|Total                                   |  | $                   | 11,127 |  |                         | $ | 7,552 |                     |  | $ | 11,127                  |  |  | $ | 6,080 | 
|                                        |  |                     |        |  |                         |   |       |                     |  |   |                         |  |  |   |       | 

Aggregate amortization expense was $1,472, $1,094, and $1,278 for 2010, 2009 and 2008, respectively.

Estimated amortization expense for each of the next five years:



|     |  |   |     | 
|---- |  | - | --- | 
|2011 |  | $ | 840 | 
|2012 |  |   | 661 | 
|2013 |  |   | 531 | 
|2014 |  |   | 419 | 
|2015 |  |   | 347 | 

NOTE 7 - INTEREST BEARING DEPOSITS

Time deposits of $100 or more were $138,413 and $161,109 at year-end 2010 and 2009.

Scheduled maturities of time deposits are as follows:



|     |  |   |         | 
|---- |  | - | ------- | 
|2011 |  | $ | 314,324 | 
|2012 |  |   | 108,703 | 
|2013 |  |   | 15,862  | 
|2014 |  |   | 1,584   | 
|2015 |  |   | 1,887   | 
|     |  |   |         | 
|     |  | $ | 442,360 | 
|     |  |   |         | 



(Continued)



83



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##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008

(Dollar amounts in thousands, except share and
per share amounts)



NOTE 7 - INTEREST BEARING DEPOSITS(Continued)



Deposits from directors and their affiliates at year-end 2010 and 2009 were $11,074 and $8,257,
comprising 0.78% and 0.61% of total deposits at those dates.

NOTE 8 - SHORT-TERM BORROWINGS

Short-term borrowings consisted of the following:



|                             |  |      |        |  |      |   |        | 
|---------------------------- |  | ---- | ------ |  | ---- | - | ------ | 
|                             |  | 2010 |        |  | 2009 |  
|Retail repurchase agreements |  |      | 23,419 |  |      |   | 21,669 | 
|                             |  |      |        |  |      |   |        | 
|                             |  | $    | 23,419 |  |      | $ | 21,669 | 
|                             |  |      |        |  |      |   |        | 

In the first quarter of 2009, the Company paid off the $4,400 outstanding on the $10,000 revolving credit line from US Bank
and closed the line. The line of credit was closed as a result of certain restrictive covenants and non usage fees being added to the note. The credit line was secured with 100% of the voting shares of the Bank. Repurchase agreements outstanding at
year-end 2010 had remaining maturities ranging from one day up to one year.

Information regarding repurchase agreements for the years ended
December 31, 2010 and 2009 is presented below:



|                                          |  |      |        |   |      |   |        |  
|----------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                          |  | 2010 |        |   | 2009 |  
|Average balance during the year           |  | $    | 22,497 |   |      | $ | 21,164 |  
|Maximum month end balance during the year |  |      | 25,472 |   |      |   | 24,222 |  
|Average rate paid during the year         |  |      | .60    | % |      |   | .88    | %
|Year-end weighted average rate            |  |      | .53    | % |      |   | .79    | %



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84



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##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008

(Dollar amounts in thousands, except share and
per share amounts)



NOTE 9 - NOTES PAYABLE



Notes payable consisted of the following:



|                        |  |      |        |  |      |   |        | 
|----------------------- |  | ---- | ------ |  | ---- | - | ------ | 
|                        |  | 2010 |        |  | 2009 |  
|FHLB advances           |  | $    | 10,000 |  |      | $ | 6,000  | 
|Subordinated debentures |  |      | 38,557 |  |      |   | 38,557 | 
|Other notes payable     |  |      | 204    |  |      |   | 224    | 
|                        |  |      |        |  |      |   |        | 
|                        |  | $    | 48,761 |  |      | $ | 44,781 | 
|                        |  |      |        |  |      |   |        | 

The FHLB advances are secured by a blanket pledge of eligible loans and securities and require monthly interest payments.
The following advances were outstanding as of December 31:



|                                                                                    |  |      |        |  |      |   |       | 
|----------------------------------------------------------------------------------- |  | ---- | ------ |  | ---- | - | ----- | 
|                                                                                    |  | 2010 |        |  | 2009 |  
|Convertible fixed rate advances with maturity in 2010 and an interest rate of 5.01% |  | $    |       |  |      | $ | 6,000 | 
|Fixed rate advances with maturity in 2013 and an interest rate of 1.35%             |  |      | 5,000  |  |      |   |      | 
|Fixed rate advances with maturity in 2014 and an interest rate of 1.72%             |  |      | 5,000  |  |      |   |      | 
|                                                                                    |  |      |        |  |      |   |       | 
|                                                                                    |  | $    | 10,000 |  |      | $ | 6,000 | 
|                                                                                    |  |      |        |  |      |   |       | 

There are no principal payments on FHLB advances scheduled in 2011, only monthly interest payments.

In March 2008, the Bank issued $20,000 of LIBOR plus 1.75% floating rate subordinated debentures to USB Capital Resources, Inc. The debentures may be
redeemed any time after March 2013 at face value. Final maturity is March of 2018. The subordinated debentures are classified as liabilities on the balance sheet and count as Tier 2 capital for regulatory capital purposes.

In May of 2007, The Bank of Kentucky Capital Trust II (the Trust), a trust subsidiary of the Company, issued $18,000 of LIBOR plus 1.47%
floating rate obligated mandatory redeemable securities (Trust Preferred Securities) as part of a pooled offering. The Trust may redeem the Trust Preferred Securities, in whole but not in part, any time after May 2012 at face value. The
final maturity date is May of 2037. The Trust used the proceeds from the issuance of its Trust Preferred Securities and common securities to buy $18,557 aggregate principal amount of junior subordinated debentures issued by the Company. These
debentures are the Trusts only assets, with terms similar to the Trust Preferred Securities, and mature in 2037. The subordinated debentures are classified as liabilities on the balance sheet and count as Tier 1 capital for regulatory capital
purposes, subject to certain limitations.

Other notes payable included a capitalized lease obligation.

The Bank maintains a $175,000 letter of credit from the Federal Home Loan Bank of Cincinnati (FHLB). The letter is pledged to secure public
funds deposit accounts and is secured by a blanket pledge of the Banks residential and commercial real estate loans.



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85



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##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008

(Dollar amounts in thousands, except share and
per share amounts)



NOTE 10 - PREFERRED STOCK



On February 13, 2009, the Company entered into a Letter Agreement with the United States Department
of Treasury (the Treasury Department) under the Troubled Asset Relief Program (TARP) Capital Purchase Program (CPP), pursuant to which the Company issued 34,000 shares of Series A Non-Cumulative Perpetual
Preferred Stock (the Series A Preferred Stock) for a total price of $34,000. The Series A Preferred Stock is to pay cumulative dividends at an annual dividend rate of 5% for the first five years and thereafter at annual dividend rate of
9%. No cash dividends can be paid to common stockholders unless all dividends on the Series A Preferred Stock have been declared and paid in full (or an amount sufficient for the payment of the dividends on the Series A Preferred Stock has been set
aside for the payment of such dividends). Pursuant to the American Recovery and Reinvestment Act of 2009, the Company may redeem the Series A Preferred Stock at any time, subject to the approval of its primary federal regulator.

As part of its purchase of the Series A Preferred Stock, the Treasury Department received a warrant (the Warrant) to purchase 274,784 shares
of the Companys common stock at an initial per share exercise price of $18.56. The Warrant provides for the adjustment of the exercise price and the number of shares of common stock issuable upon exercise pursuant to customary anti-dilution
provisions. The Warrant expires ten years from the issuance date.

Both the Series A Preferred Stock and the Warrant are accounted for as
components of Tier 1 capital. The net proceeds received from the Treasury Department were allocated between the Series A Preferred

Stock and
Warrant based on relative fair value. The Series A Preferred Stock will be accreted to liquidation value over the expected life of the shares, with accretion charged to retained earnings.

On December 22, 2010, the Company repurchased $17,000 of the outstanding $34,000 of Series A Preferred Stock, issued in February 2009 to the Treasury Department pursuant to the TARP CPP.

As part of the CCP, any increase in the Companys dividend level on its common shares from the September 2008 semi-annual payment of $.28 per share
must be approved by the Treasury Department.

NOTE 11 - STOCK OFFERING

On November 22, 2010 the Company completed its public offering of 1,765,588 shares of its common stock at $17.00 per share, for net proceeds, after underwriting discount and expenses, of
approximately $28,200. The number of shares sold includes 230,294 shares purchased by the underwriter pursuant to its over-allotment option, which was exercised in full.



(Continued)



86



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##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008

(Dollar amounts in thousands, except share and
per share amounts)



NOTE 12 - EMPLOYEE BENEFITS



The Bank maintains an employee profit sharing plan covering substantially all employees. Contributions
are at the discretion of the Board of Directors. Profit sharing expense totaled $210, $171 and $294 for the years ended December 31, 2010, 2009 and 2008, respectively.

In 2003, the Company adopted a benefit program for certain officers to encourage long-term retention. The program consists principally of a defined benefit component, providing each officer with payments
equal to 30% of final average pay for 15 years after retirement, and a deferral component, permitting each officer the ability to defer a portion of their current compensation and earn pre-tax returns on such deferred amounts. The accrued liability
under the defined benefit component was $2,463 and $1,976 at December 31, 2010 and 2009, respectively. Expense related to the program was $487, $205 and $623 for the years ended December 31, 2010, 2009 and 2008.

NOTE 13 - STOCK-BASED COMPENSATION

Stock Option Plan

Options to buy stock
are granted to directors, officers and employees under the Companys stock option and incentive plan which provide for the issuance of up to 1,200,000 shares. The Company believes that such awards better align the interests of its employees
with those of its shareholders. The specific terms of each option agreement are determined by the Compensation Committee at the date of the grant. For current options outstanding, options granted to directors vest immediately and options granted to
employees generally vest evenly over a five-year period. The options lives are generally ten years for employees and five years for directors. Total compensation cost that has been charged against income for those plans was $307, $494, and $642 for
2010, 2009 and 2008, respectively. The total income tax benefit was $0, $23, and $27.

The fair value of each option award is estimated on the
date of grant using a closed form option valuation (Black-Scholes) model that uses the assumptions noted in the table below. Expected volatilities are based on historical volatilities of the Companys common stock. The risk-free interest rate
for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. Expected term is estimated based upon the contractual term and vesting period of the options including consideration of historical
trends segregated by employees and directors. A forfeiture rate of 19% for employees and 0% for directors is used in the model and is based on historical experience.

The fair value of options granted was determined using the following weighted-average assumptions as of grant date.



|                                |  |      |         |   |      |  |           |      |  |  |           |  
|------------------------------- |  | ---- | ------- | - | ---- |  | --------- | ---- |  |  | --------- | -
|                                |  | 2010 |         |   | 2009 |  |           | 2008 | 
|Risk-free interest rate         |  |      |        | % |      |  | 1.64      | %    |  |  | 3.36      | %
|Expected term                   |  |      | - years |   |      |  | 6.8 years |      |  |  | 6.9 years |  
|Expected stock price volatility |  |      |        | % |      |  | 18.49     | %    |  |  | 17.69     | %
|Dividend yield                  |  |      |        | % |      |  | 2.65      | %    |  |  | 1.83      | %

No options were granted in 2010.



(Continued)



87



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##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008

(Dollar amounts in thousands, except share and
per share amounts)



NOTE 13 - STOCK-BASED COMPENSATION (Continued)



A summary of the activity in the stock option plan for 2010 follows:



|                                 |  |        |         |   |                              |   |       |                                         |  |  |                         |  |  |   |   | 
|-------------------------------- |  | ------ | ------- | - | ---------------------------- | - | ----- | --------------------------------------- |  |  | ----------------------- |  |  | - | - | 
|                                 |  | Shares |         |   | WeightedAverageExercisePrice |   |       | WeightedAverageRemainingContractualTerm |  |  | AggregateIntrinsicValue | 
|Outstanding at beginning of year |  |        | 616,245 |   |                              | $ | 25.31 |                                         |  |  |                         |  |  |   |   | 
|Granted                          |  |        |        |   |                              |   |       |                                         |  |  |                         |  |  |   |   | 
|Exercised                        |  |        |        |   |                              |   |       |                                         |  |  |                         |  |  |   |   | 
|Forfeited or expired             |  |        | (92,515 | ) |                              |   | 27.29 |                                         |  |  |                         |  |  |   |   | 
|                                 |  |        |         |   |                              |   |       |                                         |  |  |                         |  |  |   |   | 
|Outstanding at end of year       |  |        | 523,730 |   |                              | $ | 24.96 |                                         |  |  | 3.90                    |  |  | $ |  | 
|                                 |  |        |         |   |                              |   |       |                                         |  |  |                         |  |  |   |   | 
|Exercisable at end of year       |  |        | 402,689 |   |                              | $ | 25.26 |                                         |  |  | 3.15                    |  |  | $ |  | 
|                                 |  |        |         |   |                              |   |       |                                         |  |  |                         |  |  |   |   | 

The Company expects approximately 99,000 of the nonvested shares to become exercisable.

Information related to the stock option plan during each year follows:



|                                                     |  |      |   |  |      |   |      |      |  |   |      | 
|---------------------------------------------------- |  | ---- | - |  | ---- | - | ---- | ---- |  | - | ---- | 
|                                                     |  | 2010 |   |  | 2009 |   |      | 2008 | 
|Intrinsic value of options exercised                 |  | $    |  |  |      | $ | 39   |      |  | $ | 27   | 
|Cash received from option exercises                  |  |      |  |  |      |   | 193  |      |  |   | 44   | 
|Tax benefit realized from option exercises           |  |      |  |  |      |   | 13   |      |  |   | 7    | 
|Weighted average fair value/share of options granted |  |      |   |  |      |   | 2.80 |      |  |   | 4.18 | 

As of December 31, 2010, there
was $361 of total unrecognized compensation cost related to nonvested stock options granted under the plan. The cost is expected to be recognized over a weighted-average period of 1.42 years.

NOTE 14 - FEDERAL INCOME TAXES

Federal income taxes consisted of the following components:



|                     |  |      |       |   |      |   |        |      |  |   |       |  
|-------------------- |  | ---- | ----- | - | ---- | - | ------ | ---- |  | - | ----- | -
|                     |  | 2010 |       |   | 2009 |   |        | 2008 | 
|Income tax/(benefit) |  |      |       |   |      |   |        |      |  |   |       |  
|Currently payable    |  | $    | 5,300 |   |      | $ | 5,154  |      |  | $ | 5,462 |  
|Deferred             |  |      | (772  | ) |      |   | (2,007 | )    |  |   | (446  | )
|                     |  |      |       |   |      |   |        |      |  |   |       |  
|                     |  | $    | 4,528 |   |      | $ | 3,147  |      |  | $ | 5,016 |  
|                     |  |      |       |   |      |   |        |      |  |   |       |  

The following is a reconciliation of income tax expense and the amount computed by applying the effective federal income tax
rate of 35% to income before income taxes:



(Continued)



88



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##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008

(Dollar amounts in thousands, except share and
per share amounts)



NOTE 14 - FEDERAL INCOME TAXES(Continued)



|                                                     |  |      |       |   |      |   |       |      |  |   |       |  
|---------------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                                     |  | 2010 |       |   | 2009 |   |       | 2008 | 
|Statutory rate applied to income before income taxes |  | $    | 5,669 |   |      | $ | 4,167 |      |  | $ | 5,725 |  
|Tax exempt income                                    |  |      | (668  | ) |      |   | (616  | )    |  |   | (334  | )
|Company owned life insurance income                  |  |      | (325  | ) |      |   | (313  | )    |  |   | (261  | )
|Incentive stock options                              |  |      | 107   |   |      |   | 150   |      |  |   | 194   |  
|Low-income housing tax credit                        |  |      | (249  | ) |      |   | (248  | )    |  |   | (248  | )
|Historic tax credit                                  |  |      |      |   |      |   |      |      |  |   | (35   | )
|Other                                                |  |      | (6    | ) |      |   | 7     |      |  |   | (25   | )
|                                                     |  |      |       |   |      |   |       |      |  |   |       |  
|                                                     |  | $    | 4,528 |   |      | $ | 3,147 |      |  | $ | 5,016 |  
|                                                     |  |      |       |   |      |   |       |      |  |   |       |  

Year-end deferred tax assets and liabilities were due to the following factors:



|                                                     |  |      |        |   |      |   |        |  
|---------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                                     |  | 2010 |        |   | 2009 |  
|Deferred tax assets from:                            |  |      |        |   |      |   |        |  
|Allowance for loan losses                            |  | $    | 5,136  |   |      | $ | 4,361  |  
|Benefit plans                                        |  |      | 1,062  |   |      |   | 923    |  
|Premises and equipment                               |  |      | 682    |   |      |   | 563    |  
|Net operating loss carryforward                      |  |      | 3,675  |   |      |   | 4,005  |  
|Acquisition intangibles                              |  |      | 511    |   |      |   | 394    |  
|Other                                                |  |      | 304    |   |      |   | 113    |  
|                                                     |  |      |        |   |      |   |        |  
|                                                     |  |      | 11,370 |   |      |   | 10,359 |  
|Deferred tax liabilities for:                        |  |      |        |   |      |   |        |  
|FHLB stock dividends                                 |  |      | (952   | ) |      |   | (961   | )
|Acquisition intangibles                              |  |      | (2,244 | ) |      |   | (2,007 | )
|Net unrealized gain on available-for-sale securities |  |      | (462   | ) |      |   | (491   | )
|Other                                                |  |      | (44    | ) |      |   | (33    | )
|                                                     |  |      |        |   |      |   |        |  
|                                                     |  |      | (3,702 | ) |      |   | (3,492 | )
|                                                     |  |      |        |   |      |   |        |  
|Net deferred tax asset                               |  | $    | 7,668  |   |      | $ | 6,867  |  
|                                                     |  |      |        |   |      |   |        |  

At year end 2010, the Company had net operating loss carry forwards from a 2007 acquisition of approximately $10,653, which
expire beginning in 2022 and have an annual limitation by section 382 of the Internal Revenue Code. No valuation allowance has been established as management believes it will generate sufficient income in future years to realize the net operating
loss benefits before expiration.



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##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008

(Dollar amounts in thousands, except share and
per share amounts)



NOTE 14 - FEDERAL INCOME TAXES(Continued)



The Company had no unrecognized tax benefits as of January 1, 2010 and 2009 and did not recognize
any increase in unrecognized benefits during 2010 or 2009 relative to any tax positions taken in 2010 and 2009. Should the accrual of any interest or penalties relative to unrecognized tax benefits be necessary, it is the Companys policy to
record such accruals in its income taxes accounts; no such accruals exist as of December 31, 2010 and 2009. The Company and its corporate subsidiary file a consolidated U.S. federal income tax return, which is subject to examination for all
years after 2006.

NOTE 15 - EARNINGS PER SHARE

The factors used in the earnings per share computation follow:



|                                                                               |  |      |           |  |      |   |           |      |  |   |           | 
|------------------------------------------------------------------------------ |  | ---- | --------- |  | ---- | - | --------- | ---- |  | - | --------- | 
|                                                                               |  | 2010 |           |  | 2009 |   |           | 2008 | 
|Basic                                                                          |  |      |           |  |      |   |           |      |  |   |           | 
|Net income available to common shareholders                                    |  | $    | 9,425     |  |      | $ | 6,968     |      |  | $ | 11,341    | 
|                                                                               |  |      |           |  |      |   |           |      |  |   |           | 
|                                                                               |  |      |          
|Weighted average common shares outstanding                                     |  |      | 5,858,619 |  |      |   | 5,615,458 |      |  |   | 5,621,186 | 
|                                                                               |  |      |          
|Basic earnings per common share                                                |  | $    | 1.61      |  |      | $ | 1.24      |      |  | $ | 2.02      | 
|                                                                               |  |      |           |  |      |   |           |      |  |   |           | 
|                                                                               |  |      |          
|Diluted                                                                        |  |      |           |  |      |   |           |      |  |   |           | 
|Net income available to common shareholders                                    |  | $    | 9,425     |  |      | $ | 6,968     |      |  | $ | 11,341    | 
|                                                                               |  |      |           |  |      |   |           |      |  |   |           | 
|                                                                               |  |      |          
|Weighted average common shares outstanding for basic earnings per common share |  |      | 5,858,619 |  |      |   | 5,615,458 |      |  |   | 5,621,186 | 
|Add: Dilutive effects of assumed exercises of stock options                    |  |      |          |  |      |   | 5,541     |      |  |   | 2,579     | 
|Add: Dilutive effects of assumed exercise of stock warrant                     |  |      |          |  |      |   | 37,157    |      |  |   |          | 
|                                                                               |  |      |           |  |      |   |           |      |  |   |           | 
|                                                                               |  |      |          
|Average shares and dilutive potential common shares                            |  |      | 5,858,619 |  |      |   | 5,658,156 |      |  |   | 5,623,765 | 
|                                                                               |  |      |           |  |      |   |           |      |  |   |           | 
|                                                                               |  |      |          
|Diluted earnings per common share                                              |  | $    | 1.61      |  |      | $ | 1.23      |      |  | $ | 2.02      | 
|                                                                               |  |      |           |  |      |   |           |      |  |   |           | 

Stock options for 523,730, 564,685 and 574,100 shares of common stock were not considered in computing diluted earnings per
common share for 2010, 2009 and 2008 because they were antidilutive. Also, 274,784 and 0 warrants were not considered in computing diluted earnings per common share for 2010 and 2009 because they were antidilutive.



(Continued)



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##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008

(Dollar amounts in thousands, except share and
per share amounts)



NOTE 16 - COMMITMENTS AND OFF BALANCE SHEET ACTIVITIES



The Bank leases branch facilities and sites and is committed under various non-cancelable lease
contracts that expire at various dates through the year 2017. Most of these leases are with members of the Banks Board of Directors or companies they control. Expense for leased premises was $870, $929, and $1,065 for 2010, 2009 and 2008,
respectively. Minimum lease payments at December 31, 2010 for all non-cancelable leases were as follows:



|                             |  |   |       | 
|---------------------------- |  | - | ----- | 
|2011                         |  | $ | 657   | 
|2012                         |  |   | 614   | 
|2013                         |  |   | 486   | 
|2014                         |  |   | 364   | 
|2015                         |  |   | 111   | 
|Thereafter                   |  |   | 96    | 
|                             |  |   |       | 
|Total minimum lease payments |  | $ | 2,328 | 
|                             |  |   |       | 

Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued
to meet customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used.
Off-balance-sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral
at exercise of the commitment.

Financial instruments with off-balance-sheet risk were as follows at year-end:



|                                            |  |           |       |  |              |  |         |           |  |   |              |  |  |  |         | 
|------------------------------------------- |  | --------- | ----- |  | ------------ |  | ------- | --------- |  | - | ------------ |  |  |  | ------- | 
|                                            |  | 2010      |       |  | 2009         | 
|                                            |  | FixedRate |       |  | VariableRate |  |         | FixedRate |  |   | VariableRate | 
|Commitments to make loans (at market rates) |  | $         | 6,149 |  |              |  | 13,818  |           |  | $ | 1,534        |  |  |  | 8,543   | 
|Unused lines of credit                      |  |           |      |  |              |  | 273,418 |           |  |   |             |  |  |  | 258,770 | 
|Unused letters of credit                    |  |           |      |  |              |  | 52,859  |           |  |   |             |  |  |  | 49,902  | 

The loan commitments are generally
extended for terms of up to 60 days and, in many cases, allow the customer to select from one of several financing options offered. For the fixed rate commitments, the interest range was 4.75% to 6.50% in 2010 and 4.00% to 6.50% in 2009.

At December 31, 2010 and 2009, the Bank was required to have $8,122 and $5,325, respectively, on deposit with the Federal Reserve or as cash on hand
as reserve.

On March 3, 2005, the Bank entered into an agreement with Northern Kentucky University whereby the University granted to the
Bank the naming rights for the new Northern Kentucky University Arena constructed on the campus of the University for a term commencing immediately upon execution of the agreement and expiring twenty years after the opening of the Arena. In
consideration therefore, the Bank is paying $6,000 in seven equal annual installments beginning after substantial completion and opening of the Arena which occurred in September 2009. The cost of the naming rights will be amortized over the life of
the contract commencing on the opening of the Arena, which took place in September 2009.



(Continued)



91



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##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008

(Dollar amounts in thousands, except share and
per share amounts)



NOTE 16 - COMMITMENTS AND OFF BALANCE SHEET ACTIVITIES(Continued)



In the second quarter of 2007, the Bank and Thomas More College announced a naming rights agreement for
the new athletic field being constructed on Thomas Mores campus. The Bank committed $1,000 to the project, which will be named The Bank of Kentucky Field. The cost of the naming rights will be amortized over the twenty-five year life of the
agreement commencing on the opening of the field, which took place in September 2008.

NOTE 17 - INTEREST RATE CONTRACTS

As a result of loans acquired through the Integra Bank acquisition in the fourth quarter of 2009, the Bank initiated an interest rate protection program
in which the Bank earns a fee by providing the Banks commercial loan customers the ability to swap from variable to fixed, or fixed to variable interest rates. Under these agreements the Bank enters into a variable or fixed rate loan agreement
with its customer in addition to a swap agreement. The swap agreement effectively swaps the customers variable rate to a fixed rate or vice versa. The Bank then enters into a corresponding swap agreement with a third party in order to swap its
exposure on the variable to fixed rate swap with the Banks customer. Since the swaps are structured to offset each other, changes in fair values, while recorded, have no material net earnings impact. The notional amount of interest rate swaps
at December 31, 2010 was $10,701 and $7,288 on December 31, 2009 with maturities ranging from four to eight years. The current fair value of these swaps was $716 and $675 at December 31, 2010 and 2009, respectively and is included in
other assets and other liabilities for the value of each of the swaps.

The Bank is exposed to losses if a counterparty fails to make its
payments under a contract in which the Bank is in the receiving status. Although collateral or other security is not obtained, as the Bank is not currently in the receiving status, we minimize our credit risk by monitoring the credit standing of the
counterparties. We anticipate the counterparties will be able to fully satisfy their obligations under these agreements.

NOTE 18 - CAPITAL
REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS

Banks and bank holding companies are subject to regulatory capital requirements
administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under
regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. Management believes as of December 31, 2010, the
Company and Bank meet all capital adequacy requirements to which they are subject.

Prompt corrective action regulations provide five
classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized,
regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At year-end 2010 and 2009, the most recent regulatory
notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action.



(Continued)



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THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008

(Dollar amounts in thousands, except share and
per share amounts)



NOTE 18 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS(Continued)



There have been no subsequent conditions or events that management believes have changed the
institutions category.

The consolidated and Banks capital amounts and ratios, at December 31, 2010 and 2009 are presented
below:



|                                              |  |        |         |  |                              |  |       |                                                               |  |   |         |  |  |        |      |   |       |   |         |  |  |  |       |  
|--------------------------------------------- |  | ------ | ------- |  | ---------------------------- |  | ----- | ------------------------------------------------------------- |  | - | ------- |  |  | ------ | ---- | - | ----- | - | ------- |  |  |  | ----- | -
|                                              |  | Actual |         |  | For CapitalAdequacy
Purposes |  |       | To Be WellCapitalized UnderPrompt
CorrectiveAction Provisions | 
|                                              |  | Amount |         |  | Ratio                        |  |       | Amount                                                        |  |   | Ratio   |  |  | Amount |      |   | Ratio |  
|2010                                          |  |        |         |  |                              |  |       |                                                               |  |   |         |  |  |        |      |   |       |   |         |  |  |  |       |  
|Total Capital to risk weighted assets         |  |        |         |  |                              |  |       |                                                               |  |   |         |  |  |        |      |   |       |   |         |  |  |  |       |  
|Consolidated                                  |  | $      | 184,077 |  |                              |  | 13.77 | %                                                             |  | $ | 106,930 |  |  |        | 8.00 | % |       |   | N/A     |  |  |  | N/A   |  
|Bank                                          |  |        | 180,545 |  |                              |  | 13.52 | %                                                             |  |   | 106,842 |  |  |        | 8.00 | % |       | $ | 133,553 |  |  |  | 10.00 | %
|Tier 1 (Core) Capital to risk weighted assets |  |        |         |  |                              |  |       |                                                               |  |   |         |  |  |        |      |   |       |   |         |  |  |  |       |  
|Consolidated                                  |  | $      | 147,361 |  |                              |  | 11.02 | %                                                             |  | $ | 53,465  |  |  |        | 4.00 | % |       |   | N/A     |  |  |  | N/A   |  
|Bank                                          |  |        | 143,833 |  |                              |  | 10.77 | %                                                             |  |   | 53,421  |  |  |        | 4.00 | % |       | $ | 80,132  |  |  |  | 6.00  | %
|Tier 1 (Core) Capital to average assets       |  |        |         |  |                              |  |       |                                                               |  |   |         |  |  |        |      |   |       |   |         |  |  |  |       |  
|Consolidated                                  |  | $      | 147,361 |  |                              |  | 9.41  | %                                                             |  | $ | 62,669  |  |  |        | 4.00 | % |       |   | N/A     |  |  |  | N/A   |  
|Bank                                          |  |        | 143,833 |  |                              |  | 9.22  | %                                                             |  |   | 62,404  |  |  |        | 4.00 | % |       | $ | 78,005  |  |  |  | 5.00  | %
|                                              |  |        |        
|                                              |  | Actual |         |  | For CapitalAdequacy Purposes |  |       | To Be WellCapitalized UnderPrompt CorrectiveAction Provisions | 
|                                              |  | Amount |         |  | Ratio                        |  |       | Amount                                                        |  |   | Ratio   |  |  | Amount |      |   | Ratio |  
|2009                                          |  |        |         |  |                              |  |       |                                                               |  |   |         |  |  |        |      |   |       |   |         |  |  |  |       |  
|Total Capital to risk weighted assets         |  |        |         |  |                              |  |       |                                                               |  |   |         |  |  |        |      |   |       |   |         |  |  |  |       |  
|Consolidated                                  |  | $      | 162,444 |  |                              |  | 12.02 | %                                                             |  | $ | 108,093 |  |  |        | 8.00 | % |       |   | N/A     |  |  |  | N/A   |  
|Bank                                          |  |        | 158,878 |  |                              |  | 11.77 | %                                                             |  |   | 108,000 |  |  |        | 8.00 | % |       | $ | 134,999 |  |  |  | 10.00 | %
|Tier 1 (Core) Capital to risk weighted assets |  |        |         |  |                              |  |       |                                                               |  |   |         |  |  |        |      |   |       |   |         |  |  |  |       |  
|Consolidated                                  |  | $      | 127,291 |  |                              |  | 9.42  | %                                                             |  | $ | 54,046  |  |  |        | 4.00 | % |       |   | N/A     |  |  |  | N/A   |  
|Bank                                          |  |        | 123,725 |  |                              |  | 9.16  | %                                                             |  |   | 54,000  |  |  |        | 4.00 | % |       | $ | 81,000  |  |  |  | 6.00  | %
|Tier 1 (Core) Capital to average assets       |  |        |         |  |                              |  |       |                                                               |  |   |         |  |  |        |      |   |       |   |         |  |  |  |       |  
|Consolidated                                  |  | $      | 127,291 |  |                              |  | 8.94  | %                                                             |  | $ | 56,984  |  |  |        | 4.00 | % |       |   | N/A     |  |  |  | N/A   |  
|Bank                                          |  |        | 123,725 |  |                              |  | 8.73  | %                                                             |  |   | 56,720  |  |  |        | 4.00 | % |       | $ | 70,900  |  |  |  | 5.00  | %



(Continued)



93



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##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008

(Dollar amounts in thousands, except share and
per share amounts)



NOTE 18 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS(Continued)



The Companys principal source of funds for dividend payments is dividends received from the Bank.
Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current years net
profits, combined with the retained net profits of the preceding two years, subject to the capital requirements described above.

NOTE 19 -
DISCLOSURES ABOUT FAIR VALUE

Disclosures About Fair Value of Assets and Liabilities:

Accounting standards establish a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted
prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entitys own assumptions about the assumptions that market
participants would use in pricing an asset or liability.

The fair values of securities available-for-sale are determined by matrix pricing,
which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities relationship to other benchmark quoted
securities (Level 2 inputs). One corporate security is valued using Level 3 inputs as there is no readily observable market activity. Management determines the value of this security based on expected cash flows, the credit quality of the security,
and current market interest rates. Based on the credit and interest rate characteristics of this security, fair value approximates amortized cost.

The Banks derivative instruments consist of over-the-counter interest-rate swaps that trade in liquid markets. The fair value of the derivative instruments is primarily measured by obtaining pricing
from broker-dealers recognized to be market participants. The pricing is derived from market observable inputs that can generally be verified and do not typically involve significant judgment by the Bank. This valuation method is classified as Level
2 in the fair value hierarchy.



(Continued)



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##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008

(Dollar amounts in thousands, except share and
per share amounts)



NOTE 19 - DISCLOSURES ABOUT FAIR VALUE (Continued)



Assets and Liabilities Measured on a Recurring Basis

(Dollars in thousands)

Assets and liabilities
measured at fair value on a recurring basis are summarized below:



|                                                |  |                      |         |  |                                                             |   |   |                                            |  |   |                                         |  |  |   |       | 
|----------------------------------------------- |  | -------------------- | ------- |  | ----------------------------------------------------------- | - | - | ------------------------------------------ |  | - | --------------------------------------- |  |  | - | ----- | 
|                                                |  |                      |         |  | Fair Value Measurements at December 31, 2010 Using:         |  
|                                                |  | TotalDecember 312010 |         |  | Quoted Prices inActive Markets forIdentical Assets(Level 1) |   |   | SignificantOtherObservableInputs (Level 2) |  |   | SignificantUnobservableInputs(Level
 3) | 
|Assets                                          |  |                      |         |  |                                                             |   |   |                                            |  |   |                                         |  |  |   |       | 
|Investment securities available-for-sale        |  |                      |         |  |                                                             |   |   |                                            |  |   |                                         |  |  |   |       | 
|U.S. government-sponsored entities and agencies |  | $                    | 145,067 |  |                                                             |   |  |                                            |  |   | 145,067                                 |  |  |   |      | 
|U.S. government agency mortgage backed          |  |                      | 99,256  |  |                                                             |   |  |                                            |  |   | 99,256                                  |  |  |   |      | 
|Corporate                                       |  |                      | 1,125   |  |                                                             |   |  |                                            |  |   |                                        |  |  |   | 1,125 | 
|Derivatives                                     |  |                      | 716     |  |                                                             |   |  |                                            |  |   | 716                                     |  |  |   |      | 
|                                                |  |                      |         |  |                                                             |   |   |                                            |  |   |                                         |  |  |   |       | 
|Total                                           |  | $                    | 246,164 |  |                                                             |   |  |                                            |  |   | 245,039                                 |  |  |   | 1,125 | 
|                                                |  |                      |         |  |                                                             |   |   |                                            |  |   |                                         |  |  |   |       | 
|                                                |  |                      |         | 
|Liabilities                                     |  |                      |         |  |                                                             |   |   |                                            |  |   |                                         |  |  |   |       | 
|Derivatives                                     |  | $                    | 716     |  |                                                             |   |  |                                            |  |   | 716                                     |  |  |   |      | 
|                                                |  |                      |         |  |                                                             |   |   |                                            |  |   |                                         |  |  |   |       | 
|Total                                           |  | $                    | 716     |  |                                                             |   |  |                                            |  |   | 716                                     |  |  |   |      | 
|                                                |  |                      |         |  |                                                             |   |   |                                            |  |   |                                         |  |  |   |       | 
|                                                |  |                     
|                                                |  |                      |         |  | Fair Value Measurements at December 31, 2009 Using:         |  
|                                                |  | TotalDecember 312009 |         |  | Quoted Prices inActive Markets forIdentical Assets(Level 1) |   |   | SignificantOtherObservableInputs (Level 2) |  |   | SignificantUnobservableInputs(Level
 3) | 
|Assets                                          |  |                      |         |  |                                                             |   |   |                                            |  |   |                                         |  |  |   |       | 
|Investment securities available-for-sale        |  |                      |         |  |                                                             |   |   |                                            |  |   |                                         |  |  |   |       | 
|U.S. government-sponsored entities and agencies |  | $                    | 99,562  |  |                                                             | $ |  |                                            |  | $ | 99,562                                  |  |  | $ |      | 
|U.S. government agency mortgage backed          |  |                      | 83,098  |  |                                                             |   |  |                                            |  |   | 83,098                                  |  |  |   |      | 
|Corporate                                       |  |                      | 1,185   |  |                                                             |   |  |                                            |  |   |                                        |  |  |   | 1,185 | 
|Derivatives                                     |  |                      | 675     |  |                                                             |   |  |                                            |  |   | 675                                     |  |  |   |      | 
|                                                |  |                      |         |  |                                                             |   |   |                                            |  |   |                                         |  |  |   |       | 
|Total                                           |  | $                    | 184,520 |  |                                                             | $ |  |                                            |  | $ | 183,335                                 |  |  | $ | 1,185 | 
|                                                |  |                      |         |  |                                                             |   |   |                                            |  |   |                                         |  |  |   |       | 
|                                                |  |                      |         | 
|Liabilities                                     |  |                      |         |  |                                                             |   |   |                                            |  |   |                                         |  |  |   |       | 
|Derivatives                                     |  | $                    | 675     |  |                                                             | $ |  |                                            |  | $ | 675                                     |  |  | $ |      | 
|                                                |  |                      |         |  |                                                             |   |   |                                            |  |   |                                         |  |  |   |       | 
|Total                                           |  | $                    | 675     |  |                                                             | $ |  |                                            |  | $ | 675                                     |  |  | $ |      | 
|                                                |  |                      |         |  |                                                             |   |   |                                            |  |   |                                         |  |  |   |       | 



(Continued)



95



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##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008

(Dollar amounts in thousands, except share and
per share amounts)



NOTE 19 - DISCLOSURES ABOUT FAIR VALUE(Continued)



There were no gains or losses included in earnings for assets measured at fair value on a recurring
basis using significant unobservable inputs (Level 3) for the years ended December 31, 2010 and 2009. The change in level 3 securities was due to paydowns.

There were no changes in unrealized gains and losses recorded in other comprehensive income for the year ended December 31, 2010 and 2009 for Level 3 assets and liabilities that are still held at
December 31, 2010 and 2009.

Assets and Liabilities Measured on a Non-Recurring Basis

(Dollars in thousands)

Assets and liabilities
measured at fair value on a non-recurring basis are summarized below:



|                           |  |                      |        |  |                                                             |   |   |                                           |  |   |                                         |  |  |   |        | 
|-------------------------- |  | -------------------- | ------ |  | ----------------------------------------------------------- | - | - | ----------------------------------------- |  | - | --------------------------------------- |  |  | - | ------ | 
|                           |  |                      |        |  | Fair Value Measurements at December 31, 2010 Using:         |  
|                           |  | TotalDecember 312010 |        |  | Quoted Prices inActive Markets forIdentical Assets(Level 1) |   |   | SignificantOtherObservableInputs(Level 2) |  |   | SignificantUnobservableInputs(Level
 3) | 
|Assets                     |  |                      |        |  |                                                             |   |   |                                           |  |   |                                         |  |  |   |        | 
|Impaired loans             |  | $                    | 16,780 |  |                                                             | $ |  |                                           |  | $ | 9,302                                   |  |  | $ | 7,478  | 
|Commercial                 |  |                      | 611    |  |                                                             |   |  |                                           |  |   |                                        |  |  |   | 611    | 
|Nonresidential real estate |  |                      | 8,731  |  |                                                             |   |  |                                           |  |   | 4,700                                   |  |  |   | 4,031  | 
|Residential real estate    |  |                      | 2,371  |  |                                                             |   |  |                                           |  |   | 850                                     |  |  |   | 1,521  | 
|Construction               |  |                      | 5,067  |  |                                                             |   |  |                                           |  |   | 3,752                                   |  |  |   | 1,315  | 
|                           |  |                     
|                           |  |                      |        |  | Fair Value Measurements at December 31, 2009 Using:         |  
|                           |  | TotalDecember 312009 |        |  | Quoted Prices inActive Markets forIdentical Assets(Level 1) |   |   | SignificantOtherObservableInputs(Level 2) |  |   | SignificantUnobservableInputs(Level
 3) | 
|Assets                     |  |                      |        |  |                                                             |   |   |                                           |  |   |                                         |  |  |   |        | 
|Impaired loans             |  | $                    | 26,222 |  |                                                             | $ |  |                                           |  | $ | 11,730                                  |  |  | $ | 14,496 | 

Impaired loans, which are measured
for impairment using the fair value of the collateral for collateral dependent loans, had a gross carrying amount of $22,524, with a valuation allowance of $5,744, resulting in reduction in provision for loan losses of $172 for 2010. For
December 31, 2009, impaired loans, had a gross carrying amount of $32,142, with a valuation allowance of $5,916, resulting in an additional provision for loan losses of $2,484.



(Continued)



96



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##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008

(Dollar amounts in thousands, except share and
per share amounts)



NOTE 19 - DISCLOSURES ABOUT FAIR VALUE (Continued)



Values for collateral dependent loans are generally based on appraisals obtained from licensed real
estate appraisers and in certain circumstances consideration of offers obtained to purchase properties prior to foreclosure or other factors management deems relevant to arrive at a representative fair value. Appraisals for commercial real estate
generally use three methods to derive value: cost, sales or market comparison and income approach. The cost method bases value on the cost to replace the current property. Values using the market comparison approach evaluates the sales price of
similar properties in the same market area. The income approach considers net operating income generated by the property and an investors required return. The final fair value is based on a reconciliation of these three approaches. The loans
classified as level 2 had current and viable appraisals, while loans classified as level 3 had older appraisals and required the use of other unobservable inputs.

Financial instruments at year-end were as follows at December 31:



|                                     |  |               |            |   |           |   |            |               |  |   |            |   |  |  |            |  
|------------------------------------ |  | ------------- | ---------- | - | --------- | - | ---------- | ------------- |  | - | ---------- | - |  |  | ---------- | -
|                                     |  | 2010          |            |   | 2009      |  
|                                     |  | CarryingValue |            |   | FairValue |   |            | CarryingValue |  |   | FairValue  |  
|Financial assets                     |  |               |            |   |           |   |            |               |  |   |            |   |  |  |            |  
|Cash and cash equivalents            |  | $             | 172,664    |   |           | $ | 172,664    |               |  | $ | 98,738 $   |   |  |  | 98,738     |  
|Interest-bearing deposits with banks |  |               | 100        |   |           |   | 100        |               |  |   | 100        |   |  |  | 100        |  
|Available-for-sale securities        |  |               | 245,448    |   |           |   | 245,448    |               |  |   | 183,845    |   |  |  | 183,845    |  
|Held-to-maturity securities          |  |               | 39,778     |   |           |   | 40,262     |               |  |   | 30,722     |   |  |  | 31,275     |  
|Loans held for sale                  |  |               | 15,279     |   |           |   | 15,279     |               |  |   | 6,798      |   |  |  | 6,798      |  
|Loans (net)                          |  |               | 1,088,641  |   |           |   | 1,086,874  |               |  |   | 1,139,831  |   |  |  | 1,132,167  |  
|Federal Home Loan Bank stock         |  |               | 4,959      |   |           |   | N/A        |               |  |   | 4,959      |   |  |  | N/A        |  
|Accrued interest receivable          |  |               | 4,456      |   |           |   | 4,456      |               |  |   | 4,504      |   |  |  | 4,504      |  
|Derivative assets                    |  |               | 716        |   |           |   | 716        |               |  |   | 675        |   |  |  | 675        |  
|                                     |  |               |            |  
|Financial liabilities                |  |               |            |   |           |   |            |               |  |   |            |   |  |  |            |  
|Deposits                             |  |               | (1,422,312 | ) |           |   | (1,428,667 | )             |  |   | (1,343,272 | ) |  |  | (1,344,179 | )
|Short-term borrowings                |  |               | (23,419    | ) |           |   | (23,419    | )             |  |   | (21,669    | ) |  |  | (21,669    | )
|Notes payable                        |  |               | (48,761    | ) |           |   | (42,897    | )             |  |   | (44,781    | ) |  |  | (37,294    | )
|Accrued interest payable             |  |               | (2,711     | ) |           |   | (2,711     | )             |  |   | (3,856     | ) |  |  | (3,856     | )
|Standby letters of credit            |  |               | (342       | ) |           |   | (342       | )             |  |   | (303       | ) |  |  | (303       | )
|Derivative liabilities               |  |               | (716       | ) |           |   | (716       | )             |  |   | (675       | ) |  |  | (675       | )

The estimated fair value approximates
carrying amount for all items except those described below. Estimated fair value for all securities is determined as previously described for securities available for sale. It is not practicable to determine the fair value of FHLB stock due to
restrictions placed on its transferability. Estimated fair value of loans held for sale is based on market quotes. Estimated fair value for loans is based on the rates charged at year-end for new loans with similar maturities, applied until the loan
is assumed to reprice or be paid. Estimated fair value for time deposits is based on the rates paid at year-end for new deposits, applied until maturity. Estimated fair value of debt is based on current rates for similar financing. Estimated fair
value for commitments to make loans and unused lines of credit are considered nominal. Estimated fair value for derivatives is determined as previously described.



(Continued)



97



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THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008

(Dollar amounts in thousands, except share and
per share amounts)



NOTE 20 - PARENT COMPANY FINANCIAL STATEMENTS



Presented below are condensed balance sheets and the related
statements of income and cash flows for the parent company:

CONDENSED BALANCE SHEETS

December 31, 2010 and 2009



|                                     |  |      |         |  |      |   |         | 
|------------------------------------ |  | ---- | ------- |  | ---- | - | ------- | 
|                                     |  | 2010 |         |  | 2009 |  
|Assets                               |  |      |         |  |      |   |         | 
|Cash                                 |  | $    | 3,163   |  |      | $ | 3,183   | 
|Investment in bank subsidiary        |  |      | 173,841 |  |      |   | 155,567 | 
|Investment in unconsolidated trust   |  |      | 557     |  |      |   | 557     | 
|Other assets                         |  |      | 538     |  |      |   | 609     | 
|                                     |  |      |         |  |      |   |         | 
|                                     |  | $    | 178,099 |  |      | $ | 159,916 | 
|                                     |  |      |         |  |      |   |         | 
|Liabilities and shareholders equity |  |      |         |  |      |   |         | 
|Subordinated debentures              |  |      | 18,557  |  |      |   | 18,557  | 
|Other liabilities                    |  |      | 172     |  |      |   | 226     | 
|                                     |  |      |         |  |      |   |         | 
|Total liabilities                    |  |      | 18,729  |  |      |   | 18,783  | 
|                                     |  |     
|Shareholders equity                 |  |      | 159,370 |  |      |   | 141,133 | 
|                                     |  |      |         |  |      |   |         | 
|                                     |  | $    | 178,099 |  |      | $ | 159,916 | 
|                                     |  |      |         |  |      |   |         | 

CONDENSED STATEMENTS OF INCOME

Years ended December 31, 2010, 2009 and 2008



|                                                                             |  |      |        |   |      |   |        |      |  |   |        |  
|---------------------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                             |  | 2010 |        |   | 2009 |   |        | 2008 | 
|Dividends from subsidiary                                                    |  | $    | 3,000  |   |      | $ | 3,000  |      |  | $ | 21,000 |  
|Interest expense                                                             |  |      | (330   | ) |      |   | (465   | )    |  |   | (1,494 | )
|Operating expenses                                                           |  |      | (520   | ) |      |   | (681   | )    |  |   | (931   | )
|Tax benefit                                                                  |  |      | 188    |   |      |   | 246    |      |  |   | 637    |  
|                                                                             |  |      |        |   |      |   |        |      |  |   |        |  
|Income before equity in undistributed income of the Bank                     |  |      | 2,338  |   |      |   | 2,100  |      |  |   | 19,212 |  
|                                                                             |  |      |       
|Equity in undistributed income (dividends in excess of earnings) of the Bank |  |      | 9,333  |   |      |   | 6,660  |      |  |   | (7,871 | )
|                                                                             |  |      |        |   |      |   |        |      |  |   |        |  
|Net income                                                                   |  | $    | 11,671 |   |      | $ | 8,760  |      |  | $ | 11,341 |  
|                                                                             |  |      |        |   |      |   |        |      |  |   |        |  
|Preferred stock dividend and discount accretion                              |  |      | (2,246 | ) |      |   | (1,792 | )    |  |   |       |  
|Net income available to common shareholders                                  |  | $    | 9,425  |   |      | $ | 6,968  |      |  | $ | 11,341 |  
|                                                                             |  |      |        |   |      |   |        |      |  |   |        |  



(Continued)



98



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THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008

(Dollar amounts in thousands, except share and
per share amounts)



NOTE 20 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)



CONDENSED STATEMENTS OF CASH FLOWS

Years ended December 31, 2010, 2009 and 2008



|                                                                          |  |      |         |   |      |   |         |      |  |   |         |  
|------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                          |  | 2010 |         |   | 2009 |   |         | 2008 | 
|Cash flows from operating activities                                      |  |      |         |   |      |   |         |      |  |   |         |  
|Net income                                                                |  | $    | 11,671  |   |      | $ | 8,760   |      |  | $ | 11,341  |  
|                                                                          |  |      |        
|Adjustments to reconcile net income to net cash from operating activities |  |      |         |   |      |   |         |      |  |   |         |  
|(Equity in undistributed income)/dividends in excess of earnings          |  |      | (9,333  | ) |      |   | (6,660  | )    |  |   | 7,871   |  
|Other changes                                                             |  |      | 430     |   |      |   | 701     |      |  |   | 449     |  
|                                                                          |  |      |         |   |      |   |         |      |  |   |         |  
|Net cash from operating activities                                        |  |      | 2,768   |   |      |   | 2,801   |      |  |   | 19,661  |  
|                                                                          |  |      |        
|Cash flows from investing activities                                      |  |      |         |   |      |   |         |      |  |   |         |  
|Cash paid for acquisition                                                 |  |      |         |   |      |   |        |      |  |   |        |  
|Contribution to Bank                                                      |  |      | (9,000  | ) |      |   | (25,000 | )    |  |   |        |  
|Net change in investment in unconsolidated Subsidiary                     |  |      |        |   |      |   |        |      |  |   | 526     |  
|                                                                          |  |      |         |   |      |   |         |      |  |   |         |  
|Net cash from investing activities                                        |  |      | (9,000  | ) |      |   | (25,000 | )    |  |   | 526     |  
|                                                                          |  |      |        
|Cash flows from financing activities                                      |  |      |         |   |      |   |         |      |  |   |         |  
|Net change in short-term borrowings                                       |  |      |        |   |      |   | (4,400  | )    |  |   | 2,200   |  
|Proceeds from issuance of common stock                                    |  |      | 28,173  |   |      |   |        |      |  |   |        |  
|Proceeds from issuance of preferred stock and warrant net                 |  |      |        |   |      |   | 33,946  |      |  |   |        |  
|Redemption of preferred stock                                             |  |      | (17,000 | ) |      |   |        |      |  |   |        |  
|Redemption of subordinated debentures                                     |  |      |         |   |      |   |        |      |  |   | (17,526 | )
|Dividends paid on common stock                                            |  |      | (3,174  | ) |      |   | (3,144  | )    |  |   | (3,038  | )
|Dividends paid on preferred stock                                         |  |      | (1,787  | ) |      |   | (1,284  | )    |  |   |         |  
|Exercise of stock options                                                 |  |      |        |   |      |   | 206     |      |  |   | 51      |  
|Stock repurchase and retirement                                           |  |      |        |   |      |   |        |      |  |   | (1,865  | )
|                                                                          |  |      |         |   |      |   |         |      |  |   |         |  
|Net cash from financing activities                                        |  |      | 6,212   |   |      |   | 25,324  |      |  |   | (20,178 | )
|                                                                          |  |      |         |   |      |   |         |      |  |   |         |  
|Net change in cash                                                        |  |      | (20     | ) |      |   | 3,125   |      |  |   | 9       |  
|                                                                          |  |      |        
|Cash at beginning of year                                                 |  |      | 3,183   |   |      |   | 58      |      |  |   | 49      |  
|                                                                          |  |      |         |   |      |   |         |      |  |   |         |  
|Cash at end of year                                                       |  | $    | 3,163   |   |      | $ | 3,183   |      |  | $ | 58      |  
|                                                                          |  |      |         |   |      |   |         |      |  |   |         |  



(Continued)



99



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THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008

(Dollar amounts in thousands, except share and
per share amounts)



NOTE 21 - OTHER COMPREHENSIVE INCOME



Other comprehensive income components and related tax effects
were as follows:



|                                                                  |  |      |     |   |      |   |      |      |  |   |       |  
|----------------------------------------------------------------- |  | ---- | --- | - | ---- | - | ---- | ---- |  | - | ----- | -
|                                                                  |  | 2010 |     |   | 2009 |   |      | 2008 | 
|Unrealized holding gains on available-for-sale securities         |  | $    | (88 | ) |      | $ | 607  |      |  | $ | 1,240 |  
|Reclassification adjustment for losses (gains) realized in income |  |      |    |   |      |   | (728 | )    |  |   |      |  
|                                                                  |  |      |     |   |      |   |      |      |  |   |       |  
|Net unrealized gains (losses)                                     |  |      | (88 | ) |      |   | (121 | )    |  |   | 1,240 |  
|Tax effect                                                        |  |      | (30 | ) |      |   | 41   |      |  |   | (408  | )
|                                                                  |  |      |     |   |      |   |      |      |  |   |       |  
|                                                                  |  | $    | (58 | ) |      | $ | (80  | )    |  | $ | 832   |  
|                                                                  |  |      |     |   |      |   |      |      |  |   |       |  



(Continued)



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THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010, 2009 and 2008

(Dollar amounts in thousands, except share and
per share amounts)



NOTE 22 - SELECTED QUARTERLY DATA (Unaudited)



Presented below is a summary of the consolidated quarterly
financial data for the years ended December 31, 2010 and 2009.



|              |  |                |        |  |                 |       |       |                     |         |   |                          |  |  |                                           |       |  |                          |   |       |  |  |   |     |  |  |   |     | 
|------------- |  | -------------- | ------ |  | --------------- | ----- | ----- | ------------------- | ------- | - | ------------------------ |  |  | ----------------------------------------- | ----- |  | ------------------------ | - | ----- |  |  | - | --- |  |  | - | --- | 
|              |  | 2010           |       
|              |  | InterestIncome |        |  | InterestExpense |       |       | Net 
InterestIncome |         |   | Provision forLoan Losses |  |  | Net IncomeAvailable
toCommon Shareholders |       |  | Earnings PerCommon Share |  
|              |  |                |        |  |                 | Basic |       |                     | Diluted |  
|Quarter ended |  |                |        |  |                 |       |       |                     |         |   |                          |  |  |                                           |       |  |                          |   |       |  |  |   |     |  |  |   |     | 
|March 31      |  | $              | 16,773 |  |                 | $     | 3,839 |                     |         | $ | 12,934                   |  |  | $                                         | 4,500 |  |                          | $ | 1,350 |  |  | $ | .24 |  |  | $ | .24 | 
|June 30       |  |                | 16,813 |  |                 |       | 3,359 |                     |         |   | 13,454                   |  |  |                                           | 4,500 |  |                          |   | 2,096 |  |  |   | .37 |  |  |   | .37 | 
|September 30  |  |                | 16,694 |  |                 |       | 3,102 |                     |         |   | 13,592                   |  |  |                                           | 3,500 |  |                          |   | 3,013 |  |  |   | .53 |  |  |   | .53 | 
|December 31   |  |                | 16,402 |  |                 |       | 2,973 |                     |         |   | 13,429                   |  |  |                                           | 3,000 |  |                          |   | 2,966 |  |  |   | .46 |  |  |   | .46 | 
|              | 
|              |  | 2009           |       
|              |  | InterestIncome |        |  | InterestExpense |       |       | Net
InterestIncome  |         |   | Provision forLoan Losses |  |  | Net IncomeAvailable
toCommon Shareholders |       |  | Earnings PerCommon Share |  
|              |  |                |        |  |                 | Basic |       |                     | Diluted |  
|Quarter ended |  |                |        |  |                 |       |       |                     |         |   |                          |  |  |                                           |       |  |                          |   |       |  |  |   |     |  |  |   |     | 
|March 31      |  | $              | 15,113 |  |                 | $     | 4,877 |                     |         | $ | 10,236                   |  |  | $                                         | 1,525 |  |                          | $ | 2,558 |  |  | $ | .46 |  |  | $ | .46 | 
|June 30       |  |                | 15,528 |  |                 |       | 4,550 |                     |         |   | 10,978                   |  |  |                                           | 2,800 |  |                          |   | 1,552 |  |  |   | .28 |  |  |   | .27 | 
|September 30  |  |                | 15,787 |  |                 |       | 4,370 |                     |         |   | 11,417                   |  |  |                                           | 4,000 |  |                          |   | 1,039 |  |  |   | .19 |  |  |   | .18 | 
|December 31   |  |                | 16,322 |  |                 |       | 4,160 |                     |         |   | 12,162                   |  |  |                                           | 4,500 |  |                          |   | 1,819 |  |  |   | .32 |  |  |   | .32 | 



(Continued)



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##### Table of Contents

|Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
|------- | ------------------------------------------------------------------------------------

None.



|Item 9A. | Controls and Procedures
|-------- | -----------------------

Disclosure
Controls and Procedures

Disclosure controls and procedures are BKFCs controls and other procedures that are designed
to ensure that information required to be disclosed by BKFC in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the SECs rules and forms.
Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our
management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure. Under the supervision, and with the participation of our management, including our chief executive
officer and chief financial officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2010. Based upon this evaluation, our chief executive officer and chief financial
officer have concluded that these controls and procedures are adequate to ensure that information requiring disclosure is communicated to management in a timely manner and reported within the timeframe specified by the SECs rules and forms.

Changes in Internal Control Over Financial Reporting

During the fourth quarter of 2010, no change occurred in our internal control over financial reporting that materially affected, or is reasonably likely to materially affect, BKFCs internal control
over financial reporting.



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MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of The Bank of Kentucky Financial Corporation has prepared the consolidated financial statements in accordance with U.S. generally accepted
accounting principles and is responsible for its accuracy. The financial statements necessarily include amounts that are based on managements best estimates and judgments.

The Bank of Kentucky Financial Corporations management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act
Rule 13a-15(f). Under the supervision and with the participation of management, including The Bank of Kentucky Financial Corporations principal executive officer and principal financial officer, the Company conducted an evaluation of the
effectiveness of internal control over financial reporting based on the framework in Internal Control  Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Our evaluation included a review
of the documentation of controls, evaluations of the design of the internal control system, and tests of the effectiveness of internal controls.

Based on The Bank of Kentucky Financial Corporations evaluation under the framework in Internal Control  Integrated Framework, management concluded that internal control over financial
reporting was effective as of December 31, 2010. Managements internal control over financial reporting as of December 31, 2010 has been audited by Crowe Horwath LLP, an independent registered public accounting firm, as stated in
their report which is contained herein.



|                   |  |  |  |                                  
|------------------ |  |  |  | ---------------------------------
|/s/ Robert W. Zapp |  |  |  | /s/ Martin J. Gerrety            
|President & CEO    |  |  |  | Treasurer and Assistant Secretary

The Independent Registered
Public Accounting Firms opinion on the effectiveness of internal controls over financial reporting is included in their opinion in the financial statement section of this report.



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|Item 9B. | Other Information
|-------- | -----------------

None.

PART III



|Item 10. | Directors, Executive Officers and Corporate Governance
|-------- | ------------------------------------------------------

Information in response to this item is incorporated by reference from BKFCs definitive Proxy Statement for the 2011 Annual Meeting of Shareholders.



|Item 11. | Executive Compensation
|-------- | ----------------------

Information in response to this item is incorporated by reference from BKFCs definitive Proxy Statement for the 2011 Annual Meeting
of Shareholders.



|Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|-------- | ----------------------------------------------------------------------------------------------

Information in response to this item is incorporated by reference from BKFCs definitive Proxy Statement for the 2011 Annual Meeting
of Shareholders.



|Item 13. | Certain Relationships and Related Transactions, and Director Independence
|-------- | -------------------------------------------------------------------------

Information in response to this item is incorporated by reference from BKFCs definitive Proxy Statement for the 2011 Annual Meeting of Shareholders.



|Item 14. | Principal Accountant Fees and Services
|-------- | --------------------------------------

Information in response to this item is incorporated by reference from BKFCs definitive Proxy Statement for the 2011 Annual Meeting of Shareholders.

PART IV



|Item 15. | Exhibits and Financial Statement Schedules.
|-------- | -------------------------------------------

(a) Financial Statements. A list of Financial Statements included herein is set forth in the Index to Financial Statements appearing in Item 8 of this Form 10-K.

(b) Exhibits.See Index to Exhibits filed with this Annual Report on Form 10-K.



104



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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized on this 11th day of March 2011.



THE BANK OF KENTUCKY FINANCIAL CORPORATIONBy

/s/ Robert W. ZappRobert W. Zapp,President and Chief Executive Officer


Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been duly signed below on March 11, 2011, by
the following persons on behalf of the registrant and in the capacities indicated.



|                                                                              |  |  |  |                            
|----------------------------------------------------------------------------- |  |  |  | ---------------------------
|/s/ Martin J. Gerrety                                                         |  |  |  | /s/ Charles M. Berger      
|Martin J. Gerrety                                                             |  |  |  | Charles M. Berger          
|Treasurer and Assistant Secretary                                             |  |  |  | Director                   
|(principal financial officer and
principal accounting officer)                |  |  |  |                            
|                                                                              |  | 
|/s/ Robert W. Zapp                                                            |  |  |  | /s/ Rodney S. Cain         
|Robert W. Zapp                                                                |  |  |  | Rodney S. Cain             
|President, Chief Executive Officer and Director (principal executive officer) |  |  |  | Director                   
|                                                                              |  | 
|/s/ Mary Sue Rudicill                                                         |  |  |  | /s/ John E. Miracle, D.M.D.
|Mary Sue Rudicill                                                             |  |  |  | John E. Miracle, D.M.D.    
|Director                                                                      |  |  |  | Director                   
|                                                                              |  | 
|/s/ Harry J. Humpert                                                          |  |  |  | /s/ Herbert H. Works       
|Harry J. Humpert                                                              |  |  |  | Herbert H. Works           
|Director                                                                      |  |  |  | Director                   
|                                                                              |  | 
|/s/ Barry G. Kienzle                                                          |  |  |  | /s/ Ruth Seligman Doering  
|Barry G. Kienzle                                                              |  |  |  | Ruth Seligman Doering      
|Director                                                                      |  |  |  | Director                   

|                 |  |  |  |  |  | 
|---------------- |  |  |  |  |  | 
|                 |  |  | 
|/s/ John S. Cain |  |  |  |  |  | 
|John S. Cain     |  |  |  |  |  | 
|Director         |  |  |  |  |  | 



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##### Table of Contents

INDEX TO EXHIBITS



|              |  |                                                                                                                                                                                                                                                                                     
|------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                         
|2.1           |  | Purchase and Assumption Agreement, by and between The Bank of Kentucky, Inc., as buyer, and Peoples Bank of Northern Kentucky, Inc., as seller, and Peoples Bancorporation of
Northern Kentucky, Inc., dated as of September 24,
2002(1)                                            
|              | 
|3.1           |  | Articles of Incorporation of The Bank of Kentucky Financial Corporation, including all amendments through February 12, 2009(2)                                                                                                                                                      
|              | 
|3.2           |  | Second Amended and Restated By-laws of The Bank of Kentucky Financial Corporation(3)                                                                                                                                                                                                
|              | 
|4.1           |  | Junior Subordinated Indenture between The Bank of Kentucky Financial Corporation and The Bank of New York, as trustee, dated as of November 14, 2002(4)                                                                                                                             
|              | 
|4.2           |  | Amended and Restated Trust Agreement among The Bank of Kentucky Financial Corporation, as depositor, The Bank of New York, as Property Trustee, The Bank of New York (Delaware), as
Delaware Trustee and the Administrative Trustees named therein, dated as of November 14, 2002(4)
|              | 
|4.3           |  | Warrant to Purchase up to 274,784 Shares of Common Stock of The Bank of Kentucky Financial Corporation(4)                                                                                                                                                                           
|              | 
|4.4           |  | Form of Series A Preferred Stock
Certificate(5)                                                                                                                                                                                                                                     
|              | 
|10.1          |  | The Bank of Kentucky Financial Corporation 1997 Stock Option and Incentive Plan(5)                                                                                                                                                                                                  
|              | 
|10.2          |  | The Bank of Kentucky Financial Corporation 2007 Stock Option and Incentive Plan(6)                                                                                                                                                                                                  
|              | 
|10.3          |  | The Bank of Kentucky, Inc. Executive Deferred Contribution Plan(7)                                                                                                                                                                                                                  
|              | 
|10.4          |  | Amendment to the Bank of Kentucky, Inc. Executive Deferred Contribution Plan, dated November 17, 2010(8)                                                                                                                                                                            
|              | 
|10.5          |  | The Bank of Kentucky, Inc. Executive Private Pension
Plan(7)                                                                                                                                                                                                                        
|              | 
|10.6          |  | Amendment to the Bank of Kentucky, Inc. Executive Private Pension Plan, dated November 17, 2010(8)                                                                                                                                                                                  
|              | 
|10.7          |  | Amendment to the Bank of Kentucky, Inc. Group Insurance Endorsement Plan(7)                                                                                                                                                                                                         
|              | 
|10.8          |  | Purchase Agreement among The Bank of Kentucky Financial Corporation, The Bank of Kentucky Capital Trust I and Trapeza CDO I, LLC, dated as of November 14, 2002(7)                                                                                                                  
|              | 
|10.9          |  | Letter Agreement (including the Securities Purchase Agreement--Standard Terms) between The Bank of Kentucky Financial Corporation and the United States Department of the Treasury,
dated as of February 13, 2009(9)                                                                
|              | 
|10.10         |  | Form of Waiver, executed by each of the Senior Executive Officers(9)                                                                                                                                                                                                                
|              | 
|10.11         |  | Form of Letter Agreement between The Bank of Kentucky Financial Corporation and each of the Senior Executive Officers(9)                                                                                                                                                            
|              | 
|10.12         |  | The Bank of Kentucky, Inc. Executive Deferred Contribution Plan Trust Agreement, dated November 17, 2010(8)                                                                                                                                                                         
|              | 
|21            |  | Subsidiaries of The Bank of Kentucky Financial Corporation                                                                                                                                                                                                                          



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##### Table of Contents

|     |  |                                                                                                                                                         
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------
|     | 
|23   |  | Consent of Crowe Horwath LLP                                                                                                                            
|     | 
|31.1 |  | Section 302 Certification of Robert W. Zapp, Chief Executive Officer                                                                                    
|     | 
|31.2 |  | Section 302 Certification of Martin J. Gerrety, Treasurer and Assistant Secretary                                                                       
|     | 
|32.1 |  | Section 906 of Sarbanes-Oxley Act of 2002 Certification of Robert W. Zapp                                                                               
|     | 
|32.2 |  | Section 906 of Sarbanes-Oxley Act of 2002 Certification of Martin J. Gerrety                                                                            
|     | 
|99.1 |  | Certification of Robert W. Zapp, Chief Executive Officer, pursuant to Section 111(b)(4) of the Emergency Economic Stabilization Act of 2008             
|     | 
|99.2 |  | Certification of Martin J. Gerrety, Treasurer and Assistant Secretary, pursuant to Section 111(b)(4) of the Emergency Economic Stabilization Act of 2008



|(1) | Incorporated by reference to the Quarterly Report on Form 10-Q for the period ended September 30, 2002, filed with the SEC on November 14,
2002.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Incorporated by reference to the Annual Report on Form 10-K, filed with the SEC on March 13, 2009.
|--- | --------------------------------------------------------------------------------------------------

|(3) | Incorporated by reference to the Current Report on Form 8-K, filed with the SEC on September 24, 2008.
|--- | ------------------------------------------------------------------------------------------------------

|(4) | Incorporated by reference to the Form 8-K, filed with the SEC on December 9, 2002.
|--- | ----------------------------------------------------------------------------------

|(5) | Incorporated by reference to the Form S-8, filed with the SEC on October 2, 1997.
|--- | ---------------------------------------------------------------------------------

|(6) | Incorporated by reference to the Form 8-K, filed with the SEC on April 25, 2007.
|--- | --------------------------------------------------------------------------------

|(7) | Incorporated by reference to the Form 10-K for the year ended December 31, 2003, filed with the SEC on March 12, 2004.
|--- | ----------------------------------------------------------------------------------------------------------------------

|(8) | Incorporated by reference to the Current Report on Form 8-K, filed with the SEC on November 23, 2010.
|--- | -----------------------------------------------------------------------------------------------------

|(9) | Incorporated by reference to the Current Report on Form 8-K, filed with the SEC on February 19, 2009.
|--- | -----------------------------------------------------------------------------------------------------



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