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U.S. Securities and Exchange Commission

Washington, D.C. 20549



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FORM 10-K



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(Mark One)

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

For the Fiscal Year December 31, 2005

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: 0-25960



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THE BANK OF KENTUCKY FINANCIAL
CORPORATION

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|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)

Issuers telephone number: (859) 371-2340



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

None

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

Common Stock, no par value

(Title of Class)



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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 past 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 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, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer ̈Accelerated filer   x    Non-accelerated filer ̈

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, 2005 (the last business day of the
registrants most recently completed second fiscal quarter) was approximately $83,900,000.

At March 1, 2006 there were 5,860,054 shares of the
registrants Common Stock issued and outstanding.

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

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 a variety of community-oriented consumer and commercial financial services to customers throughout Northern Kentucky. The principal business activity of the Bank consists of accepting
consumer and commercial deposits and using such deposits to fund residential and non-residential real estate loans and commercial, consumer, construction and land development loans. The Banks primary market area for both loans and deposits
includes Boone, Kenton and Campbell counties and parts of Grant and Gallatin counties in Northern Kentucky.

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 BKFC 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 will be amortized to income and expensed over the estimated remaining lives of the related assets and liabilities.

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). The Bank is also a member of the Federal Home Loan Bank of Cincinnati (the FHLB).

Because BKFCs activities have been limited primarily to holding the shares of common stock of the Bank, the following discussion of operations
focuses primarily on the business of the Bank.



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##### Table of Contents

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,     |        
|                                                  |  | 2005                   |         |   | 2004  |   |        | 2003 |         |  | 2002  |        |  | 2001 |        
|                                                  |  | Amount                 |         | % |       |   | Amount |      | %       |  |       | Amount |  | %    |         |  | Amount |   | % |   |         | Amount |       | % | 
|                                                  |  | (Dollars in thousands) |        
|Type of Loan:                                     |  |                        |         |   |       |   |        |      |         |  |       |        |  |      |         |  |        |   |   |   |         |        |       |   |  |   |         |  |       |  
|Nonresidential real estate loans                  |  | $                      | 295,326 |   | 40.4  | % |        | $    | 290,684 |  | 40.3  | %      |  | $    | 249,683 |  | 37.8   | % |   | $ | 216,579 |        | 35.6  | % |  | $ | 126,161 |  | 30.6  | %
|One- to four-family residential real estate loans |  |                        | 183,644 |   | 25.1  |   |        |      | 188,140 |  | 26.1  |        |  |      | 175,492 |  | 26.5   |   |   |   | 176,546 |        | 29.1  |   |  |   | 136,194 |  | 33.1  |  
|Commercial loans                                  |  |                        | 136,693 |   | 18.7  |   |        |      | 130,760 |  | 18.2  |        |  |      | 130,022 |  | 19.7   |   |   |   | 119,446 |        | 19.7  |   |  |   | 81,051  |  | 19.7  |  
|Consumer loans                                    |  |                        | 20,046  |   | 2.7   |   |        |      | 20,606  |  | 2.9   |        |  |      | 19,367  |  | 2.9    |   |   |   | 19,258  |        | 3.2   |   |  |   | 14,959  |  | 3.6   |  
|Construction and land development loans           |  |                        | 89,847  |   | 12.3  |   |        |      | 84,690  |  | 11.8  |        |  |      | 82,356  |  | 12.5   |   |   |   | 72,522  |        | 11.9  |   |  |   | 52,184  |  | 12.7  |  
|Municipal obligations                             |  |                        | 6,171   |   | 0.8   |   |        |      | 5,074   |  | 0.7   |        |  |      | 4,183   |  | 0.6    |   |   |   | 3,013   |        | 0.5   |   |  |   | 1,443   |  | 0.3   |  
|                                                  |  |                        |         |   |       |   |        |      |         |  |       |        |  |      |         |  |        |   |   |   |         |        |       |   |  |   |         |  |       |  
|Total loans                                       |  | $                      | 731,727 |   | 100.0 | % |        | $    | 719,954 |  | 100.0 | %      |  | $    | 661,103 |  | 100.0  | % |   | $ | 607,364 |        | 100.0 | % |  | $ | 411,992 |  | 100.0 | %
|                                                  |  |                        |         |   |       |   |        |      |         |  |       |        |  |      |         |  |        |   |   |   |         |        |       |   |  |   |         |  |       |  
|Less:                                             |  |                        |         |   |       |   |        |      |         |  |       |        |  |      |         |  |        |   |   |   |         |        |       |   |  |   |         |  |       |  
|Deferred loan fees                                |  |                        | 668     |   |       |   |        |      | 797     |  |       |        |  |      | 661     |  |        |   |   |   | 549     |        |       |   |  |   | 520     |  |       |  
|Allowance for loan losses                         |  |                        | 7,581   |   |       |   |        |      | 7,214   |  |       |        |  |      | 6,855   |  |        |   |   |   | 6,408   |        |       |   |  |   | 4,244   |  |       |  
|                                                  |  |                        |         |   |       |   |        |      |         |  |       |        |  |      |         |  |        |   |   |   |         |        |       |   |  |   |         |  |       |  
|Net loans                                         |  | $                      | 723,478 |   |       |   |        | $    | 711,943 |  |       |        |  | $    | 653,587 |  |        |   |   | $ | 600,407 |        |       |   |  | $ | 407,228 |  |       |  
|                                                  |  |                        |         |   |       |   |        |      |         |  |       |        |  |      |         |  |        |   |   |   |         |        |       |   |  |   |         |  |       |  



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##### Table of Contents

Loan Maturity Schedule. The following table sets forth certain information, as of
December 31, 2005, regarding the dollar amount of 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 2005:



|                                        |  |                        |         |                           |   |                  |  |       |     |  |   |        
|--------------------------------------- |  | ---------------------- | ------- | ------------------------- | - | ---------------- |  | ----- | --- |  | - | -------
|                                        |  | Due within oneyear     |         | Due after 1year to 5years |   | Due after 5years |  | Total
|                                        |  | (Dollars in thousands)
|Commercial loans                        |  | $                      | 80,179  |                           | $ | 55,728           |  | $     | 786 |  | $ | 136,693
|Construction and land development loans |  |                        | 89,847  |                           |   |                 |  |       |    |  |   | 89,847 
|                                        |  |                        |         |                           |   |                  |  |       |     |  |   |        
|Total                                   |  | $                      | 170,026 |                           | $ | 55,728           |  | $     | 786 |  | $ | 226,540
|                                        |  |                        |         |                           |   |                  |  |       |     |  |   |        
|Interest sensitivity:                   |  |                        |         |                           |   |                  |  |       |     |  |   |        
|With fixed rates                        |  |                        |         |                           | $ | 19,752           |  | $     | 74  |  |   |        
|With variable rates                     |  |                        |         |                           |   | 35,976           |  |       | 712 |  |   |        
|                                        |  |                        |         |                           |   |                  |  |       |     |  |   |        
|Total                                   |  |                        |         |                           | $ | 55,728           |  | $     | 786 |  |   |        
|                                        |  |                        |         |                           |   |                  |  |       |     |  |   |        

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. Such loans typically have adjustment period caps
of 2% and lifetime caps of 6%.

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, 2005, the Bank had a total
of $295 million invested in nonresidential real estate loans, the vast majority of which were secured by property located in the Northern Kentucky metropolitan area. Such loans comprised approximately 40% of the Banks total loans at such date,
$3,063,000 of which were nonperforming.

One-to Four-Family Residential Real Estate Loans. The Bank originates permanent
conventional loans secured by first mortgages on one-to four-family residences, primarily single-family residences, located in the Northern Kentucky area. The Bank also originates a limited amount of loans for the construction of one-to four-family
residences and home equity loans secured by second mortgages on one-to four-family residential real estate. Each of such loans is secured by a mortgage on the underlying real estate and improvements thereon, if any. The Bank does not originate
mortgage loans insured by the Federal Housing Administration or guaranteed by the Veterans Administration.

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.

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



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The aggregate amount of the Banks residential real estate loans equaled approximately $184 million
at December 31, 2005, and represented 25% of total loans at such date. At December 31, 2005, the Bank had $1,320,000 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, 2005 these loans totaled $1,609,000.

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, 2005, the Bank had $137 million, or 19% of total loans, invested in commercial loans, $3,514,000 of which was
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,
2005, the Bank had $20 million, or 3% of total loans, invested in consumer loans, $93,000 of which was 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 to dispose of the unfinished project. At December 31, 2005, a total of $90 million, or approximately 12% of the Banks total loans, consisted of construction and land development loans, $1,055,000 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 or by a lien on equipment purchased or by the general taxing authority of the municipality and provide certain tax
benefits for the Bank. At December 31, 2005, the Bank had $6 million, or 0.8% 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



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of the nonresidential real estate and the receipt of information on the borrower, the loan application is submitted to
the Banks Loan Committee for approval or rejection. If, however, the loan relationship is in excess of $1.50 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 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 to 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 and are not well
secured and in the process of collection will be placed on non-accrual status. Under-collateralized loans that are 90 days past due will be fully or partially charged-off. The amount charged-off will be charged against the loan loss allowance.

The Bank has developed a risk-rating system to quantify commercial loan quality. The system assigns a risk rating from 1 to 9 for each
loan. Classified commercial loans are those with risk ratings of 5 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 is similar to that used by regulatory
agencies. Problem assets are classified as substandard (risk rating 7), doubtful (risk rating 8) or loss (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 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. An asset classified loss is considered
uncollectable and of such little value that its continuance as an asset of the institution is not warranted. The regulations also contain a special mention 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.



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##### Table of Contents

Generally, the Bank classifies as substandard all commercial loans that are delinquent more
than 60 days, unless management believes the delinquency status is short-term due to unusual circumstances. Loans delinquent fewer than 60 days may also be classified if the loans have the characteristics described above rendering classification
appropriate.

The aggregate amounts of the Banks classified assets at December 31, 2005, were as follows:



|                            |  |                |       
|--------------------------- |  | -------------- | ------
|                            |  | (In thousands)
|Substandard (risk rating 7) |  | $              | 9,524 
|Doubtful (risk rating 8)    |  |                | 4,160 
|Loss (risk rating 9)        |  |                | 0     
|                            |  |                |       
|Total classified assets     |  | $              | 13,684
|                            |  |                |       

The following table reflects the amount of loans in delinquent status as of December 31,
2005:



|                                               |  |                |        |  
|---------------------------------------------- |  | -------------- | ------ | -
|                                               |  | (In thousands) |       
|Loans delinquent                               |  |                |        |  
|30 to 59 days                                  |  | $              | 6,120  |  
|60 to 89 days                                  |  |                | 1,808  |  
|90 or more days                                |  |                | 2,349  |  
|                                               |  |                |        |  
|Total delinquent loans                         |  | $              | 10,277 |  
|                                               |  |                |        |  
|Ratio of total delinquent loans to total loans |  |                | 1.41   | %
|                                               |  |                |        |  

The following table sets forth information with respect to the Banks nonperforming assets
for the periods indicated. During the periods shown, the Bank had no restructured loans within the meaning of FAS No. 15. 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 to the present value of expected future cash flows, or to the fair value of the
collateral securing the loan, by the allocation of a portion of the allowance for loan losses to the loan. As of December 31, 2005, the Bank had designated $8.9 million as impaired loans. 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,        |      
|                                                                 |  | 2005                   |       |   | 2004 |   |       | 2003 |  |   | 2002  |   |  | 2001 |      
|                                                                 |  | (Dollars in thousands) |      
|Loans accounted for on a non-accrual basis:(1)                   |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Real estate:                                                     |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Nonresidential                                                   |  | $                      | 2,996 |   |      | $ | 1,319 |      |  | $ | 489   |   |  | $    | 0     |   |  | $ | 427   |  
|Residential                                                      |  |                        | 95    |   |      |   | 941   |      |  |   | 181   |   |  |      | 318   |   |  |   | 329   |  
|Construction                                                     |  |                        | 941   |   |      |   | 217   |      |  |   | 174   |   |  |      | 248   |   |  |   | 0     |  
|Commercial                                                       |  |                        | 2,664 |   |      |   | 1,010 |      |  |   | 622   |   |  |      | 365   |   |  |   | 198   |  
|Consumer and other                                               |  |                        | 0     |   |      |   | 0     |      |  |   | 0     |   |  |      | 0     |   |  |   | 0     |  
|                                                                 |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Total                                                            |  |                        | 6,696 |   |      |   | 3,487 |      |  |   | 1,466 |   |  |      | 931   |   |  |   | 954   |  
|                                                                 |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Accruing loans which are contractually past due 90 days or more: |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Real estate:                                                     |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Nonresidential                                                   |  | $                      | 67    |   |      | $ | 361   |      |  | $ | 800   |   |  | $    | 358   |   |  |   | 0     |  
|Residential                                                      |  |                        | 1,225 |   |      |   | 1,115 |      |  |   | 843   |   |  |      | 2,292 |   |  |   | 2,114 |  
|Construction                                                     |  |                        | 114   |   |      |   | 0     |      |  |   | 0     |   |  |      | 324   |   |  |   | 0     |  
|Commercial                                                       |  |                        | 850   |   |      |   | 113   |      |  |   | 310   |   |  |      | 158   |   |  |   | 44    |  
|Consumer and other loans                                         |  |                        | 93    |   |      |   | 69    |      |  |   | 54    |   |  |      | 109   |   |  |   | 41    |  
|                                                                 |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Total                                                            |  |                        | 2,349 |   |      |   | 1,658 |      |  |   | 2,007 |   |  |      | 3,241 |   |  |   | 2,199 |  
|                                                                 |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Total of non-accrual and 90 days past due loans                  |  | $                      | 9,045 |   |      | $ | 5,145 |      |  | $ | 3,473 |   |  | $    | 4,172 |   |  | $ | 3,153 |  
|                                                                 |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Percentage of total loans                                        |  |                        | 1.24  | % |      |   | .72   | %    |  |   | .53   | % |  |      | .69   | % |  |   | .77   | %
|                                                                 |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Other nonperforming assets(2)                                    |  | $                      | 5,063 |   |      | $ | 1,434 |      |  | $ | 1,239 |   |  | $    | 1,754 |   |  | $ | 292   |  
|                                                                 |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  

---

|(1) | Non-accrual status denotes loans on which, in the opinion of management, the collection of additional interest is unlikely, or loans that meet non-accrual criteria as established by
regulatory authorities. Payments received on a non-accrual loan are either applied to the outstanding principal balance or recorded as interest income, depending on managements assessment of the collectibility of the loan.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



7



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##### Table of Contents

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

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, 2005, the Banks allowance for loan losses totaled $7.6 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. These components are added together and compared to the balance of our allowance at the evaluation date.

The
following table sets forth an analysis of the Banks allowance for loan losses for the periods indicated:



|                                                        |  |                            |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|------------------------------------------------------- |  | -------------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | - |  | ---- | ------ | - |  | - | ------ | -
|                                                        |  | Year ended at December 31, |       
|                                                        |  | 2005                       |        |   | 2004 |   |        | 2003 |  |   | 2002   |   |  | 2001 |       
|                                                        |  | (Dollars in thousands)     |       
|Balance of allowance at beginning of period             |  | $                          | 7,214  |   |      | $ | 6,855  |      |  | $ | 6,408  |   |  | $    | 4,244  |   |  | $ | 3,806  |  
|Recoveries of loans previously charged off:             |  |                            |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Commercial loans                                        |  |                            | 67     |   |      |   | 8      |      |  |   | 5      |   |  |      | 10     |   |  |   | 49     |  
|Consumer loans                                          |  |                            | 11     |   |      |   | 2      |      |  |   | 26     |   |  |      | 9      |   |  |   | 10     |  
|Mortgage loans                                          |  |                            | 0      |   |      |   | 0      |      |  |   | 1      |   |  |      | 6      |   |  |   | 2      |  
|                                                        |  |                            |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Total recoveries                                        |  |                            | 78     |   |      |   | 10     |      |  |   | 32     |   |  |      | 25     |   |  |   | 61     |  
|                                                        |  |                            |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Loans charged off:                                      |  |                            |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Commercial loans                                        |  |                            | 1,127  |   |      |   | 936    |      |  |   | 335    |   |  |      | 152    |   |  |   | 242    |  
|Consumer loans                                          |  |                            | 277    |   |      |   | 360    |      |  |   | 226    |   |  |      | 211    |   |  |   | 69     |  
|Mortgage loans                                          |  |                            | 132    |   |      |   | 30     |      |  |   | 114    |   |  |      | 115    |   |  |   | 93     |  
|                                                        |  |                            |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Total charge-offs                                       |  |                            | 1,536  |   |      |   | 1,326  |      |  |   | 675    |   |  |      | 478    |   |  |   | 404    |  
|                                                        |  |                            |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Net charge-offs                                         |  |                            | (1,458 | ) |      |   | (1,316 | )    |  |   | (643   | ) |  |      | (453   | ) |  |   | (343   | )
|Provision for loan losses                               |  |                            | 1,825  |   |      |   | 1,675  |      |  |   | 1,090  |   |  |      | 1,235  |   |  |   | 781    |  
|Merger adjustment                                       |  |                            | 0      |   |      |   | 0      |      |  |   | 0      |   |  |      | 1,382  |   |  |   | 0      |  
|                                                        |  |                            |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Balance of allowance at end of period                   |  | $                          | 7,581  |   |      | $ | 7,214  |      |  | $ | 6,855  |   |  | $    | 6,408  |   |  | $ | 4,244  |  
|                                                        |  |                            |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Net charge-offs to average loans outstanding for period |  |                            | .20    | % |      |   | .19    | %    |  |   | .10    | % |  |      | .10    | % |  |   | .09    | %
|                                                        |  |                            |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Allowance at end of period to loans at end of period    |  |                            | 1.04   | % |      |   | 1.00   | %    |  |   | 1.04   | % |  |      | 1.06   | % |  |   | 1.02   | %
|                                                        |  |                            |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Allowance to nonperforming loans at end of period       |  |                            | 83.81  | % |      |   | 140.21 | %    |  |   | 197.38 | % |  |      | 153.60 | % |  |   | 134.60 | %
|                                                        |  |                            |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  



8



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##### Table of Contents

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

|                                |  |                        |       |      |   |       |  |      |       |      |   |       |  |   |      
|------------------------------- |  | ---------------------- | ----- | ---- | - | ----- |  | ---- | ----- | ---- | - | ----- |  | - | -----
|                                | 
|                                |  | At December 31,       
|                                |  | 2005                   |       | 2004 |   | 2003  |  | 2002 |       | 2001
|                                |  | (Dollars in thousands)
|Loan type                       |  |                        |       |      |   |       |  |      |       |      |   |       |  |   |      
|Commercial                      |  | $                      | 3,827 |      | $ | 3,537 |  | $    | 3,369 |      | $ | 3,139 |  | $ | 2,099
|Real estate                     |  |                        | 2,571 |      |   | 2,528 |  |      | 2,499 |      |   | 2,433 |  |   | 1,556
|Consumer, CRA and credit cards  |  |                        | 1,183 |      |   | 1,149 |  |      | 987   |      |   | 836   |  |   | 589  
|                                |  |                        |       |      |   |       |  |      |       |      |   |       |  |   |      
|Total allowance for loan losses |  | $                      | 7,581 |      | $ | 7,214 |  | $    | 6,855 |      | $ | 6,408 |  | $ | 4,244
|                                |  |                        |       |      |   |       |  |      |       |      |   |       |  |   |      

The Bank increased its allowance for loan losses from $7.2 million at December 31, 2004, to
$7.6 million at December 31, 2005, due primarily to a higher level of losses and higher balance of loans. 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.

Investment Activities

The investment policy of the Bank is both to manage the utilization of excess funds and to provide for liquidity needs of the Bank as loan demand and daily operations dictate. The Banks federal income tax position is 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,       
|                                    |  | 2005                   |        | 2004       |   | 2003          
|                                    |  | Amortized Cost         |        | Fair Value |   | Amortized Cost |  | Fair Value |        | Amortized Cost |   | Fair Value
|                                    |  | (Dollars in thousands)
|Held-to-maturity securities:        |  |                        |        |            |   |                |  |            |        |                |   |            |  |   |        |  |   |       
|                                    |  |                        |        |            |   |               
|U.S. Government agency obligations  |  |                        | 0      |            |   | 0              |  |            | 0      |                |   | 0          |  |   | 1,500  |  |   | 1,523 
|Municipal and other obligations     |  |                        | 14,823 |            |   | 14,551         |  |            | 12,062 |                |   | 12,129     |  |   | 13,611 |  |   | 13,793
|                                    |  |                        |        |            |   |                |  |            |        |                |   |            |  |   |        |  |   |       
|Total held-to-maturity securities   |  | $                      | 14,823 |            | $ | 14,551         |  | $          | 12,062 |                | $ | 12,129     |  | $ | 15,111 |  | $ | 15,316
|                                    |  |                        |        |            |   |                |  |            |        |                |   |            |  |   |        |  |   |       
|Available-for-sale securities:      |  |                        |        |            |   |                |  |            |        |                |   |            |  |   |        |  |   |       
|                                    |  |                        |        |            |   |               
|U.S. Government agency obligations  |  |                        | 78,931 |            |   | 78,147         |  |            | 50,903 |                |   | 50,749     |  |   | 42,717 |  |   | 42,924
|Corporate obligations               |  |                        | 1,405  |            |   | 1,405          |  |            | 1,455  |                |   | 1,455      |  |   | 1,500  |  |   | 1,500 
|                                    |  |                        |        |            |   |                |  |            |        |                |   |            |  |   |        |  |   |       
|Total available-for-sale securities |  | $                      | 80,336 |            | $ | 79,552         |  | $          | 52,358 |                | $ | 52,204     |  | $ | 44,217 |  | $ | 44,424
|                                    |  |                        |        |            |   |                |  |            |        |                |   |            |  |   |        |  |   |       



9



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##### Table of Contents

The following table sets forth the carrying value of the Banks securities portfolio at
December 31, 2005 by contractual or expected maturity. Securities with call features are presented at call date if management expects that option to be exercised.



|                                    |  |                          |  |               |                                          |  |                |                                          |               |   |                          |                |  |               |   |  |                |  |               |   |  |                |  |               |  
|----------------------------------- |  | ------------------------ |  | ------------- | ---------------------------------------- |  | -------------- | ---------------------------------------- | ------------- | - | ------------------------ | -------------- |  | ------------- | - |  | -------------- |  | ------------- | - |  | -------------- |  | ------------- | -
|                                    |  | Maturing within one year |  |               | Maturing after one And within five years |  |                | Maturing after five and within ten years |               |   | Maturing after ten years |                |  | Total         |  
|                                    |  | Amortized Cost           |  | Average Yield |                                          |  | Amortized Cost |                                          | Average Yield |   |                          | Amortized Cost |  | Average Yield |   |  | Amortized Cost |  | Average Yield |   |  | Amortized Cost |  | Average Yield |  
|                                    |  | (Dollars in thousands)   | 
|Held-to-maturity:                   |  |                          |  |               |                                          |  |                |                                          |               |   |                          |                |  |               |   |  |                |  |               |   |  |                |  |               |  
|Municipal and other obligations (1) |  | 1,138                    |  | 4.44          | %                                        |  | 8,580          |                                          | 4.50          | % |                          | 5,105          |  | 4.60          | % |  | 0              |  | 0.00          | % |  | 14,823         |  | 4.53          | %
|                                    |  |                          |  |               |                                          |  |                |                                          |               |  
|Available for sale:                 |  |                          |  |               |                                          |  |                |                                          |               |   |                          |                |  |               |   |  |                |  |               |   |  |                |  |               |  
|Corporate obligations               |  | 1,405                    |  | 4.07          | %                                        |  | 0              |                                          | 0.00          | % |                          | 0              |  | 0.00          | % |  | 0              |  | 0.00          | % |  | 1,405          |  | 4.07          | %
|U.S. Government agency obligations  |  | 37,948                   |  | 3.78          | %                                        |  | 35,235         |                                          | 3.69          | % |                          | 4,393          |  | 4.16          | % |  | 571            |  | 6.02          | % |  | 78,147         |  | 3.78          | %

---

|(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 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, 2005 the Bank had $4.2 million in retail repurchase
agreements.

The Bank has a mortgage payable that is secured by a parcel of real estate owned by the Bank (the Mortgage Loan).
The Mortgage Loan has an interest rate of 9.00%, monthly payments of $2,762 and a balance of $21,000 at December 31, 2005, and $51,000 at December 31, 2004. 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 had $9 million in deposits from outside its market area as of December 31, 2005.

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, 2005:



|                           |  |                      |        
|-------------------------- |  | -------------------- | -------
|Maturity                   |  | At December 31, 2005
|                           |  | (In thousands)      
|Three months or less       |  | $                    | 18,051 
|Over 3 months to 6 months  |  |                      | 15,157 
|Over 6 months to 12 months |  |                      | 29,290 
|Over 12 months             |  |                      | 42,871 
|                           |  |                      |        
|Total                      |  | $                    | 105,369
|                           |  |                      |        



10



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##### Table of Contents

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, 2005, 2004 and 2003, along with the average aggregate balances of the Banks outstanding short-term borrowings for such
periods:



|                                                   |  |                                |        |   |      |   |        |      |  |   |       |  
|-------------------------------------------------- |  | ------------------------------ | ------ | - | ---- | - | ------ | ---- |  | - | ----- | -
|                                                   |  | During year ended December 31, |       
|                                                   |  | 2005                           |        |   | 2004 |   |        | 2003 | 
|                                                   |  | (Dollars in thousands)         |       
|Maximum balance at any month-end during the period |  | $                              | 39,656 |   |      | $ | 31,013 |      |  | $ | 8,347 |  
|Average balance                                    |  |                                | 9,632  |   |      |   | 15,985 |      |  |   | 5,510 |  
|Weighted average interest rate                     |  |                                | 2.97   | % |      |   | 1.78   | %    |  |   | 1.41  | %

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



|                                  |  |              |       |   |      |   |       |      |  |   |       |  
|--------------------------------- |  | ------------ | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                  |  | December 31, |      
|                                  |  | 2005         |       |   | 2004 |   |       | 2003 | 
|Short-term borrowings outstanding |  | $            | 4,225 |   |      | $ | 9,161 |      |  | $ | 8,347 |  
|Weighted average interest rate    |  |              | 3.21  | % |      |   | 1.78  | %    |  |   | 1.32  | %

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 over the past two years 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.



11



---

##### Table of Contents

The following table sets forth the amounts of the Banks interest-earning assets and
interest-bearing liabilities outstanding at December 31, 2005, which is 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 repricing of the Banks liabilities exceed the contractual terms to maturity or repricing of the Banks earning assets in twelve month
period by $25.4 million. While this table based on contractual terms shows a negative gap, the Banks interest rate model which incorporates assumptions based on historical behavior shows a positive gap of $89.5 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 repricing 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 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                                                            |  | $                      | 30,658  |    |               | $ | 0       |                   |  | $ | 0            |   |  | $     | 0       |   |  | $ | 30,658 
|Interest bearing deposits with banks                                          |  |                        | 100     |    |               |   | 0       |                   |  |   | 0            |   |  |       | 0       |   |  |   | 100    
|Securities                                                                    |  |                        | 35,110  |    |               |   | 9,664   |                   |  |   | 43,815       |   |  |       | 10,069  |   |  |   | 98,658 
|Loans receivable (1)                                                          |  |                        | 367,587 |    |               |   | 106,433 |                   |  |   | 250,561      |   |  |       | 4,641   |   |  |   | 729,222
|                                                                              |  |                        |         |    |               |   |         |                   |  |   |              |   |  |       |         |   |  |   |        
|Total interest-earning assets                                                 |  |                        | 433,455 |    |               |   | 116,097 |                   |  |   | 294,376      |   |  |       | 14,710  |   |  |   | 858,638
|                                                                              |  |                        |         |    |               |   |         |                   |  |   |              |   |  |       |         |   |  |   |        
|Interest-bearing liabilities:                                                 |  |                        |         |    |               |   |         |                   |  |   |              |   |  |       |         |   |  |   |        
|Savings deposits                                                              |  |                        | 39,476  |    |               |   | 0       |                   |  |   | 0            |   |  |       | 0       |   |  |   | 39,476 
|Money market deposit accounts                                                 |  |                        | 101,808 |    |               |   | 0       |                   |  |   | 0            |   |  |       | 0       |   |  |   | 101,808
|NOW accounts                                                                  |  |                        | 242,864 |    |               |   | 0       |                   |  |   | 0            |   |  |       | 0       |   |  |   | 242,864
|Certificates of deposit                                                       |  |                        | 32,984  |    |               |   | 118,998 |                   |  |   | 115,519      |   |  |       | 669     |   |  |   | 268,170
|IRAs                                                                         |  |                        | 3,359   |    |               |   | 14,233  |                   |  |   | 25,580       |   |  |       | 0       |   |  |   | 43,172 
|Federal funds purchased                                                       |  |                        | 0       |    |               |   | 0       |                   |  |   | 0            |   |  |       | 0       |   |  |   | 0      
|Repurchase agreements                                                         |  |                        | 4,225   |    |               |   | 0       |                   |  |   | 0            |   |  |       | 0       |   |  |   | 4,225  
|Notes payable                                                                 |  |                        | 17,005  |    |               |   | 16      |                   |  |   | 10,317       |   |  |       | 6,953   |   |  |   | 34,291 
|                                                                              |  |                        |         |    |               |   |         |                   |  |   |              |   |  |       |         |   |  |   |        
|Total interest-bearing liabilities                                            |  |                        | 441,721 |    |               |   | 133,247 |                   |  |   | 151,416      |   |  |       | 7,622   |   |  |   | 734,006
|                                                                              |  |                        |         |    |               |   |         |                   |  |   |              |   |  |       |         |   |  |   |        
|Interest-earning assets less Interest-bearing liabilities                     |  | $                      | (8,266  | )  |               | $ | (17,150 | )                 |  | $ | 142,960      |   |  | $     | 7,088   |   |  | $ | 124,632
|                                                                              |  |                        |         |    |               |   |         |                   |  |   |              |   |  |       |         |   |  |   |        
|Cumulative interest-rate sensitivity gap                                      |  | $                      | (8,266  | )  |               | $ | (25,416 | )                 |  | $ | 117,544      |   |  | $     | 124,632 |   |  |   |        
|                                                                              |  |                        |         |    |               |   |         |                   |  |   |              |   |  |       |         |   |  |   |        
|Cumulative interest-rate gap as a Percentage of total interest earning assets |  |                        | (.96    | )% |               |   | (2.96   | )%                |  |   | 13.69        | % |  |       | 14.52   | % |  |   |        
|                                                                              |  |                        |         |    |               |   |         |                   |  |   |              |   |  |       |         |   |  |   |        

---

|(1) | Excludes overdrawn accounts reflected as loans.
|--- | -----------------------------------------------



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Competition

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. The primary factors in competing
for deposits are interest rates and convenience of office location. In making loans, the Bank competes with other banks, savings associations, consumer finance companies, credit unions, leasing companies and other lenders. 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 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 area, management believes that the Bank does not have a substantial share of the deposit and loan markets. The size of financial institutions competing with the Bank is
likely to increase as a result of changes in statutes and regulations eliminating various restrictions on interstate and inter-industry branching and acquisitions. Such increased competition may have an adverse effect upon the Bank.

Employees

As of December 31, 2005, the Bank had
236 full-time employees and 64 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 of BKFC

BKFC is a bank holding company
subject to regulation by the Board of Governors of the Federal Reserve System (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 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 Securities and Exchange Commission (SEC).

In general, BKFC is only permitted to engage in activities deemed by the FRB to be closely related to banking. FRB regulations contain a list of
activities that are deemed closely related to banking. Generally, many securities and insurance activities, most real estate development activities and most industrial operations, are not deemed to be closely related to banking. 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 will be subject and regulatory limits on BKFCs ability to pay
dividends to stockholders. 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 Federal Deposit Insurance Corporation (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 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 a bank.



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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.

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 collateral 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, 2005, the maximum the Bank could lend to any one borrower generally equaled $10.7
million and equaled $16.1 million if 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.

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 Risk-Based Ratio) of 8%. At least half of the minimum-required total capital of 8% is to 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, effective April 1, 2002, 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 will be 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.

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, 2005:



|                  |  |                        |        |         |          |   |        |   |         |  |       |  
|----------------- |  | ---------------------- | ------ | ------- | -------- | - | ------ | - | ------- |  | ----- | -
|                  |  | At December 31, 2005   |       
|                  |  | BKFC                   |        |         | The Bank |  
|                  |  | Amount                 |        | Percent |          |   | Amount |   | Percent | 
|                  |  | (Dollars in thousands) |       
|Tier 1 risk-based |  | $                      | 85,153 |         | 9.79     | % |        | $ | 84,069  |  | 9.68  | %
|Requirement       |  |                        | 34,784 |         | 4.00     |   |        |   | 34,731  |  | 4.00  |  
|                  |  |                        |        |         |          |   |        |   |         |  |       |  
|Excess            |  | $                      | 50,369 |         | 5.79     | % |        | $ | 49,338  |  | 5.68  | %
|                  |  |                        |        |         |          |   |        |   |         |  |       |  
|Total risk-based  |  | $                      | 92,734 |         | 10.66    | % |        | $ | 91,650  |  | 10.56 | %
|Requirement       |  |                        | 69,568 |         | 8.00     |   |        |   | 69,463  |  | 8.00  |  
|                  |  |                        |        |         |          |   |        |   |         |  |       |  
|Excess            |  | $                      | 23,166 |         | 2.66     | % |        | $ | 22,187  |  | 2.56  | %
|                  |  |                        |        |         |          |   |        |   |         |  |       |  
|Leverage ratio    |  | $                      | 85,153 |         | 9.21     | % |        | $ | 84,069  |  | 9.10  | %
|Requirement       |  |                        | 36,984 |         | 4.00     |   |        |   | 36,943  |  | 4.00  |  
|                  |  |                        |        |         |          |   |        |   |         |  |       |  
|Excess            |  | $                      | 48,169 |         | 5.21     | % |        | $ | 47,126  |  | 5.10  | %
|                  |  |                        |        |         |          |   |        |   |         |  |       |  



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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.

The FDIC has adopted regulations governing prompt corrective action to resolve the problems of capital deficient and otherwise troubled banks under its regulation. 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 90 days of reaching that capitalization level, except under limited circumstances. The Banks capital levels at December 31, 2005, meet 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.

Dividend Restrictions

The ability of BKFC to pay cash dividends to its stockholders depends on the
amount of dividends that may be declared and paid by the Bank and on BKFCs $10 million borrowing line of credit, which currently has $0 outstanding. There are a number of statutory and regulatory requirements applicable to the payment of
dividends by banks and bank holding companies.

If the FRB or the FDIC, respectively, 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.

At December 31, 2005, the Bank had capital in excess of the FDICs most restrictive minimum capital requirements in an amount equal to $4.8
million from which dividends could be paid, subject to the FDICs general safety and soundness review. In 2005, BKFC paid a cash dividend of $0.30 per share totaling $1,772,000.

FDIC Deposit Insurance and Assessments

The FDIC is an independent federal agency that insures the
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 FDIC administers two separate insurance funds, the BIF for commercial banks and
state savings banks and the SAIF for savings associations and SAIF deposits acquired by banks (The FDIC has announced that it intends to merge the BIF and SAIF insurance funds). The FDIC is required to maintain designated levels of reserves in each
fund.

The deposits of Burnett and FTSB obtained by the Bank in the mergers, which at September 30, 2005 was $141 million, including
the attributed growth factor, remain insured by the SAIF. The Bank is a member of the BIF, and, at September 30, 2005, it had $603 million in deposits insured in the BIF.



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The FDIC is authorized to establish separate annual assessment rates for deposit insurance each for
members of the BIF and the SAIF. The FDIC may increase assessment rates for either fund if necessary to restore the funds ratio of reserves to insured deposits to its target level within a reasonable time and may decrease such rates if such
target level has been met. The FDIC has established a risk-based assessment system for both SAIF and BIF members. Under this system, assessments vary based on the risk the institution poses to its deposit insurance fund. The risk level is determined
based on the institutions capital level and the FDICs level of supervisory concern about the institution.

FRB Reserve Requirements

FRB regulations currently require banks to maintain reserves of 3% of net transaction accounts (primarily demand and NOW accounts) up
to $48.3 million of such accounts (subject to an exemption of up to $7.0 million), and of 10% of net transaction accounts in excess of $48.3 million. At December 31, 2005, the Bank was in compliance with this reserve requirement.

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 Federal Home Loan Banks (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 consist of two components, the first is the membership component which is equal to .15% of the Banks total assets, the second is an activity component that is
equal to 2%-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 $4,282,900 at December 31, 2005. 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 Fort Thomas Financial
Corporation. Fort Thomas Financial Corporations wholly owned subsidiary was Fort Thomas Savings Bank. Federal income tax laws provided savings banks with additional bad debt deductions through 1987, totaling $1,255,000 for Fort Thomas
Financial Corporation. 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.

Kentucky Taxation

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

In 1996 the Kentucky legislature passed legislation to replace the Bank Shares Tax with the Local Deposits Franchise Tax and the
Kentucky Bank 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 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
(Deposits Tax). The tax is levied at a rate of 0.001% 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 $0.315 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.



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##### Table of Contents

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; 7% 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 $0.315 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.

Available Information

BKFC maintains an Internet web
site 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 Exchange Act, as soon as reasonably practicable after such material was electronically filed with, or furnished to the SEC. Materials that BKFC files with the SEC may be read
and copied at the SECs 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 stockholders upon request.

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 Form 10-K. 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 Form 10-K is qualified in its entirety
by these risk factors.

If any 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 BKFCs 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 Success Depends Upon the General Economic Conditions in the Areas in Which We Operate.

Our success depends upon the general economic conditions of the specific local markets in which we operate. Our operations are concentrated in the
northern Kentucky area. As a result, 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.

We are Subject to Intense Competition with Other Financial Institutions
That Could Adversely Affect Our Business.

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. The primary factors in competing for deposits are interest rates and convenience of office location. In making loans, the Bank
competes with other banks, savings associations, consumer finance companies, credit unions, leasing companies and other lenders. The Bank competes for loan originations primarily through the interest rates and loan fees it charges and through the
efficiency and



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quality of services it provides to borrowers. Competition 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 area, management believes that the Bank does not have a substantial share of the deposit and loan markets. The size of financial institutions
competing with the Bank is likely to increase as a result of changes in statutes and regulations eliminating various restrictions on interstate and inter-industry branching and acquisitions. Such increased competition may have a material adverse
effect on our financial condition and results of operations.

Any Changes in Our Accounting Policies and Estimates Could Adversely Affect Our Business.

Our management makes judgments and assumptions in selecting and adopting various accounting policies and in applying estimates.
Actual outcomes may be materially different from amounts previously estimated. Management has identified the accounting policy related to the allowance for loan losses as critical to the understanding of BKFCs results of operations. See
Item 1  Allowance for Loan Losses and Item 7  Critical Accounting Policies for additional discussion regarding these critical accounting policies. 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.

We are 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 mortgage loans and investment securities, and its interest expense paid on its interest-bearing liabilities,
consisting of deposits and borrowings. Management cannot predict or control changes in interest rates, which are highly sensitive to many factors that are beyond our control, including general economic conditions and the policies of various
governmental and regulatory agencies and, in particular, the Federal Reserve Board.

Although the Bank has implemented an asset and
liability management strategy designed to maintain a reasonable degree of interest rate sensitivity (as more fully described in Item 1  Asset/Liability Management), at any given time the Banks assets and liabilities will
likely be affected differently by a given change in interest rates, principally because asset and liability re-pricing do not coincide. Changes in interest rates may also affect the level of voluntary prepayments on the Banks loans and the
level of financing or refinancing by customers. While management and the Board of Directors of the Bank intend to continue to implement our asset and liability management strategy and monitor interest rate risk, there can be no assurance as to
whether such measures will be entirely effective in mitigating the Banks exposure to interest rate risk.

We are Subject to Intensive Government
Regulation and Supervision.

BKFC and the Bank are subject to extensive state and federal regulation, supervision and legislation that
govern almost all aspects of the operations of BKFC and the Bank. See Item 1  Regulation of BKFC and Regulation of the Bank for additional discussion regarding government regulation. Any change in applicable
federal or state laws or regulations could have a substantial impact on BKFC and the Bank. While it is not reasonably predictable what effect any presently contemplated or future changes in the laws or regulations or their interpretations would have
on BKFC and the Bank, these changes could have a material adverse effect on our financial condition and results of operations, and could also adversely affect the market value of our common stock.

We are Required to Meet Various Capital Adequacy Guidelines.

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 Item 1  Regulatory Capital
Requirements for detailed capital guidelines for bank holding companies and banks.



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Our Internal Controls May be Ineffective.

We regularly review and update our internal controls, disclosure controls and procedures and corporate governance policies and procedures. Any system of
controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of our controls or procedures or
failure to comply with regulations related to controls and procedures could have a material adverse effect on our business, results of operations or financial conditions.

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 stockholders 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 Item 1  Dividend Restrictions.

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 Success Depends Upon Attracting and Retaining Senior Management.

BKFCs success depends to a great extent on its ability to attract and retain members of senior management. The unexpected loss of a member of senior
management could have a material adverse impact on BKFCs business and its operations. In addition, BKFCs future performance depends on its ability to attract and retain key personnel and skilled employees, particularly at the senior
management level.

Our Stock Price Can Be Volatile.

Our stock price can fluctuate widely in response to a variety of factors. Factors include actual or anticipated variations in our quarterly operating results, recommendations by securities analysts, operating and
stock price performance of other companies, news reports, results of litigation and other factors, including those described in this Risk Factors section. 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 stock. In addition, a low average trading volume can lead to significant price swings even when a relatively small number of shares are being traded.

An Investment in Our Common Stock is Not an Insured Deposit.

Our common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, or any other deposit insurance fund, or by any other public or private entity. Investment in our common stock is
inherently risky for the reasons described in this Risk Factors section and elsewhere in this Form 10-K, and is subject to the same market forces that may affect the price of common stock in any company. As a result, if you acquire our
common stock, you may lose some or all of your investment.

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 27 branch
locations operated by the Bank, 13 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.



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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. Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of stockholders of BKFC during the fourth quarter of the fiscal year covered by this report.



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##### Table of Contents

PART II

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

BKFCs common stock is quoted on the OTC Bulletin Board 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 2005 |  | High |       | Low
|First Quarter    |  | $    | 26.45 |     | $ | 25.50
|Second Quarter   |  |      | 26.00 |     |   | 25.75
|Third Quarter    |  |      | 26.50 |     |   | 25.75
|Fourth Quarter   |  |      | 26.25 |     |   | 25.75
|                 |  |     
|Fiscal Year 2004 |  | High |       | Low
|First Quarter    |  | $    | 30.50 |     | $ | 30.00
|Second Quarter   |  |      | 30.30 |     |   | 28.75
|Third Quarter    |  |      | 29.25 |     |   | 26.00
|Fourth Quarter   |  |      | 26.85 |     |   | 25.75

There were 5,884,079 shares of common stock of BKFC outstanding on December 31, 2005, which
were held of record by 1,012 shareholders. The Board of Directors declared cash dividends of $.11 per share in March 2004, and $.12 per share in September 2004, and $.14 per share in March 2005, and $.16 per share in September 2005.

The following table shows information relating to the repurchase of shares by the Company during the fourth quarter of 2005:



|                    |  |                                |  |                             |       |                                                                       |         |                                                                       |       
|------------------- |  | ------------------------------ |  | --------------------------- | ----- | --------------------------------------------------------------------- | ------- | --------------------------------------------------------------------- | ------
|Period              |  | Total numberof sharespurchased |  | Average pricepaid per share |       | Total number ofshares purchased aspart of
publiclyannounced plans (1) |         | Maximumnumber ofshares that maybe purchasedunder the plansor programs
|October 1-31, 2005  |  | 0                              |  | $                           | 0     |                                                                       | 118,500 |                                                                       | 81,500
|November 1-30, 2005 |  | 5,700                          |  | $                           | 26.00 |                                                                       | 124,200 |                                                                       | 75,800
|December 1-31, 2005 |  | 11,000                         |  | $                           | 26.00 |                                                                       | 135,200 |                                                                       | 64,800

---

|(1) | The Company maintained a share repurchase program that was approved by the Companys board of directors in June of 2003, as thereby extended by the board of directors on
November 19, 2004. This repurchase program, which expired on December 31, 2005, authorized the repurchase and retirement of 200,000 common shares of the Company in the over-the-counter market. As of the date of this report, 135,200 of the
200,000 shares authorized for repurchase have been repurchased. The Company did not terminate any plan prior to its expiration date.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In
December of 2005 the Companys Board of Directors approved a new share repurchase program, which authorizes the repurchase of up to 200,000 shares of the Companys outstanding common shares in the over-the-counter market from time to time
over the next twelve months, beginning January 1, 2006 and expiring December 31, 2006.



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##### Table of Contents

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, 2005. 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 |        
|                                                 | 2005 |                              |         | 2004 |  |   | 2003    |   |  | 2002 |         |   | 2001 |  
|Earnings:                                        |      |                              |         |      |  |   |         |   |  |      |         |   |      |   |         |   |  |   |         |  
|Total Interest Income                            |      | $                            | 50,755  |      |  | $ | 41,591  |   |  | $    | 39,369  |   |      | $ | 33,959  |   |  | $ | 36,083  |  
|Total Interest Expense                           |      |                              | 18,132  |      |  |   | 11,598  |   |  |      | 12,690  |   |      |   | 12,120  |   |  |   | 17,415  |  
|                                                 |      |                              |         |      |  |   |         |   |  |      |         |   |      |   |         |   |  |   |         |  
|Net Interest Income                              |      |                              | 32,623  |      |  |   | 29,993  |   |  |      | 26,679  |   |      |   | 21,839  |   |  |   | 18,668  |  
|Provision for Loan Losses                        |      |                              | 1,825   |      |  |   | 1,675   |   |  |      | 1,090   |   |      |   | 1,235   |   |  |   | 781     |  
|Noninterest Income                               |      |                              | 9,085   |      |  |   | 8,271   |   |  |      | 8,940   |   |      |   | 5,515   |   |  |   | 4,346   |  
|Noninterest Expense                              |      |                              | 25,161  |      |  |   | 21,602  |   |  |      | 20,484  |   |      |   | 13,583  |   |  |   | 11,854  |  
|                                                 |      |                              |         |      |  |   |         |   |  |      |         |   |      |   |         |   |  |   |         |  
|Income Before Income Taxes                       |      |                              | 14,722  |      |  |   | 14,987  |   |  |      | 14,045  |   |      |   | 12,536  |   |  |   | 10,379  |  
|Federal Income Taxes                             |      |                              | 4,595   |      |  |   | 4,929   |   |  |      | 4,686   |   |      |   | 4,085   |   |  |   | 3,310   |  
|                                                 |      |                              |         |      |  |   |         |   |  |      |         |   |      |   |         |   |  |   |         |  
|Net Income                                       |      | $                            | 10,127  |      |  | $ | 10,058  |   |  | $    | 9,359   |   |      | $ | 8,451   |   |  | $ | 7,069   |  
|                                                 |      |                              |         |      |  |   |         |   |  |      |         |   |      |   |         |   |  |   |         |  
|Per Common Share Data:                           |      |                              |         |      |  |   |         |   |  |      |         |   |      |   |         |   |  |   |         |  
|Basic Earnings                                   |      | $                            | 1.71    |      |  | $ | 1.69    |   |  | $    | 1.57    |   |      | $ | 1.42    |   |  | $ | 1.16    |  
|Diluted Earnings                                 |      |                              | 1.70    |      |  |   | 1.68    |   |  |      | 1.55    |   |      |   | 1.41    |   |  |   | 1.15    |  
|Dividends Paid                                   |      |                              | 0.30    |      |  |   | 0.23    |   |  |      | 0.17    |   |      |   | 0.13    |   |  |   | 0.10    |  
|Balances at December 31:                         |      |                              |         |      |  |   |         |   |  |      |         |   |      |   |         |   |  |   |         |  
|Total Investment Securities                      |      | $                            | 94,375  |      |  | $ | 64,266  |   |  | $    | 59,535  |   |      | $ | 59,464  |   |  | $ | 52,298  |  
|Total Loans                                      |      |                              | 731,059 |      |  |   | 719,157 |   |  |      | 660,442 |   |      |   | 606,815 |   |  |   | 411,472 |  
|Allowance for Loan Losses                        |      |                              | 7,581   |      |  |   | 7,214   |   |  |      | 6,855   |   |      |   | 6,408   |   |  |   | 4,244   |  
|Total Assets                                     |      |                              | 957,338 |      |  |   | 878,129 |   |  |      | 815,976 |   |      |   | 779,606 |   |  |   | 507,262 |  
|Noninterest Bearing Deposits                     |      |                              | 135,620 |      |  |   | 121,454 |   |  |      | 106,451 |   |      |   | 91,787  |   |  |   | 55,763  |  
|Interest Bearing Deposits                        |      |                              | 695,490 |      |  |   | 631,346 |   |  |      | 592,276 |   |      |   | 575,559 |   |  |   | 360,420 |  
|Total Deposits                                   |      |                              | 831,110 |      |  |   | 752,800 |   |  |      | 698,727 |   |      |   | 667,346 |   |  |   | 416,183 |  
|Notes payable                                    |      |                              | 34,291  |      |  |   | 37,573  |   |  |      | 37,850  |   |      |   | 43,125  |   |  |   | 9,449   |  
|Total Shareholders Equity                       |      |                              | 80,447  |      |  |   | 73,664  |   |  |      | 66,689  |   |      |   | 58,423  |   |  |   | 51,521  |  
|Other Statistical Information:                   |      |                              |         |      |  |   |         |   |  |      |         |   |      |   |         |   |  |   |         |  
|Return on Average Assets                         |      |                              | 1.14    | %    |  |   | 1.21    | % |  |      | 1.19    | % |      |   | 1.52    | % |  |   | 1.48    | %
|Return on Average Equity                         |      |                              | 13.11   | %    |  |   | 14.39   | % |  |      | 14.84   | % |      |   | 15.35   | % |  |   | 14.05   | %
|Dividend Payout Ratio                            |      |                              | 17.54   | %    |  |   | 13.61   | % |  |      | 10.83   | % |      |   | 9.15    | % |  |   | 8.62    | %
|Capital Ratios at December 31:                   |      |                              |         |      |  |   |         |   |  |      |         |   |      |   |         |   |  |   |         |  
|Total Equity to Total Assets                     |      |                              | 8.40    | %    |  |   | 8.39    | % |  |      | 8.17    | % |      |   | 7.50    | % |  |   | 10.16   | %
|Average Equity to Average Assets                 |      |                              | 8.67    | %    |  |   | 8.38    | % |  |      | 8.04    | % |      |   | 9.93    | % |  |   | 10.50   | %
|Tier 1 Leverage Ratio                            |      |                              | 9.21    | %    |  |   | 9.08    | % |  |      | 8.87    | % |      |   | 9.57    | % |  |   | 10.46   | %
|Tier 1 Capital to Risk-Weighted Assets           |      |                              | 9.79    | %    |  |   | 9.50    | % |  |      | 9.60    | % |      |   | 9.40    | % |  |   | 10.46   | %
|Total Risk-Based Capital to Risk-Weighted Assets |      |                              | 10.66   | %    |  |   | 10.38   | % |  |      | 10.54   | % |      |   | 10.39   | % |  |   | 12.12   | %
|Loan Quality Ratios at December 31:              |      |                              |         |      |  |   |         |   |  |      |         |   |      |   |         |   |  |   |         |  
|Allowance for Loan Losses                        |      |                              |         |      |  |   |         |   |  |      |         |   |      |   |         |   |  |   |         |  
|To Total Loans                                   |      |                              | 1.04    | %    |  |   | 1.00    | % |  |      | 1.04    | % |      |   | 1.06    | % |  |   | 1.02    | %
|Allowance for Loan Losses                        |      |                              |         |      |  |   |         |   |  |      |         |   |      |   |         |   |  |   |         |  
|To Nonperforming Loans                           |      |                              | 83.81   | %    |  |   | 140.21  | % |  |      | 197.38  | % |      |   | 153.60  | % |  |   | 134.60  | %
|Net Charge-Offs to Average Net Loans             |      |                              | 0.20    | %    |  |   | 0.19    | % |  |      | 0.10    | % |      |   | 0.10    | % |  |   | 0.09    | %



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

Managements Discussion and Analysis of Financial Condition

And the Results of Operations

December 31, 2005

FORWARD LOOKING STATEMENTS

This report includes
forward-looking statements by the Corporation relating to such matters as anticipated operating results, credit quality expectations, prospects for new lines of business, technological developments, economic trends (including interest rates) and
similar matters. Such statements are based upon the current beliefs and expectations of the Corporations management and are subject to risks and uncertainties. While the Corporation believes that the assumptions underlying the forward-looking
statements contained herein are reasonable, any of the assumptions could prove to be inaccurate, and accordingly, actual results and experience could differ materially from the anticipated results or other expectations expressed by the Corporation
in its forward-looking statements. Factors that could cause actual results or experience to differ from results discussed in the forward-looking statements include, but are not limited to: economic conditions; volatility and direction of market
interest rates; governmental legislation and regulation, including changes in accounting regulation or standards; material unforeseen changes in the financial condition or results of operations of the Corporations clients; and other risks
identified from time-to-time in the Corporations other public documents on file with the Securities and Exchange Commission, including those described in Item 1A of the Corporations annual report on Form 10-K. The Private Securities
Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements, and the purpose of this paragraph is to secure the use of the safe harbor provisions.

MANAGEMENT OVERVIEW

The business of The Bank of Kentucky Financial Corporation (BKFC or the
Corporation) consists of holding and administering its interest in The Bank of Kentucky, Inc. (the Bank). The Bank conducts basic banking operations from locations in Boone, Kenton, Campbell, and Grant Counties in Northern
Kentucky. The majority of the Corporation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. Commercial or
residential real estate or other business and consumer assets secure the majority of the Banks loans.

The Corporation produced record earnings of
$10,127,000 in 2005, which was a slight increase of $69,000 or 1% over 2004. The financial results of the Corporation for 2005 were affected primarily by two factors. Growth in the balance sheet and higher levels of earning assets, drove net
interest income up $2,630,000, or 9%, for the year, while the investments the Bank made in infrastructure contributed to the increase in expenses of $3,559,000 or 16% over 2004. A third factor affecting the financial results of 2005 was a $617,000
increase in service charges, which helped non-interest income grow 10% from 2004.

The driving force for the growth in the Corporations balance sheet
in 2005 was deposit growth, which increased $78,310,000, or 10% from 2004. This deposit growth funded the increases in loans of 2%, securities of 47%, and allowed for an investment in federal funds sold of



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##### Table of Contents

$30,658,000. The Corporations net interest margin, on a tax equivalent basis, increased 3 basis points to 4.06% in
2005. Contributing to the improvement in the net interest margin was lower cash reserve requirements, which were invested in earning assets, and the growth in demand deposit balances. While the net interest margin increased in 2005, it was
negatively impacted by the mix of assets added, and the higher level of nonperforming assets. Of the additional $61,130,000 of average earning assets added in 2005, $34,729,000 consisted of higher yielding loans and $26,401,000 consisted of lower
yielding overnight investments and securities. This was particularly evident in the fourth quarter of 2005, when net interest income growth slowed to 4% and the net interest margin fell 23 basis points from 2004. Non-performing assets grew
$7,529,000 or 114% from $6,579,000 at the end of 2004 to $14,108,000 at the end of 2005, as a result of two borrowers adding a total of $7,986,000 in non-performing loans and other real estate property. The non-performing assets at year-end 2005
consisted of $9,045,000 in non-performing loans and $5,063,000 in other real estate owned.

The Bank made significant investments in staff and equipment in
2005 to take advantage of new revenue sources, to strengthen the Bank and to meet growing challenges in the regulatory environment. The largest investment made in 2005 was the opening of Banks cash management operations center in February of
2005. This center was opened to increase the Banks capacity in existing lines of business and to offer new cash management products. The investment in this center included over $700,000 in new equipment and software, 8,750 square feet of
office space and 25 additional employees. This investment contributed to the strong growth in service charge revenue, which was up 17% from 2004. This revenue stream is expected to continue to grow in 2006. Other investments of additional employees
in 2005, were made in the information technology area, credit, commercial and consumer lending, auditing and accounting.

Increased impaired loans and
higher credit losses in 2005 drove the provision for loan losses to an increase of $150,000 or 9% from 2004. Net charge offs for 2005 were $1,458,000 or .20% of average loans compared to the $1,316,000 or .19% in 2004.

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

CRITICAL ACCOUNTING POLICIES

BKFC has prepared all of the consolidated financial information in this report in
accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). In preparing the consolidated financial statements in accordance with U.S. 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 materially different amounts to be reported if conditions or underlying circumstances were to
change.



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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 on ongoing quarterly assessments and evaluations of the collectibility 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 the 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 conservative underwriting, documentation and collections standards and quarterly management reviews of large loan exposures
and loans experiencing deterioration of loan quality.

Larger commercial loans that exhibit probable or observed loan weaknesses are subject to individual
review. Where appropriate, specific portions of the allowance are allocated to individual loans based on managements estimate of the borrowers ability to repay the loan given the availability of collateral, other sources of cash flow and
legal options available to the Bank. The review of individual loans includes those loans that are impaired as provided in SFAS No. 114, Accounting by Creditors for Impairment of a Loan. The Bank evaluates the collectibility of both
principal and interest when assessing the need for loans being placed on non-accrual status. Historical loss rates are applied to other commercial loans not subject to specific reserve allocations. The loss rates applied to commercial loans are
derived from analyzing a range of the loss experience sustained on loans according to their internal risk grade. These loss rates may be adjusted to account for environmental factors if warranted.

Homogenous loans, such as consumer installment, residential mortgage loans and home equity loans are not individually risk graded. Rather, 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 individual loans or
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 the analysis include the effects of the local economy, trends in the nature and volume of loans (delinquencies, charge-offs and nonaccrual loans), changes in mix of loans, asset quality trends, risk management and loan
administration, changes in the internal lending policies and credit standards, and examination results from bank regulatory agencies and internal review by the credit department.

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

FINANCIAL CONDITION

Total assets at
December 31, 2005 were $957,338,000 compared to $878,129,000 at December 31, 2004, an increase of $79,209,000 (9%). Driving the Corporations balance sheet growth was



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##### Table of Contents

an increase of $78,310,000 (10%) in total Bank deposits to $831,110,000 at December 31, 2005, compared to
$752,800,000 at December 31, 2004. Contributing to the growth in deposits were increases in certificates of deposits and individual retirement accounts (up $49,011,000 or 19%), money market accounts (up $14,930,000 or 17%) and demand deposit
accounts (up $14,159,000 or 12%). The growth in certificates of deposits and individual retirement accounts benefited from the rising rate environment as the yields on these accounts increased significantly from the historic low yields of the
preceding years. Growth in money market accounts benefited from the growth in the Banks Money Market Plus account and the Money Market Index account. The largest other funding source for asset growth was shareholders equity, which
increased $6,783,000 (9%) to $80,447,000 at December 31, 2005, compared to $73,664,000 at December 31, 2004. The growth in deposits and shareholders equity was offset by other borrowings, which decreased $8,218,000 to $38,516,000 at
December 31,2005 compared to $46,734,000 at December 31, 2004.

On the asset side of the Banks balance sheet, growth came from federal
funds sold (up $30,658,000 or 100%), securities (up $30,109,000 or 47%) and loans (up $11,535,000 or 2%). Contributing to the growth in the loan portfolio were increases in the commercial and commercial real estate loan portfolios (up $10,575,000 or
3%). Contributing to the growth in the securities portfolio was $26,000,000 invested in the fourth quarter of 2005 in short term discount notes. These notes are a form of short-term investment, which the Bank pledges for collateralization of public
fund deposits.

As discussed in the Management Overview section above, the following table illustrates the change in the mix of average earning assets in
2005 as compared to 2004. The table shows that loans as a percentage of average earning assets dropped to 80.9% of the average earning assets in 2005, compared to 82.2% in 2004 while short-term investments and securities increased to 9.0% of average
earning assets in 2005 compared to 6.5% in 2004. These changes to the mix of earning assets had a negative effect on net interest income, with lower yielding short-term investments and securities growth outpacing higher yielding loan growth.

Table 1 - Average Assets 2005, 2004 and 2003



|                                         |  |      |         |                        |       |   |      |   |                        |  |       |      |  |                        |         |  |       |  
|---------------------------------------- |  | ---- | ------- | ---------------------- | ----- | - | ---- | - | ---------------------- |  | ----- | ---- |  | ---------------------- | ------- |  | ----- | -
|                                         |  | 2005 |         | As a % of total assets |       |   | 2004 |   | As a % of total assets |  |       | 2003 |  | As a % of total assets |        
|Average Assets:                          |  |      |         |                        |       |   |      |   |                        |  |       |      |  |                        |         |  |       |  
|Cash and Due from banks                  |  | $    | 34,654  |                        | 3.9   | % |      | $ | 42,364                 |  | 5.1   | %    |  | $                      | 37,098  |  | 4.7   | %
|Short term Investments                   |  |      | 13,339  |                        | 1.5   | % |      |   | 2,355                  |  | .3    | %    |  |                        | 35,480  |  | 4.5   | %
|Other interest-earning assets            |  |      | 4,236   |                        | .5    | % |      |   | 4,157                  |  | .5    | %    |  |                        | 5,757   |  | .8    | %
|Securities                               |  |      | 67,062  |                        | 7.5   | % |      |   | 51,724                 |  | 6.2   | %    |  |                        | 48,103  |  | 6.1   | %
|Loans (net of allowance for loan losses) |  |      | 720,528 |                        | 80.9  | % |      |   | 686,016                |  | 82.2  | %    |  |                        | 615,814 |  | 78.5  | %
|Premises and Equipment                   |  |      | 17,163  |                        | 1.9   | % |      |   | 16,589                 |  | 2.0   | %    |  |                        | 16,394  |  | 2.1   | %
|Goodwill and Acquisition intangibles     |  |      | 13,080  |                        | 1.5   | % |      |   | 13,296                 |  | 1.6   | %    |  |                        | 13,926  |  | 1.8   | %
|Cash Surrender Value of life insurance   |  |      | 12,786  |                        | 1.4   | % |      |   | 11,869                 |  | 1.4   | %    |  |                        | 5,497   |  | .7    | %
|Other Assets                             |  |      | 8,019   |                        | .9    | % |      |   | 6,283                  |  | .7    | %    |  |                        | 6,176   |  | .8    | %
|                                         |  |      |         |                        |       |   |      |   |                        |  |       |      |  |                        |         |  |       |  
|Total Average Assets                     |  | $    | 890,867 |                        | 100.0 | % |      | $ | 834,653                |  | 100.0 | %    |  | $                      | 784,245 |  | 100.0 | %
|                                         |  |      |         |                        |       |   |      |   |                        |  |       |      |  |                        |         |  |       |  



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RESULTS OF OPERATIONS

SUMMARY

Net income was $10,127,000 for the year ended December 31, 2005, compared to $10,058,000 in 2004, an
increase of $69,000 (1%). Net income for the year ended December 31, 2004 increased $699,000 (7%) from the $9,359,000 recorded in 2003. Driven by the growth in the balance sheet and an increase in the effect of net free funds (non-interest
bearing liabilities funding earning assets), net interest income increased $2,630,000 or 9% in 2005 which helped offset the $3,559,000 (16%) increase in non-interest expense. Also helping to offset the increase in non-interest expense was
non-interest income, which increased $814,000. While deposit growth fueled balance sheet growth, increasing demand deposit accounts and the deposit reclassification process, described in the net interest section below, positively impacted the net
free funds. Contributing to the higher expenses in 2005 was the opening of the Banks cash management operations center in February of 2005. Revenues from the increased volume of cash management activities and new products contributed to the
$617,000 increase in service charges from 2004. The 2004 results reflected a $3,314,000 or 12% increase in the net interest income, which was offset with a $1,643,000 or 56% reduction in gains on loans sold from 2003.

NET INTEREST INCOME

Net interest income grew to $32,623,000 in 2005,
an increase of $2,630,000 (9%) over the $29,993,000 earned in 2004. The increase was driven by the growth in the balance sheet and an increase in the effect of net free funds, and drove the increase in the net interest margin from 4.03% in 2004
to 4.06% in 2005. As illustrated in Table 3, net interest income was positively impacted by the volume additions, which includes the effect of net free funds, to the balance sheet by $2,440,000 in 2005, and was helped to a smaller degree by the rate
variance, which had a $256,000 positive impact on net interest income. While the general increase in short-term interest rates throughout 2005 enhanced loan and security yields, deposit rates increase as well. Also, longer-term rates did not
increase at the same levels as short-term rates, somewhat diminishing the positive impact of the increasing rate environment on the Corporations net interest margin. As illustrated in Table 2, lower cash reserve requirements and growing demand
deposit balances, coupled with rising rates, nearly doubled the contribution of net free funds to the net interest margin, from 22 basis points in 2004 to 39 basis points in 2005.

As allowed by the Federal Reserve Bank, in the first quarter of 2005, the Bank completed a process to reclassify a portion of its transaction deposits (primarily demand deposits and interest bearing checking accounts)
to savings deposits. The effect of this process was a reduction in the amount of cash (approximately $21,000,000) that the Bank was required to hold with the Federal Reserve Bank. The reduction of cash held in reserve was in full effect by the end
of April of 2005. The cash balances reduced at the Federal Reserve Bank as a result of the lower reserve requirement contributed in 2005 to both reduce short-term borrowing and increase short-term investments. At year end 2005, short-term borrowings
had decreased $4,936,000 and short-term investments had increased $30,658,000 from year end 2004. The lower cash reserve requirement contributed to the increase in the effect of net free funds from .22% in 2004 to .39% in 2005 that can be seen in
Table 2. Rising rates also contribute positively to the effect of net free funds. The lower reserve requirement also contributed to the Banks percentage of average interest-earning assets to interest-bearing liabilities improving to 117.28% in
2005 from 113.90% in 2004. This improved interest-earning



27



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assets to interest-bearing liabilities ratio was the result of earning assets increasing $61,130,000 or 8% and interest
bearing liabilities rising only $33,119,000 or 5%. These results are also illustrated in Table 2

Net interest income grew to $29,993,000 in 2004, an
increase of $3,314,000 (12%) over the $26,679,000 earned in 2003. The increase was driven by the growth in loans and an improved mix of earning assets. These balance sheet changes help produce the increase in the net interest margin from 3.79%
in 2003 to 4.03% in 2004. As illustrated in Table 3, net interest income was positively impacted by the volume additions and mix improvements to the balance sheet by $3,140,000 in 2004, and was helped to a smaller degree by the rate variance, which
had a $137,000 positive impact on net interest income. The Banks ratio of interest-earning assets to interest-bearing liabilities was 113.90% for 2004, which was an increase, or improvement, from the 112.60% in 2003.

Table 2 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.

Table 3 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) total 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.



28



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Table 2 - Average Balance Sheet Rates 2005, 2004 and 2003 (presented on a tax
equivalent basis in thousands)



|                                                                                          |  |                            |         |   |                       |   |             |      |      |                            |  |   |                     |   |             |   |        |                           |      |   |                      |   |             |   |  |   |        |  |      |  
|----------------------------------------------------------------------------------------- |  | -------------------------- | ------- | - | --------------------- | - | ----------- | ---- | ---- | -------------------------- |  | - | ------------------- | - | ----------- | - | ------ | ------------------------- | ---- | - | -------------------- | - | ----------- | - |  | - | ------ |  | ---- | -
|                                                                                          |  | Year ended December 31,    |        
|                                                                                          |  | 2005                       |         |   | 2004                  |   |             | 2003 |     
|                                                                                          |  | Average outstandingbalance |         |   | Interest earned/ paid |   | Yield/ rate |      |      | Average outstandingbalance |  |   | Interestearned/paid |   | Yield/ rate |   |        | Averageoutstandingbalance |      |   | Interestearned/ paid |   | Yield/ rate |  
|                                                                                          |  | (Dollars in thousands)     |        
|Interest-earning assets:                                                                  |  |                            |         |   |                       |   |             |      |      |                            |  |   |                     |   |             |   |        |                           |      |   |                      |   |             |   |  |   |        |  |      |  
|Loans receivable (1)(2)                                                                   |  | $                          | 727,924 |   |                       | $ | 47,944      |      | 6.59 | %                          |  | $ | 693,195             |   |             | $ | 39,969 |                           | 5.77 | % |                      | $ | 622,346     |   |  | $ | 37,288 |  | 5.99 | %
|Securities (2)                                                                            |  |                            | 67,062  |   |                       |   | 2,436       |      | 3.63 |                            |  |   | 51,724              |   |             |   | 1,686  |                           | 3.26 |   |                      |   | 48,103      |   |  |   | 1,826  |  | 3.80 |  
|Other interest-earning assets                                                             |  |                            | 17,575  |   |                       |   | 709         |      | 4.03 |                            |  |   | 6,512               |   |             |   | 204    |                           | 3.15 |   |                      |   | 41,237      |   |  |   | 560    |  | 1.36 |  
|                                                                                          |  |                            |         |   |                       |   |             |      |      |                            |  |   |                     |   |             |   |        |                           |      |   |                      |   |             |   |  |   |        |  |      |  
|Total interest-earning assets                                                             |  |                            | 812,561 |   |                       |   | 51,089      |      | 6.29 |                            |  |   | 751,431             |   |             |   | 41,859 |                           | 5.57 |   |                      |   | 711,686     |   |  |   | 39,674 |  | 5.57 |  
|                                                                                          |  |                            |         |   |                       |   |             |      |      |                            |  |   |                     |   |             |   |        |                           |      |   |                      |   |             |   |  |   |        |  |      |  
|Non-interest-earning assets                                                               |  |                            | 78,306  |   |                       |   |             |      |      |                            |  |   | 83,222              |   |             |   |        |                           |      |   |                      |   | 72,559      |   |  |   |        |  |      |  
|                                                                                          |  |                            |         |   |                       |   |             |      |      |                            |  |   |                     |   |             |   |        |                           |      |   |                      |   |             |   |  |   |        |  |      |  
|Total assets                                                                              |  | $                          | 890,867 |   |                       |   |             |      |      |                            |  | $ | 834,653             |   |             |   |        |                           |      |   |                      | $ | 784,245     |   |  |   |        |  |      |  
|                                                                                          |  |                            |         |   |                       |   |             |      |      |                            |  |   |                     |   |             |   |        |                           |      |   |                      |   |             |   |  |   |        |  |      |  
|Interest-bearing liabilities:                                                             |  |                            |         |   |                       |   |             |      |      |                            |  |   |                     |   |             |   |        |                           |      |   |                      |   |             |   |  |   |        |  |      |  
|Transaction accounts                                                                      |  |                            | 360,492 |   |                       |   | 6,780       |      | 1.88 |                            |  |   | 346,940             |   |             |   | 3,153  |                           | .91  |   |                      |   | 323,837     |   |  |   | 3,276  |  | 1.01 |  
|Time deposits                                                                             |  |                            | 285,305 |   |                       |   | 9,255       |      | 3.24 |                            |  |   | 259,072             |   |             |   | 6,660  |                           | 2.57 |   |                      |   | 264,056     |   |  |   | 7,831  |  | 2.97 |  
|Borrowings                                                                                |  |                            | 47,028  |   |                       |   | 2,097       |      | 4.46 |                            |  |   | 53,694              |   |             |   | 1,785  |                           | 3.32 |   |                      |   | 44,148      |   |  |   | 1,583  |  | 3.59 |  
|                                                                                          |  |                            |         |   |                       |   |             |      |      |                            |  |   |                     |   |             |   |        |                           |      |   |                      |   |             |   |  |   |        |  |      |  
|Total interest-bearing liabilities                                                        |  |                            | 692,825 |   |                       |   | 18,132      |      | 2.62 |                            |  |   | 659,706             |   |             |   | 11,598 |                           | 1.76 |   |                      |   | 632,041     |   |  |   | 12,690 |  | 2.01 |  
|                                                                                          |  |                            |         |   |                       |   |             |      |      |                            |  |   |                     |   |             |   |        |                           |      |   |                      |   |             |   |  |   |        |  |      |  
|Non-interest-bearing liabilities                                                          |  |                            | 120,780 |   |                       |   |             |      |      |                            |  |   | 105,030             |   |             |   |        |                           |      |   |                      |   | 89,117      |   |  |   |        |  |      |  
|                                                                                          |  |                            |         |   |                       |   |             |      |      |                            |  |   |                     |   |             |   |        |                           |      |   |                      |   |             |   |  |   |        |  |      |  
|Total liabilities                                                                         |  |                            | 813,605 |   |                       |   |             |      |      |                            |  |   | 764,736             |   |             |   |        |                           |      |   |                      |   | 721,158     |   |  |   |        |  |      |  
|                                                                                          |  |                            |         |   |                       |   |             |      |     
|Shareholders equity                                                                      |  |                            | 77,262  |   |                       |   |             |      |      |                            |  |   | 69,917              |   |             |   |        |                           |      |   |                      |   | 63,087      |   |  |   |        |  |      |  
|                                                                                          |  |                            |         |   |                       |   |             |      |      |                            |  |   |                     |   |             |   |        |                           |      |   |                      |   |             |   |  |   |        |  |      |  
|Total liabilities and shareholders equity                                                |  | $                          | 890,867 |   |                       |   |             |      |      |                            |  | $ | 834,653             |   |             |   |        |                           |      |   |                      | $ | 784,245     |   |  |   |        |  |      |  
|                                                                                          |  |                            |         |   |                       |   |             |      |      |                            |  |   |                     |   |             |   |        |                           |      |   |                      |   |             |   |  |   |        |  |      |  
|Net interest income                                                                       |  |                            |         |   |                       | $ | 32,957      |      |      |                            |  |   |                     |   |             | $ | 30,261 |                           |      |   |                      |   |             |   |  | $ | 26,984 |  |      |  
|                                                                                          |  |                            |         |   |                       |   |             |      |      |                            |  |   |                     |   |             |   |        |                           |      |   |                      |   |             |   |  |   |        |  |      |  
|interest rate spread                                                                      |  |                            |         |   |                       |   |             |      | 3.67 | %                          |  |   |                     |   |             |   |        |                           | 3.81 | % |                      |   |             |   |  |   |        |  | 3.56 | %
|                                                                                          |  |                            |         |   |                       |   |             |      |      |                            |  |   |                     |   |             |   |        |                           |      |   |                      |   |             |   |  |   |        |  |      |  
|Net interest margin (net interest income as a percent of average interest-earning assets) |  |                            |         |   |                       |   |             |      | 4.06 | %                          |  |   |                     |   |             |   |        |                           | 4.03 | % |                      |   |             |   |  |   |        |  | 3.79 | %
|                                                                                          |  |                            |         |   |                       |   |             |      |      |                            |  |   |                     |   |             |   |        |                           |      |   |                      |   |             |   |  |   |        |  |      |  
|Effect of Net Free Funds (earning assets funded by non interest bearing liabilities)      |  |                            |         |   |                       |   |             |      | .39  | %                          |  |   |                     |   |             |   |        |                           | .22  | % |                      |   |             |   |  |   |        |  | .23  | %
|                                                                                          |  |                            |         |   |                       |   |             |      |      |                            |  |   |                     |   |             |   |        |                           |      |   |                      |   |             |   |  |   |        |  |      |  
|Average interest-earning assets to interest-bearing liabilities                           |  |                            | 117.28  | % |                       |   |             |      |      |                            |  |   | 113.90              | % |             |   |        |                           |      |   |                      |   | 112.60      | % |  |   |        |  |      |  
|                                                                                          |  |                            |         |   |                       |   |             |      |      |                            |  |   |                     |   |             |   |        |                           |      |   |                      |   |             |   |  |   |        |  |      |  

---

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

|(2) | Income presented on a tax equivalent basis using a 35% tax rate. The tax equivalent adjustment was $334,000, $268,000,and $305,000, in 2005, 2004, and 2003 respectively.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Table 3  Volume/Rate Analysis (in thousands)



|                                           |  |                            |       |                            |      |   |       |  |        |       |  |      |       |   |       |   |        |   |  |   |        |  
|------------------------------------------ |  | -------------------------- | ----- | -------------------------- | ---- | - | ----- |  | ------ | ----- |  | ---- | ----- | - | ----- | - | ------ | - |  | - | ------ | -
|                                           |  | Year ended December 31,    |      
|                                           |  | 2005 vs. 2004              |       | 2004 vs. 2003              |     
|                                           |  | Increase (Decrease) Due to |       | Increase (Decrease) Due to |     
|                                           |  | Volume                     |       |                            | Rate |   | Total |  | Volume |       |  | Rate |       |   | Total |  
|                                           |  | (Dollars in thousands)     |      
|Interest income attributable to:           |  |                            |       |                            |      |   |       |  |        |       |  |      |       |   |       |   |        |   |  |   |        |  
|Loans receivable                           |  | $                          | 2,077 |                            |      | $ | 5,898 |  | $      | 7,975 |  | $    | 4,125 |   |       | $ | (1,444 | ) |  | $ | 2,681  |  
|Securities                                 |  |                            | 541   |                            |      |   | 209   |  |        | 750   |  |      | 131   |   |       |   | (271   | ) |  |   | (140   | )
|Other interest-earning assets(1)           |  |                            | 432   |                            |      |   | 73    |  |        | 505   |  |      | (713  | ) |       |   | 357    |   |  |   | (356   | )
|                                           |  |                            |       |                            |      |   |       |  |        |       |  |      |       |   |       |   |        |   |  |   |        |  
|Total interest-earning assets              |  |                            | 3,050 |                            |      |   | 6,180 |  |        | 9,230 |  |      | 3,543 |   |       |   | (1,358 | ) |  |   | 2,185  |  
|                                           |  |                            |       |                            |      |   |       |  |        |       |  |      |       |   |       |   |        |   |  |   |        |  
|Interest expense attributable to:          |  |                            |       |                            |      |   |       |  |        |       |  |      |       |   |       |   |        |   |  |   |        |  
|Transaction accounts                       |  |                            | 128   |                            |      |   | 3,499 |  |        | 3,627 |  |      | 224   |   |       |   | (347   | ) |  |   | (123   | )
|Time deposits                              |  |                            | 724   |                            |      |   | 1,871 |  |        | 2,595 |  |      | (145  | ) |       |   | (1,026 | ) |  |   | (1,171 | )
|Borrowings                                 |  |                            | (242  | )                          |      |   | 554   |  |        | 312   |  |      | 324   |   |       |   | (122   | ) |  |   | 202    |  
|                                           |  |                            |       |                            |      |   |       |  |        |       |  |      |       |   |       |   |        |   |  |   |        |  
|Total interest-bearing liabilities         |  |                            | 610   |                            |      |   | 5,924 |  |        | 6,534 |  |      | 403   |   |       |   | (1,495 | ) |  |   | (1,092 | )
|                                           |  |                            |       |                            |      |   |       |  |        |       |  |      |       |   |       |   |        |   |  |   |        |  
|Increase (decrease) in net interest income |  | $                          | 2,440 |                            |      | $ | 256   |  | $      | 2,696 |  | $    | 3,140 |   |       | $ | 137    |   |  | $ | 3,277  |  
|                                           |  |                            |       |                            |      |   |       |  |        |       |  |      |       |   |       |   |        |   |  |   |        |  

---

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

PROVISION FOR LOAN LOSSES

The provision for loan losses was $1,825,000 for the year ended December 31, 2005,
compared to $1,675,000 for 2004. The increase of $150,000 (9%) reflected a higher level of losses in the loan portfolio in 2005. For the year ended December 31, 2005, net charge offs were $1,458,000 or .20% of average loan balances
compared to 2004 figures of $1,316,000 or .19% of average loan balances. Total non-accrual loans and loans past due 90 days or more were $9,045,000 (1.24% of loans outstanding) at December 31, 2005 compared to $5,145,000 (.72% of loans
outstanding) at December 31, 2004. As the non-performing loan balances increased, the ratio of the allowance to nonperforming loans (coverage ratio) decreased from 140% at the end of 2004 to 84% at the end of 2005. The increase in
non-performing loans and the decrease in the coverage ratio were the result of two commercial loan relationships, one for $2,400,000, that is collateralized with business assets, was placed on non-accrual status in the third quarter of 2005, and the
second for $2,600,000, that is collateralized with commercial real estate, was placed on non-accrual status in the fourth quarter of 2005. Management continues to monitor these relationships and has established appropriate reserves.

Non-performing assets, which include non-performing loans, other real estate owned and repossessed assets, totaled $14,108,000 at December 31, 2005 and $6,579,000
at December 31, 2004. This represents 1.47% of total assets at December 31, 2005 compared to .75% at December 31, 2004. The largest increases in other real estate owned in 2005 were two pieces of commercial real estate totaling
approximately $3,000,000, that were added to other real estate owned as a result of deeds to the Bank in lieu of foreclosure. These properties were part of the same relationship as the $2,400,000 in commercial loans that were added to non-accrual
loans.



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The provision for loan losses was $1,675,000 for the year ended December 31, 2004, compared to $1,090,000 for 2003.
The increase of $585,000 (54%) reflected a higher level of losses in the loan portfolio in 2004. For the year 2004, net charge offs were $1,316,000 or .19% of average loan balances compared to 2003 figures of $643,000 or .10% of average loan
balances. Total non-accrual loans and loans past due 90 days or more were $5,145,000 (.72% of loans outstanding) at December 31, 2004 compared to $3,473,000 (.53% of loans outstanding) at December 31, 2003. As the non-performing loan
balances increased, the ratio of the allowance to non-performing loans (coverage ratio) decreased from 197% at the end of 2003 to 140% at the end of 2004.

The allowance for loan losses as a percentage of total assets was 1.04% on December 31, 2005, which was up from the 1.00% at December 31, 2004. Management believes the current level of the allowance for loan losses is sufficient to
absorb probable incurred losses in the loan portfolio. Management continues to monitor the loan portfolio closely and believes the increase in the provision for loan losses is directionally consistent with the increase in losses in the loan
portfolio and the higher level of non-performing loans.

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 allowance 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 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.

For additional information on the allowance for loan losses see the critical accounting policies section of this discussion.



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Table 4 - Analysis of the allowance for losses for the periods indicated:



|                                                        |  |                            |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|------------------------------------------------------- |  | -------------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | - |  | ---- | ------ | - |  | - | ------ | -
|                                                        |  | Year ended at December 31, |       
|                                                        |  | 2005                       |        |   | 2004 |   |        | 2003 |  |   | 2002   |   |  | 2001 |       
|                                                        |  | (Dollars in thousands)     |       
|Balance of allowance at beginning of period             |  | $                          | 7,214  |   |      | $ | 6,855  |      |  | $ | 6,408  |   |  | $    | 4,244  |   |  | $ | 3,806  |  
|Recoveries of loans previously charged off:             |  |                            |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Commercial loans                                        |  |                            | 67     |   |      |   | 8      |      |  |   | 5      |   |  |      | 10     |   |  |   | 49     |  
|Consumer loans                                          |  |                            | 11     |   |      |   | 2      |      |  |   | 26     |   |  |      | 9      |   |  |   | 10     |  
|Mortgage loans                                          |  |                            | 0      |   |      |   | 0      |      |  |   | 1      |   |  |      | 6      |   |  |   | 2      |  
|                                                        |  |                            |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Total recoveries                                        |  |                            | 78     |   |      |   | 10     |      |  |   | 32     |   |  |      | 25     |   |  |   | 61     |  
|                                                        |  |                            |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Loans charged off:                                      |  |                            |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Commercial loans                                        |  |                            | 1,127  |   |      |   | 936    |      |  |   | 335    |   |  |      | 152    |   |  |   | 242    |  
|Consumer loans                                          |  |                            | 277    |   |      |   | 360    |      |  |   | 226    |   |  |      | 211    |   |  |   | 69     |  
|Mortgage loans                                          |  |                            | 132    |   |      |   | 30     |      |  |   | 114    |   |  |      | 115    |   |  |   | 93     |  
|                                                        |  |                            |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Total charge-offs                                       |  |                            | 1,536  |   |      |   | 1,326  |      |  |   | 675    |   |  |      | 478    |   |  |   | 404    |  
|                                                        |  |                            |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Net charge-offs                                         |  |                            | (1,458 | ) |      |   | (1,316 | )    |  |   | (643   | ) |  |      | (453   | ) |  |   | (343   | )
|Provision for loan losses                               |  |                            | 1,825  |   |      |   | 1,675  |      |  |   | 1,090  |   |  |      | 1,235  |   |  |   | 781    |  
|Merger adjustment                                       |  |                            | 0      |   |      |   | 0      |      |  |   | 0      |   |  |      | 1,382  |   |  |   | 0      |  
|                                                        |  |                            |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Balance of allowance at end of period                   |  | $                          | 7,581  |   |      | $ | 7,214  |      |  | $ | 6,855  |   |  | $    | 6,408  |   |  | $ | 4,244  |  
|                                                        |  |                            |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Net charge-offs to average loans outstanding for period |  |                            | .20    | % |      |   | .19    | %    |  |   | .10    | % |  |      | .10    | % |  |   | .09    | %
|                                                        |  |                            |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Allowance at end of period to loans at end of period    |  |                            | 1.04   | % |      |   | 1.00   | %    |  |   | 1.04   | % |  |      | 1.06   | % |  |   | 1.02   | %
|                                                        |  |                            |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Allowance to nonperforming loans at end of period       |  |                            | 83.81  | % |      |   | 140.21 | %    |  |   | 197.38 | % |  |      | 153.60 | % |  |   | 134.60 | %
|                                                        |  |                            |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  

NON-INTEREST INCOME

Table 5 - Major Components of non-interest income (in thousands)



|                                      |  |                         |       |                                |   |       |  |           |       |  |           |   |  |     |   
|------------------------------------- |  | ----------------------- | ----- | ------------------------------ | - | ----- |  | --------- | ----- |  | --------- | - |  | --- | --
|                                      |  | Year ended December 31, |       | Percentage Increase/(Decrease) |  
|                                      |  | 2005                    |       | 2004                           |   | 2003  |  | 2005/2004 |       |  | 2003/2002 |  
|Non-interest income:                  |  |                         |       |                                |   |       |  |           |       |  |           |   |  |     |   
|Service charges and fees              |  | $                       | 4,297 |                                | $ | 3,680 |  | $         | 3,502 |  | 17        | % |  | 5   | % 
|Gain on sale of securities            |  |                         | 0     |                                |   | 10    |  |           | 0     |  | (100      | ) |  | 100 |   
|Gains on sale of real estate loans    |  |                         | 965   |                                |   | 1,281 |  |           | 2,924 |  | (25       | ) |  | (56 | ) 
|Trust fee income                      |  |                         | 928   |                                |   | 779   |  |           | 622   |  | 19        |   |  | 25  |   
|Bankcard transaction revenue          |  |                         | 1,050 |                                |   | 812   |  |           | 669   |  | 29        |   |  | 21  |   
|Company owned life insurance earnings |  |                         | 472   |                                |   | 485   |  |           | 224   |  | (3        | ) |  | 116 |   
|Other                                 |  |                         | 1,373 |                                |   | 1,224 |  |           | 999   |  | 12        |   |  | 23  |   
|                                      |  |                         |       |                                |   |       |  |           |       |  |           |   |  |     |   
|Total non-interest income             |  | $                       | 9,085 |                                | $ | 8,271 |  | $         | 8,940 |  | 10        | % |  | (7  | )%
|                                      |  |                         |       |                                |   |       |  |           |       |  |           |   |  |     |   

Total non-interest income increased $814,000 (10%) in 2005 from $8,271,000 in 2004 to $9,085,000 in 2005.
Increases for 2005 included service charges and fees (up $617,000, 17%) bankcard transaction revenue (up $238,000, 29%), standby letters of credit fees (up $193,000, 76%), trust fee income (up $149,000, 19%), and were offset by lower gains on the
sale of real estate loans (down $316,000, 25%).



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Contributing to the increase in service charges was lockbox revenue and fees from the Banks consolidated returns
product, which offset the effects that rising interest rates had on service charges. Rising interest rates reduce service charges and fees, as the earnings credit rate used to offset service charges increased. Service charges in 2005 included the
earnings from several new large lockbox customers. The volume of lockbox items processed increased 400% in March of 2005 compared to February of 2005 as a result of these customers. In 2005, the Bank began to provide a new cash management product by
offering the service of consolidating returned checks for specific customers. The related fees from the new lockbox customers and the consolidated returns were approximately $716,000 in 2005. The consolidating of returns helps national and regional
retailers save money by routing the returned checks of their customers to one financial institution, versus through multiple local depository banks.

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

The decrease in gains on the sale of real estate loans was a continued slowdown in the refinancing market. The Bank originates fixed rate first mortgage loans and sells
them, servicing released, into the secondary market. For the twelve months ended December 31, 2005, $81,000,000 of loans were sold compared to $94,000,000 sold during the same period in 2004. Loans held for sale at December 31, 2005
increased to $1,609,000 from $1,391,000 at December 31, 2004. These loans have been approved by the secondary market buyer and closed by the Bank. The Bank is awaiting settlement, but is not exposed to significant interest rate or pricing risk
during the period between closing the loan and settlement. The level of the refinancing business is dependent upon rates, and with rates staying relatively flat on fixed rate mortgage loans in 2005, the refinancing slowed appreciably from the
preceding years. Likewise, if rates remain stable or rise in 2006, the result will likely be a relatively low level of refinancing in 2006.

The increase
in trust fee income was a result of continued new business development and equity market advances. At year-end 2005, total trust assets stood at $269,000,000 compared to $244,000,000 at the end of 2004.

Total non-interest income decreased $669,000 (7%) in 2004 from $8,940,000 in 2003 to $8,271,000 in 2004. The largest decrease in non-interest income for 2004, was
in gains on the sale of mortgage loans, which decreased $1,643,000 (56%) in 2004 from $2,924,000 in 2003 to $1,281,000 in 2004. The decrease was due to the slowdown in refinancing activity as a result of rising mortgage rates and a saturated
refinancing market. For the twelve months ended December 31, 2004, $94,000,000 of loans were sold compared to $263,000,000 sold during the same period in 2003. Loans held for sale at December 31, 2004 increased to $1,391,000 from
$1,017,000 at December 31, 2003.

Service charges and fees on deposit accounts increased by $178,000 (5%) from $3,502,000 in 2003, to $3,680,000
in 2004. Fee increases associated with higher volume of accounts was partially offset by higher earnings credit rates. Earnings credit rates are tied to short-term rates and rose steadily in 2004. The Bank had $10,000 in gains from the sale of
investment securities in 2004 versus $0 in 2003. Trust fee income increased $157,000 (25%) in 2004 compared to



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2003 as a result of business development efforts and market value increases. As of December 31, 2004, total trust
assets stood at $244,000,000 compared to $197,000,000 at the end of 2003. Bankcard transactions, which are the fees received from vendors when the Banks debit cards and credit cards are used, increased by $143,000 (21%) from $669,000 in
2003 to $812,000 in 2004, reflecting the added cards and increased volume. The growth in the bankcard transactions fees from 2003 levels were slowed somewhat as a result of an industry wide legal settlement which effectively reduced the fee
percentage that Banks may receive from customers using the banks debit and credit cards in mid-year of 2003.

NON-INTEREST EXPENSE

Table 6 - Major Components of non-interest expense (in thousands)



|                                  |  |                         |        |                                |   |        |  |           |        |  |           |   |  |     |  
|--------------------------------- |  | ----------------------- | ------ | ------------------------------ | - | ------ |  | --------- | ------ |  | --------- | - |  | --- | -
|                                  |  | Year ended December 31, |        | Percentage Increase/(Decrease) |  
|                                  |  | 2005                    |        | 2004                           |   | 2003   |  | 2005/2004 |        |  | 2004/2003 |  
|Non-interest expense:             |  |                         |        |                                |   |        |  |           |        |  |           |   |  |     |  
|Salaries and employee benefits    |  | $                       | 12,228 |                                | $ | 10,386 |  | $         | 9,445  |  | 18        | % |  | 10  | %
|Occupancy and equipment           |  |                         | 3,881  |                                |   | 3,357  |  |           | 3,387  |  | 16        |   |  | (1  | )
|Data processing                   |  |                         | 1,393  |                                |   | 1,278  |  |           | 1,278  |  | 9         |   |  | 0   |  
|Advertising                       |  |                         | 618    |                                |   | 630    |  |           | 525    |  | (2        | ) |  | 20  |  
|ATM processing fees               |  |                         | 674    |                                |   | 572    |  |           | 845    |  | 18        |   |  | (32 | )
|Outside service fees              |  |                         | 828    |                                |   | 734    |  |           | 644    |  | 13        |   |  | 14  |  
|State bank taxes                  |  |                         | 1,007  |                                |   | 870    |  |           | 763    |  | 16        |   |  | 14  |  
|Amortization of intangible assets |  |                         | 646    |                                |   | 645    |  |           | 645    |  | 0         |   |  | 0   |  
|Other                             |  |                         | 3,886  |                                |   | 3,130  |  |           | 2,952  |  | 24        |   |  | 6   |  
|                                  |  |                         |        |                                |   |        |  |           |        |  |           |   |  |     |  
|Total non-interest expense        |  | $                       | 25,161 |                                | $ | 21,602 |  | $         | 20,484 |  | 16        | % |  | 5   | %
|                                  |  |                         |        |                                |   |        |  |           |        |  |           |   |  |     |  

Non-interest expense increased $3,559,000 (16%) to $25,161,000 for 2005, compared to $21,602,000 in 2004. The
largest increases in non-interest expense were in salaries and benefits and occupancy and equipment, which increased $1,842,000 (18%) and $524,000(16%) respectively in 2005 compared to the same period in 2004. The Bank made significant
investments in staff and equipment in 2005 to take advantage of new revenue sources, to strengthen the Bank and to meet growing challenges in the regulatory environment. The largest investment made in 2005 was the opening of Banks cash
management operations center in February of 2005. This center was opened to increase the Banks capacity in existing lines of business and to offer new cash management products. The investment in this center included over $700,000 in new
equipment and software, 8,750 square feet of office space and 25 additional employees. Other areas where additional staff was added included commercial and consumer lending, credit review, information technology, human resources, audit and
accounting. Other expenses in 2005 also included for the first time a $143,000 expense for the Banks investment in a low-income housing project. This before tax expense was offset with the reduction of Federal income tax expense resulting from
recognition of a $133,000 low-income housing tax credit.

Non-interest expense increased $1,118,000 (5%) to $21,602,000 for 2004, compared to
$20,484,000 in 2003. The largest increase in non-interest expense was in salaries and benefits, which increased $941,000 (10%) in 2004 compared to the same period in 2003. The increase in



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salaries and benefits was the result of annual merit increases, staff additions and added employee benefit plans related
to the investments in Company owned life insurance policies. Contributing to the decreases in occupancy and equipment, $30,000 (1%), and the flat data processing expense in 2004, was the elimination of certain conversion expenses and temporary
redundancies in 2003 associated with the PBNK transaction of 2002. The $273,000 (32%) reduction in ATM processing fees was the result of a change in the processor for the Banks debit cards and ATM machines.

TAX EXPENSE

Federal income tax expense decreased $334,000
(7%) to $4,595,000 for 2005 compared to $4,929,000 for 2004, due to a $133,000 low-income housing tax credit and a lower effective tax rate. The effective tax rate was 31.2% for 2005, which was a decrease of 1.7% from 32.9% in 2003. In addition
to the low income tax credit, higher level of tax free income contributed to the decrease in the effective rate.

Federal income tax expense increased
$243,000 (5%) to $4,929,000 for 2004 compared to $4,686,000 for 2003, due to the increase in earnings. The effective tax rate was 32.9% for 2004, which was a decrease of .5% from 33.4% in 2003. The decrease in the effective rate was primarily
the result of a higher level of tax-free income from the Company owned life insurance policies.

CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET
ARRANGEMENTS

The Bank enters into certain contractual obligations in the ordinary course of operations. Table 7 presents, as of December 31, 2005,
the Banks significant fixed and determinable contractual obligations by payment date. The required payments under these contacts represent future cash requirements of the Bank. The payment amounts represent those amounts due to the recipient
plus the unamortized premium on the FHLB advances.

Table 7 - Contractual obligations (in thousands)



|                                                 |  |                    |        |                  |   |           |  |           |       |                   |   |        |  |   |       
|------------------------------------------------ |  | ------------------ | ------ | ---------------- | - | --------- |  | --------- | ----- | ----------------- | - | ------ |  | - | ------
|                                                 |  | Maturity by period
|                                                 |  | Total              |        | Less than 1 year |   | 1-3 Years |  | 3-5 Years |       | More than 5 Years
|FHLB advances                                    |  | $                  | 16,460 |                  |   |          |  |           |      |                   | $ | 10,000 |  | $ | 6,460 
|Subordinated debentures                          |  |                    | 17,526 |                  |   |          |  |           |      |                   |   |       |  |   | 17,526
|Other notes payable                              |  |                    | 305    |                  |   | 34        |  |           | 30    |                   |   | 37     |  |   | 204   
|Northern Kentucky University arena naming rights |  |                    | 6,000  |                  |   |          |  |           | 6,000 |                   |   |       |  |   |      
|Lease commitments                                |  |                    | 3,992  |                  |   | 788       |  |           | 1,226 |                   |   | 857    |  |   | 1,121 
|                                                 |  |                    |        |                  |   |           |  |           |       |                   |   |        |  |   |       
|Total                                            |  | $                  | 44,283 |                  | $ | 822       |  | $         | 7,256 |                   | $ | 10,894 |  | $ | 25,311
|                                                 |  |                    |        |                  |   |           |  |           |       |                   |   |        |  |   |       

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 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 the Corporations consolidated balance sheets. Table 8 presents, as of December 31, 2005, the Banks significant off-balance sheet commitments.



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Lease commitments represent the total minimum lease payments under noncancelable leases.

Table 8  Significant Off-Balance Sheet Commitments (in thousands)



|                                            |  |                    |         |                  |   |           |  |           |        |                   |   |        |  |   |       
|------------------------------------------- |  | ------------------ | ------- | ---------------- | - | --------- |  | --------- | ------ | ----------------- | - | ------ |  | - | ------
|                                            |  | Maturity by period
|                                            |  | Total              |         | Less than 1 year |   | 1-3 Years |  | 3-5 Years |        | More than 5 Years
|Unused lines of credit and loan commitments |  | $                  | 212,588 |                  | $ | 132,825   |  | $         | 19,807 |                   | $ | 12,771 |  | $ | 47,185
|Standby letters of credit                   |  |                    | 64,453  |                  |   | 30,280    |  |           | 16,179 |                   |   | 12,317 |  |   | 5,677 
|FHLB letters of credit                      |  |                    | 86,300  |                  |   | 86,300    |  |           |       |                   |   |       |  |   |      

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.

Stand-by 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 stand-by 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 February 16, 2005, the Bank entered into an agreement to lease space for its cash management operation center. The lease has a term of five years with an annual cost which escalates from $79,000 for the first
year to $89,000 by the fifth year.

On March 3, 2005, the Bank entered into an agreement with Northern Kentucky University whereby the University will
grant to the Bank the naming rights for the new Northern Kentucky University Arena to be constructed on the campus of the University for a term commencing immediately upon execution of the document and expiring twenty years after the opening of the
Arena. In consideration therefore the Bank will pay 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.

Further discussion of the
Banks contractual obligations and off-balance sheet activities is included in Note 14 of the Corporations consolidated financial statements.



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LIQUIDITY AND CAPITAL RESOURCES

Liquidity refers to the availability of funds to meet deposit withdrawals, fund loan commitments and pay expenses. BKFC will need to have funds available to meet its quarterly payment obligations under the
subordinated debentures. The source of the funds for BKFCs debt obligations is dependent on the Bank and BKFCs line of credit. During 2005, the Bank funded its loan growth with growth in deposits and equity. At December 31, 2005,
the Banks customers have available $240,771,000 in unused lines and letters of credit, and the Bank has further extended loan commitments totaling $36,270,000. Historically, many such commitments have expired without being drawn and,
accordingly, do not represent future cash commitments.

If needed, the Bank has the ability to borrow term and overnight funds from the Federal Home Loan
Bank or other financial intermediaries. In addition BKFC has a $10,000,000 line of credit with U.S Bank that had $0 outstanding at December 31, 2005. Further, the Bank has $79,552,000 of securities designated as available-for-sale and an
additional $1,138,000 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, 2005 to meet known and potential obligations.

As illustrated in the Companys statement of cash flows, the net change in cash and cash equivalents was an increase of $23,938,000. Net income
provided $10,127,000 of the



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$10,308,000 in the Bank cash flows from operating activities, while the largest cash outflow from investing activities
was in the form of an increase in net securities of $30,764,000. The largest source of cash from financing activities came from the increase of $78,327,000 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 2005, BKFC paid cash dividends of $.30 per share totaling $1,772,000.

The FDIC has issued regulations
that relate 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 capital 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, 2005, BKFCs leverage and total risk-based capital ratios were 9.21% and 10.56%, respectively, which exceed all required ratios established for bank holding companies.

EFFECT OF NEWLY ISSUED BUT NOT YET EFFECTIVE ACCOUNTING STANDARDS

Statement of Financial Accounting Standards 123, Revised, requires all public companies to record compensation cost for stock options provided to employees in return for employee service. The cost is measured at the fair value of the
options when granted, and this cost is expensed over the employee service period, which is normally the vesting period of the options. This will apply to awards granted or modified after the first quarter beginning after December 15, 2005.
Compensation cost will also be recorded for prior option grants that vest after the date of adoption. The effect on results of operations will depend on the level of future option grants and the calculation of the fair value of the options granted
at such future date, as well as the vesting periods provided, and so cannot currently be predicted. Existing options that will vest after adoption date are expected to result in additional compensation expense of approximately $434, $395, $282 and
$139 during 2006, 2007, 2008 and 2009. There will be no significant effect on financial position as total equity will not change.

Statement of Position
03-3 requires that a valuation allowance for loans acquired in a transfer, including in a business combination, reflect only losses incurred after acquisition and should not be recorded at acquisition. It applies to any loan acquired in a transfer
that showed evidence of credit quality deterioration since it was made. This requirement would only have an impact if loans were acquired, and currently there are no loan acquisitions pending.



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Item 7A. Quantitative and Qualitative Disclosure about 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 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 twelve months. An institution is said to have a negative gap position when more interest-bearing liabilities reprice within a certain period than do 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 positive gap position, $89,512,000 (9.35%), and as a result would benefit from higher rates and would be negatively impacted by lower
interest rates.

At December 31, 2005, BKFCs twelve-month interest rate gap position, as measured by the banks asset/liability model, was
positive. Over the succeeding twelve months, interest rate sensitive assets exceed interest rate sensitive liabilities by $89,512,000 (9.35% of total assets). At December 31, 2004, the one-year interest rate gap was positive $59,763,000 (6.81%
of total assets). An assumption, based on historical behavior, contributing to the positive gap 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 any 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 changes in market values for these rate assumptions are within the Banks acceptable ranges. The assumptions used in the simulation are inherently uncertain and, as a result, the model cannot precisely measure future net interest
income. Actual results will differ from the models simulated results due to timing, frequency of interest rate changes as well as changes in changes in various management strategies. Additionally, as seen in 2005, actual results can differ
materially from the model if interest rates do not move equally across the yield curve. To illustrate, yields on loans tied to the prime rate and deposits tied to short-term indices rose dramatically in 2005, while yields on loans tied to
longer-term indices rose only modestly in 2005.

Net interest income estimates are summarized below.



|                |  |                            |   |  |        |  
|--------------- |  | -------------------------- | - |  | ------ | -
|                |  | Net Interest Income Change |  
|                |  | 2005                       |   |  | 2004   |  
|Increase 200 bp |  | 5.33                       | % |  | 4.94   | %
|Increase 100 bp |  | 3.03                       |   |  | 2.83   |  
|Decrease 100 bp |  | (3.15                      | ) |  | (3.51  | )
|Decrease 200 bp |  | (7.16                      | ) |  | (10.00 | )

The table below provides information about the quantitative market risk of interest sensitive instruments at
December 31, 2005 (dollars in thousands) and shows the contractually 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:

Table 9 - Balance sheet repricing data (in thousands)

|                          |  |         |   |  |         |   |  |         |   |  |        |   |  |        |   |  |            |   |  |         |  |           
|------------------------- |  | ------- | - |  | ------- | - |  | ------- | - |  | ------ | - |  | ------ | - |  | ---------- | - |  | ------- |  | ----------
|                          |  | 2006    |   |  | 2007    |   |  | 2008    |   |  | 2009   |   |  | 2010   |   |  | Thereafter |   |  | Total   |  | Fair Value
|Repricing in:             |  |         |   |  |         |   |  |         |   |  |        |   |  |        |   |  |            |   |  |         |  |           
|Federal Funds Sold        |  | 30,658  |   |  |        |   |  |        |   |  |       |   |  |       |   |  |           |   |  | 30,658  |  | 30,658    
|Average Interest Rate     |  | 4.09    | % |  |        |   |  |        |   |  |       |   |  |       |   |  |           |   |  |        |  |          
|Interest Bearing Deposits |  | 100     |   |  |        |   |  |        |   |  |       |   |  |       |   |  |           |   |  | 100     |  | 100       
|Average Interest Rate     |  | 3.40    | % |  |        |   |  |        |   |  |       |   |  |       |   |  |           |   |  |        |  |          
|Securities                |  | 40,491  |   |  | 25,123  |   |  | 11,037  |   |  | 3,331  |   |  | 4,324  |   |  | 10,069     |   |  | 94,375  |  | 94,103    
|Average Interest Rate     |  | 3.76    | % |  | 3.33    | % |  | 3.56    | % |  | 4.61   | % |  | 4.98   | % |  | 3.68       | % |  |         |  |           
|FHLB Stock                |  | 4,283   |   |  |        |   |  |        |   |  |       |   |  |       |   |  |           |   |  | 4,283   |  | 4,283     
|Average Interest Rate     |  | 5.75    | % |  |        |   |  |        |   |  |       |   |  |       |   |  |           |   |  |        |  |          
|Loans                     |  | 474,020 |   |  | 103,904 |   |  | 104,447 |   |  | 15,012 |   |  | 27,198 |   |  | 4,641      |   |  | 729,222 |  | 720,399   
|Average Interest Rate     |  | 7.16    | % |  | 5.99    | % |  | 6.54    | % |  | 6.67   | % |  | 6.70   | % |  | 6.89       | % |  |        |  |          
|                          |  |         |   |  |         |   |  |        
|Liabilities               |  |         |   |  |         |   |  |         |   |  |        |   |  |        |   |  |            |   |  |         |  |           
|Savings, NOW, MMA         |  | 384,148 |   |  |        |   |  |        |   |  |       |   |  |       |   |  |           |   |  | 384,148 |  | 384,148   
|Average Interest Rate     |  | 2.68    | % |  |        |   |  |        |   |  |       |   |  |       |   |  |           |   |  |        |  |          
|CDs and IRAs            |  | 169,574 |   |  | 123,256 |   |  | 14,260  |   |  | 2,914  |   |  | 669    |   |  | 669        |   |  | 311,342 |  | 311,267   
|Average Interest Rate     |  | 3.52    | % |  | 4.04    | % |  | 3.83    | % |  | 3.84   | % |  | 4.23   | % |  | 4.68       | % |  |        |  |          
|Borrowings                |  | 4,225   |   |  |        |   |  |        |   |  |       |   |  |       |   |  |           |   |  | 4,225   |  | 4,225     
|Average Interest Rate     |  | 3.20    | % |  |        |   |  |        |   |  |       |   |  |       |   |  |           |   |  |        |  |          
|Notes Payable             |  | 17,000  |   |  |        |   |  | 4,000   |   |  |       |   |  | 6,230  |   |  | 7,061      |   |  | 34,291  |  | 34,022    
|Average Interest Rate     |  | 7.69    | % |  |        |   |  | 4.82    | % |  |       |   |  | 3.09   | % |  | 2.61       | % |  |        |  |          



39



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##### Table of Contents

Item 8. Financial Statements and Supplementary Data

THE BANK OF KENTUCKY

FINANCIAL CORPORATION

FINANCIAL STATEMENTS

December 31,
2005, 2004 and 2003



40



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##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

Florence, Kentucky

FINANCIAL STATEMENTS

December 31, 2005, 2004 and 2003

CONTENTS



|                                                           |  |   
|---------------------------------------------------------- |  | --
|REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM    |  | 42
|                                                           | 
|CONSOLIDATED FINANCIAL STATEMENTS                          |  |   
|                                                           | 
|CONSOLIDATED BALANCE SHEETS                                |  | 43
|                                                           | 
|CONSOLIDATED STATEMENTS OF INCOME                          |  | 44
|                                                           | 
|CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY |  | 45
|                                                           | 
|CONSOLIDATED STATEMENTS OF CASH FLOWS                      |  | 46
|                                                           | 
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 |  | 47



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##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON CONSOLIDATED

FINANCIAL STATEMENTS

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, 2005 and 2004 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, 2005. These financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements 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 audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

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, 2005 and 2004, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles.

We also have audited, in
accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of The Bank of Kentucky Financial Corporations internal control over financial reporting as of December 31, 2005 based on
criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 11, 2006 expressed an unqualified opinion thereon.

Crowe Chizek and Company LLC

Columbus, Ohio

February 11, 2006



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THE BANK OF KENTUCKY FINANCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS

December 31, 2005 and 2004

(Dollar
amounts in thousands, except per share amounts)



|                                                                                                              |  |      |         |   |      |   |         |  
|------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                                                                                              |  | 2005 |         |   | 2004 |  
|ASSETS                                                                                                        |  |      |         |   |      |   |         |  
|Cash and due from banks                                                                                       |  | $    | 40,686  |   |      | $ | 47,406  |  
|Federal funds sold and other short-term investments                                                           |  |      | 30,658  |   |      |   |        |  
|                                                                                                              |  |      |         |   |      |   |         |  
|Total cash and cash equivalents                                                                               |  |      | 71,344  |   |      |   | 47,406  |  
|Interest bearing deposits with banks                                                                          |  |      | 100     |   |      |   |        |  
|Available-for-sale securities                                                                                 |  |      | 79,552  |   |      |   | 52,204  |  
|Held-to-maturity securities (Fair value of $14,551 and $12,129)                                               |  |      | 14,823  |   |      |   | 12,062  |  
|Loans held for sale                                                                                           |  |      | 1,609   |   |      |   | 1,391   |  
|Loans, net of allowance ($7,581 and $7,214)                                                                   |  |      | 723,478 |   |      |   | 711,943 |  
|Premises and equipment - net                                                                                  |  |      | 17,479  |   |      |   | 16,465  |  
|Federal Home Loan Bank stock, at cost                                                                         |  |      | 4,283   |   |      |   | 4,075   |  
|Goodwill                                                                                                      |  |      | 9,867   |   |      |   | 9,867   |  
|Acquisition intangibles                                                                                       |  |      | 2,935   |   |      |   | 3,581   |  
|Cash surrender value of life insurance                                                                        |  |      | 19,078  |   |      |   | 12,106  |  
|Accrued interest receivable and other assets                                                                  |  |      | 12,790  |   |      |   | 7,029   |  
|                                                                                                              |  |      |         |   |      |   |         |  
|                                                                                                              |  | $    | 957,338 |   |      | $ | 878,129 |  
|                                                                                                              |  |      |         |   |      |   |         |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                          |  |      |         |   |      |   |         |  
|Liabilities                                                                                                   |  |      |         |   |      |   |         |  
|Deposits                                                                                                      |  |      |         |   |      |   |         |  
|Non interest bearing deposits                                                                                 |  | $    | 135,620 |   |      | $ | 121,454 |  
|Interest bearing deposits                                                                                     |  |      | 695,490 |   |      |   | 631,346 |  
|                                                                                                              |  |      |         |   |      |   |         |  
|Total deposits                                                                                                |  |      | 831,110 |   |      |   | 752,800 |  
|Short-term borrowings                                                                                         |  |      | 4,225   |   |      |   | 9,161   |  
|Notes payable                                                                                                 |  |      | 34,291  |   |      |   | 37,573  |  
|Accrued expenses and other liabilities                                                                        |  |      | 7,265   |   |      |   | 4,931   |  
|                                                                                                              |  |      |         |   |      |   |         |  
|                                                                                                              |  |      | 876,891 |   |      |   | 804,465 |  
|Commitments and contingent liabilities                                                                        |  |      |        |   |      |   |        |  
|Shareholders equity                                                                                          |  |      |         |   |      |   |         |  
|Common stock, no par value, 15,000,000 shares authorized, 5,884,079 (2005) and 5,927,979 (2004) shares issued |  |      | 3,098   |   |      |   | 3,098   |  
|Additional paid-in capital                                                                                    |  |      | 7,888   |   |      |   | 9,050   |  
|Retained earnings                                                                                             |  |      | 69,969  |   |      |   | 61,614  |  
|Accumulated other comprehensive income (loss)                                                                 |  |      | (508    | ) |      |   | (98     | )
|                                                                                                              |  |      |         |   |      |   |         |  
|                                                                                                              |  |      | 80,447  |   |      |   | 73,664  |  
|                                                                                                              |  |      |         |   |      |   |         |  
|                                                                                                              |  | $    | 957,338 |   |      | $ | 878,129 |  
|                                                                                                              |  |      |         |   |      |   |         |  

See accompanying notes



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THE BANK OF KENTUCKY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

Years ended December 31, 2005, 2004 and 2003

(Dollar amounts in thousands, except per share amounts)



|                                                    |  |      |        |      |   |        |  |   |       
|--------------------------------------------------- |  | ---- | ------ | ---- | - | ------ |  | - | ------
|                                                    |  | 2005 |        | 2004 |   | 2003  
|Interest income                                     |  |      |        |      |   |        |  |   |       
|Loans, including related fees                       |  | $    | 47,836 |      | $ | 39,896 |  | $ | 37,218
|Securities                                          |  |      |        |      |   |        |  |   |       
|Taxable                                             |  |      | 1,790  |      |   | 1,129  |  |   | 1,155 
|Tax exempt                                          |  |      | 420    |      |   | 362    |  |   | 436   
|Other                                               |  |      | 709    |      |   | 204    |  |   | 560   
|                                                    |  |      |        |      |   |        |  |   |       
|                                                    |  |      | 50,755 |      |   | 41,591 |  |   | 39,369
|Interest expense                                    |  |      |        |      |   |        |  |   |       
|Deposits                                            |  |      | 16,035 |      |   | 9,813  |  |   | 11,107
|Borrowings                                          |  |      | 2,097  |      |   | 1,785  |  |   | 1,583 
|                                                    |  |      |        |      |   |        |  |   |       
|                                                    |  |      | 18,132 |      |   | 11,598 |  |   | 12,690
|                                                    |  |      |        |      |   |        |  |   |       
|Net interest income                                 |  |      | 32,623 |      |   | 29,993 |  |   | 26,679
|                                                    |  |      |       
|Provision for loan losses                           |  |      | 1,825  |      |   | 1,675  |  |   | 1,090 
|                                                    |  |      |        |      |   |        |  |   |       
|Net interest income after provision for loan losses |  |      | 30,798 |      |   | 28,318 |  |   | 25,589
|                                                    |  |      |       
|Non-interest income                                 |  |      |        |      |   |        |  |   |       
|Service charges and fees                            |  |      | 4,297  |      |   | 3,680  |  |   | 3,502 
|Gain on sale of real estate loans                   |  |      | 965    |      |   | 1,281  |  |   | 2,924 
|Gain on sale of securities                          |  |      |       |      |   | 10     |  |   |      
|Trust fee income                                    |  |      | 928    |      |   | 779    |  |   | 622   
|Bankcard transaction revenue                        |  |      | 1,050  |      |   | 812    |  |   | 669   
|Other                                               |  |      | 1,845  |      |   | 1,709  |  |   | 1,223 
|                                                    |  |      |        |      |   |        |  |   |       
|                                                    |  |      | 9,085  |      |   | 8,271  |  |   | 8,940 
|Non-interest expense                                |  |      |        |      |   |        |  |   |       
|Salaries and employee benefits                      |  |      | 12,228 |      |   | 10,386 |  |   | 9,445 
|Occupancy and equipment                             |  |      | 3,881  |      |   | 3,357  |  |   | 3,387 
|Data processing                                     |  |      | 1,393  |      |   | 1,278  |  |   | 1,278 
|Advertising                                         |  |      | 618    |      |   | 630    |  |   | 525   
|ATM processing fees                                 |  |      | 674    |      |   | 572    |  |   | 845   
|Outside service fees                                |  |      | 828    |      |   | 734    |  |   | 644   
|State bank taxes                                    |  |      | 1,007  |      |   | 870    |  |   | 763   
|Amortization of intangible assets                   |  |      | 646    |      |   | 645    |  |   | 645   
|Other                                               |  |      | 3,886  |      |   | 3,130  |  |   | 2,952 
|                                                    |  |      |        |      |   |        |  |   |       
|                                                    |  |      | 25,161 |      |   | 21,602 |  |   | 20,484
|                                                    |  |      |        |      |   |        |  |   |       
|Income before income taxes                          |  |      | 14,722 |      |   | 14,987 |  |   | 14,045
|                                                    |  |      |       
|Federal income taxes                                |  |      | 4,595  |      |   | 4,929  |  |   | 4,686 
|                                                    |  |      |        |      |   |        |  |   |       
|Net income                                          |  | $    | 10,127 |      | $ | 10,058 |  | $ | 9,359 
|                                                    |  |      |        |      |   |        |  |   |       
|Per share data                                      |  |      |        |      |   |        |  |   |       
|Earnings per share                                  |  | $    | 1.71   |      | $ | 1.69   |  | $ | 1.57  
|                                                    |  |      |        |      |   |        |  |   |       
|Earnings per share, assuming dilution               |  | $    | 1.70   |      | $ | 1.68   |  | $ | 1.55  
|                                                    |  |      |        |      |   |        |  |   |       

See accompanying notes



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THE BANK OF KENTUCKY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS

OF CHANGES IN SHAREHOLDERS EQUITY

Years
ended December 31, 2005, 2004 and 2003

(Dollar amounts in thousands, except per share amounts)



|                                                 |  |           |   |  |              |       |                            |   |        |                   |  |   |                                               |   |  |       |      |   |  |   |        |  
|------------------------------------------------ |  | --------- | - |  | ------------ | ----- | -------------------------- | - | ------ | ----------------- |  | - | --------------------------------------------- | - |  | ----- | ---- | - |  | - | ------ | -
|                                                 |  | Shares    |   |  | Common Stock |       | Additional Paid-in Capital |   |        | Retained Earnings |  |   | Accumulated Other Comprehensive Income (Loss) |   |  | Total |     
|Balance January 1, 2003                          |  | 5,953,849 |   |  | $            | 3,098 |                            | $ | 10,379 |                   |  | $ | 44,582                                        |   |  | $     | 364  |   |  | $ | 58,423 |  
|                                                 |  |           |   |  |              |      
|Comprehensive income                             |  |           |   |  |              |       |                            |   |        |                   |  |   |                                               |   |  |       |      |   |  |   |        |  
|Net income                                       |  |          |   |  |              |      |                            |   |       |                   |  |   | 9,359                                         |   |  |       |     |   |  |   | 9,359  |  
|Change in net unrealized gain (loss), net of tax |  |          |   |  |              |      |                            |   |       |                   |  |   |                                              |   |  |       | (227 | ) |  |   | (227   | )
|                                                 |  |           |   |  |              |       |                            |   |        |                   |  |   |                                               |   |  |       |      |   |  |   |        |  
|Total comprehensive income                       |  |           |   |  |              |       |                            |   |        |                   |  |   |                                               |   |  |       |      |   |  |   | 9,132  |  
|Cash dividends - $.17 per share                  |  |          |   |  |              |      |                            |   |       |                   |  |   | (1,015                                        | ) |  |       |     |   |  |   | (1,015 | )
|Exercise of stock options                        |  | 31,200    |   |  |              |      |                            |   | 559    |                   |  |   |                                              |   |  |       |     |   |  |   | 559    |  
|Repurchase and retirement of common shares       |  | (13,000   | ) |  |              |      |                            |   | (410   | )                 |  |   |                                              |   |  |       |     |   |  |   | (410   | )
|                                                 |  |           |   |  |              |       |                            |   |        |                   |  |   |                                               |   |  |       |      |   |  |   |        |  
|Balance December 31, 2003                        |  | 5,972,049 |   |  |              | 3,098 |                            |   | 10,528 |                   |  |   | 52,926                                        |   |  |       | 137  |   |  |   | 66,689 |  
|                                                 |  |           |   |  |              |      
|Comprehensive income                             |  |           |   |  |              |       |                            |   |        |                   |  |   |                                               |   |  |       |      |   |  |   |        |  
|Net income                                       |  |          |   |  |              |      |                            |   |       |                   |  |   | 10,058                                        |   |  |       |     |   |  |   | 10,058 |  
|Change in net unrealized gain (loss), net of tax |  |          |   |  |              |      |                            |   |       |                   |  |   |                                              |   |  |       | (235 | ) |  |   | (235   | )
|                                                 |  |           |   |  |              |       |                            |   |        |                   |  |   |                                               |   |  |       |      |   |  |   |        |  
|Total comprehensive income                       |  |           |   |  |              |       |                            |   |        |                   |  |   |                                               |   |  |       |      |   |  |   | 9,823  |  
|Cash dividends - $.23 per share                  |  |          |   |  |              |      |                            |   |       |                   |  |   | (1,370                                        | ) |  |       |     |   |  |   | (1,370 | )
|Exercise of stock options                        |  | 30,930    |   |  |              |      |                            |   | 701    |                   |  |   |                                              |   |  |       |     |   |  |   | 701    |  
|Repurchase and retirement of common shares       |  | (75,000   | ) |  |              |      |                            |   | (2,179 | )                 |  |   |                                              |   |  |       |     |   |  |   | (2,179 | )
|                                                 |  |           |   |  |              |       |                            |   |        |                   |  |   |                                               |   |  |       |      |   |  |   |        |  
|Balance December 31, 2004                        |  | 5,927,979 |   |  |              | 3,098 |                            |   | 9,050  |                   |  |   | 61,614                                        |   |  |       | (98  | ) |  |   | 73,664 |  
|                                                 |  |           |   |  |              |      
|Comprehensive income                             |  |           |   |  |              |       |                            |   |        |                   |  |   |                                               |   |  |       |      |   |  |   |        |  
|Net income                                       |  |          |   |  |              |      |                            |   |       |                   |  |   | 10,127                                        |   |  |       |     |   |  |   | 10,127 |  
|Change in net unrealized gain (loss), net of tax |  |          |   |  |              |      |                            |   |       |                   |  |   |                                              |   |  |       | (410 | ) |  |   | (410   | )
|                                                 |  |           |   |  |              |       |                            |   |        |                   |  |   |                                               |   |  |       |      |   |  |   |        |  
|Total comprehensive income                       |  |           |   |  |              |       |                            |   |        |                   |  |   |                                               |   |  |       |      |   |  |   | 9,717  |  
|Cash dividends - $.30 per share                  |  |          |   |  |              |      |                            |   |       |                   |  |   | (1,772                                        | ) |  |       |     |   |  |   | (1,772 | )
|Exercise of stock options                        |  | 5,800     |   |  |              |      |                            |   | 126    |                   |  |   |                                              |   |  |       |     |   |  |   | 126    |  
|Repurchase and retirement of common shares       |  | (49,700   | ) |  |              |      |                            |   | (1,288 | )                 |  |   |                                              |   |  |       |     |   |  |   | (1,288 | )
|                                                 |  |           |   |  |              |       |                            |   |        |                   |  |   |                                               |   |  |       |      |   |  |   |        |  
|Balance December 31, 2005                        |  | 5,884,079 |   |  | $            | 3,098 |                            | $ | 7,888  |                   |  | $ | 69,969                                        |   |  | $     | (508 | ) |  | $ | 80,447 |  
|                                                 |  |           |   |  |              |       |                            |   |        |                   |  |   |                                               |   |  |       |      |   |  |   |        |  

See accompanying notes



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THE BANK OF KENTUCKY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended December 31, 2005, 2004 and 2003

(Dollar amounts in thousands)



|                                                                                 |  |      |         |   |      |   |         |      |  |   |          |  
|-------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | -------- | -
|                                                                                 |  | 2005 |         |   | 2004 |   |         | 2003 | 
|Cash flows from operating activities                                             |  |      |         |   |      |   |         |      |  |   |          |  
|Net income                                                                       |  | $    | 10,127  |   |      | $ | 10,058  |      |  | $ | 9,359    |  
|Adjustments to reconcile net income to net cash from operating activities        |  |      |         |   |      |   |         |      |  |   |          |  
|Depreciation and amortization                                                    |  |      | 1,390   |   |      |   | 1,304   |      |  |   | 1,243    |  
|Net amortization on securities                                                   |  |      | 25      |   |      |   | 173     |      |  |   | 150      |  
|Provision for loan losses                                                        |  |      | 1,825   |   |      |   | 1,675   |      |  |   | 1,090    |  
|Federal Home Loan Bank stock dividend                                            |  |      | (208    | ) |      |   | (163    | )    |  |   | (153     | )
|Securities gains                                                                 |  |      |        |   |      |   | (10     | )    |  |   |         |  
|Amortization of acquisition intangibles                                          |  |      | 646     |   |      |   | 645     |      |  |   | 645      |  
|Earnings on life insurance                                                       |  |      | (472    | ) |      |   | (485    | )    |  |   | (223     | )
|Loss on sale/write-down of other real estate                                     |  |      | 123     |   |      |   | 51      |      |  |   | 195      |  
|Gains on sales of loans                                                          |  |      | (965    | ) |      |   | (1,281  | )    |  |   | (2,924   | )
|Proceeds from loans sold                                                         |  |      | 81,356  |   |      |   | 93,934  |      |  |   | 262,742  |  
|Origination of loans held for sale                                               |  |      | (80,609 | ) |      |   | (93,027 | )    |  |   | (250,036 | )
|Net change in:                                                                   |  |      |         |   |      |   |         |      |  |   |          |  
|Accrued interest receivable and other assets                                     |  |      | (1,903  | ) |      |   | 84      |      |  |   | 527      |  
|Accrued expenses and other liabilities                                           |  |      | 2,334   |   |      |   | 568     |      |  |   | (469     | )
|                                                                                 |  |      |         |   |      |   |         |      |  |   |          |  
|Net cash from operating activities                                               |  |      | 13,669  |   |      |   | 13,526  |      |  |   | 22,146   |  
|Cash flows from investing activities                                             |  |      |         |   |      |   |         |      |  |   |          |  
|Net change in interest-bearing deposits with banks                               |  |      | (100    | ) |      |   | 1,935   |      |  |   | 80       |  
|Proceeds from maturities and principal reductions of held-to-maturity securities |  |      | 4,100   |   |      |   | 3,900   |      |  |   | 6,499    |  
|Purchase of held-to-maturity securities                                          |  |      | (6,883  | ) |      |   | (865    | )    |  |   | (5,926   | )
|Proceeds from maturities and sales of available-for-sale securities              |  |      | 28,902  |   |      |   | 48,371  |      |  |   | 42,570   |  
|Purchase of available-for-sale securities                                        |  |      | (56,883 | ) |      |   | (56,661 | )    |  |   | (53,709  | )
|Loans made to customers, net of principal collections                            |  |      | (17,987 | ) |      |   | (60,790 | )    |  |   | (55,842  | )
|Property and equipment expenditures, net                                         |  |      | (2,850  | ) |      |   | (1,471  | )    |  |   | (1,290   | )
|Purchase of Company owned life insurance                                         |  |      | (6,500  | ) |      |   |        |      |  |   | (10,024  | )
|Proceeds from the sale of other real estate                                      |  |      | 1,064   |   |      |   | 95      |      |  |   | 1,257    |  
|Net payments in acquisition                                                      |  |      |        |   |      |   |        |      |  |   | (68      | )
|                                                                                 |  |      |         |   |      |   |         |      |  |   |          |  
|Net cash from investing activities                                               |  |      | (57,137 | ) |      |   | (65,486 | )    |  |   | (76,453  | )
|                                                                                 |  |      |        
|Cash flows from financing activities                                             |  |      |         |   |      |   |         |      |  |   |          |  
|Net change in deposits                                                           |  |      | 78,327  |   |      |   | 54,200  |      |  |   | 31,819   |  
|Net change in short-term borrowings                                              |  |      | (4,936  | ) |      |   | 814     |      |  |   | 2,467    |  
|Payments on notes payable                                                        |  |      | (3,042  | ) |      |   | (37     | )    |  |   | (5,035   | )
|Dividends paid on common stock                                                   |  |      | (1,772  | ) |      |   | (1,370  | )    |  |   | (1,015   | )
|Stock repurchase and retirement                                                  |  |      | (1,288  | ) |      |   | (2,179  | )    |  |   | (410     | )
|Proceeds from exercise of stock options                                          |  |      | 117     |   |      |   | 617     |      |  |   | 484      |  
|                                                                                 |  |      |         |   |      |   |         |      |  |   |          |  
|Net cash from financing activities                                               |  |      | 67,406  |   |      |   | 52,045  |      |  |   | 28,310   |  
|                                                                                 |  |      |         |   |      |   |         |      |  |   |          |  
|Net change in cash and cash equivalents                                          |  |      | 23,938  |   |      |   | 85      |      |  |   | (25,997  | )
|                                                                                 |  |      |        
|Cash and cash equivalents at beginning of year                                   |  |      | 47,406  |   |      |   | 47,321  |      |  |   | 73,318   |  
|                                                                                 |  |      |         |   |      |   |         |      |  |   |          |  
|Cash and cash equivalents at end of year                                         |  | $    | 71,344  |   |      | $ | 47,406  |      |  | $ | 47,321   |  
|                                                                                 |  |      |         |   |      |   |         |      |  |   |          |  
|Supplemental cash flow information:                                              |  |      |         |   |      |   |         |      |  |   |          |  
|Cash paid for interest                                                           |  | $    | 16,550  |   |      | $ | 11,389  |      |  | $ | 13,262   |  
|Cash paid for income taxes                                                       |  |      | 4,920   |   |      |   | 4,638   |      |  |   | 4,245    |  
|                                                                                 |  |      |        
|Supplemental noncash disclosures:                                                |  |      |         |   |      |   |         |      |  |   |          |  
|Transfers from loans to other real estate                                        |  | $    | 4,416   |   |      | $ | 340     |      |  | $ | 937      |  
|Transfers from property and equipment to other real estate                       |  |      | 400     |   |      |   |        |      |  |   |         |  

See accompanying notes.



46



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##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005, 2004 and 2003

(Dollar
amounts in thousands, except 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 and Kenton counties in northern Kentucky. 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.

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. Other securities such as Federal Home Loan Bank stock are carried at cost.

Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the level-yield method without anticipating
prepayments. Gains and losses on sales are based on the amortized cost of the security sold. Securities are written down to fair value when a decline in fair value is not temporary.

Declines in the fair value of securities below their cost that are other than temporary are reflected as realized losses. In estimating other-than-temporary losses, management considers: (1) the length of time
and extent that fair value of securities have been below their cost, (2) the financial condition and near term prospects of the issurer, and (3) the Companys ability and intent to hold the security for a period sufficient to allow
for any anticipated recovery in fair value.

(Continued)



47



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##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005, 2004 and 2003

(Dollar amounts in thousands, except per share amounts)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)

Loans Held For Sale: The Bank
originates loans for sale, servicing released, 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 market, on an aggregate basis. Net
unrealized losses, if any, are recorded as a valuation allowance and charged to earnings. All 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, net of unearned interest, deferred loan fees and costs, and an allowance for loan losses.

Interest income is reported on the interest method
and includes amortization of net deferred loan fees and costs over the loan term. Deferred loan fees and cost are amortized on the level-yield method without anticipating prepayments. Interest income on 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.

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.

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 non-classified loans and is based on historical loss experience adjusted for current factors.

(Continued)



48



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##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005, 2004 and 2003

(Dollar amounts in thousands, except per share amounts)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)

A loan is impaired when full payment under the loan terms is not expected. 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.

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 when acquired, establishing a new cost basis. Expenses incurred in carrying other real estate
are charged to operations as incurred. A total of $5,063 and $1,434 of other real estate was owned on December 31, 2005 and 2004 and included in other assets.

Company Owned Life Insurance: The Company has purchased life insurance policies on certain key executives. Company owned life insurance is recorded at its cash surrender value, or the amount that can be realized.

Goodwill and Other Intangible Assets: Goodwill results from business acquisitions and represents the excess of the purchase price over the fair value of acquired
tangible assets and liabilities and identifiable intangible assets. Goodwill is assessed at least annually for impairment and any such impairment will be recognized in the period identified.

Other intangible assets consist of core deposit and acquired customer relationship intangible assets arising from whole bank and branch acquisitions. They are initially
measured at fair value and then are amortized on the straight-line method over their estimated useful lives of eight years for the core deposit intangible and seven years for the customer relationship intangible.

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.

(Continued)



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##### Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005, 2004 and 2003

(Dollar amounts in thousands, except per share
amounts)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)

Stock Compensation: Employee compensation expense under stock options is reported using the intrinsic value method. No stock-based compensation cost is reflected in net income, as all options granted had an
exercise price equal to or greater than the market price of the underlying common stock at date of grant. The following table illustrates the effect on net income and earnings per share if expense was measured using the fair value recognition
provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation.



|                                                                                 |  |      |        |      |   |        |  |   |      
|-------------------------------------------------------------------------------- |  | ---- | ------ | ---- | - | ------ |  | - | -----
|                                                                                 |  | 2005 |        | 2004 |   | 2003  
|Net income as reported                                                           |  | $    | 10,127 |      | $ | 10,058 |  | $ | 9,359
|Deduct: Stock-based compensation expensedetermined under fair value based method |  |      | 575    |      |   | 546    |  |   | 526  
|                                                                                 |  |      |        |      |   |        |  |   |      
|Pro forma net income                                                             |  | $    | 9,552  |      | $ | 9,512  |  | $ | 8,833
|                                                                                 |  |      |       
|Basic earnings per share as reported                                             |  | $    | 1.71   |      | $ | 1.69   |  | $ | 1.57 
|Pro forma basic earnings per share                                               |  |      | 1.62   |      |   | 1.60   |  |   | 1.48 
|                                                                                 |  |      |       
|Diluted earnings per share as reported                                           |  |      | 1.70   |      |   | 1.68   |  |   | 1.55 
|Pro forma diluted earnings per share                                             |  |      | 1.61   |      |   | 1.58   |  |   | 1.46 

The pro forma effects are computed using option pricing models, using the following weighted-average assumptions
as of grant date.



|                                |  |        |   |  |         |   |  |         |  
|------------------------------- |  | ------ | - |  | ------- | - |  | ------- | -
|                                |  | 2005   |   |  | 2004    |   |  | 2003    |  
|Risk-free interest rate         |  | 3.89   | % |  | 3.60    | % |  | 2.72    | %
|Expected option life            |  | 6.7yrs |   |  | 6.8 yrs |   |  | 5.2 yrs |  
|Expected stock price volatility |  | 27.52  | % |  | 37.27   | % |  | 31.40   | %
|Dividend yield                  |  | .85    | % |  | .80     | % |  | .48     | %

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.

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.

(Continued)



50



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##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005, 2004 and 2003

(Dollar amounts in thousands, except per share amounts)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)

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.

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 now are such matters that will have a material effect on the financial
statements.

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.

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 14 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.

Share Data: Earnings, dividends and stock option related per share data are restated for the effect of stock splits and dividends. Outstanding share data is not
restated.

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.

(Continued)



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##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005, 2004 and 2003

(Dollar amounts in thousands, except per share amounts)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)

Adoption of New Accounting Standards: No new accounting policies were adopted in 2005 which had a significant impact on the financial statements.

Effect of Newly Issued But Not Yet Effective Accounting Standards: Statement of Financial Accounting Standards 123, Revised, requires all public companies to record compensation cost for stock options provided
to employees in return for employee service. The cost is measured at the fair value of the options when granted, and this cost is expensed over the employee service period, which is normally the vesting period of the options. This will apply to
awards granted or modified after the first quarter beginning after December 15, 2005. Compensation cost will also be recorded for prior option grants that vest after the date of adoption. The effect on results of operations will depend on the
level of future option grants and the calculation of the fair value of the options granted at such future date, as well as the vesting periods provided, and so cannot currently be predicted. Existing options that will vest after adoption date are
expected to result in additional compensation expense of approximately $434, $395, $282 and $139 during 2006, 2007, 2008 and 2009. There will be no significant effect on financial position as total equity will not change.

Statement of Position 03-3 requires that a valuation allowance for loans acquired in a transfer, including in a business combination, reflect only losses incurred after
acquisition and should not be recorded at acquisition. It applies to any loan acquired in a transfer that showed evidence of credit quality deterioration since it was made. This requirement would only have an impact if loans were acquired, and
currently there are no loan acquisitions pending.

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                                                    |  | FairValue |        | GrossUnrealizedGains |   | GrossUnrealizedLosses | 
|2005                                                                  |  |           |        |                      |   |                       |  |   |      |  
|U.S. Government, federal agencies andGovernment sponsored enterprises |  | $         | 72,709 |                      | $ | 4                     |  | $ | (666 | )
|Mortgage-backed                                                       |  |           | 5,438  |                      |   | 20                    |  |   | (142 | )
|Corporate                                                             |  |           | 1,405  |                      |   |                      |  |   |     |  
|                                                                      |  |           |        |                      |   |                       |  |   |      |  
|                                                                      |  | $         | 79,552 |                      | $ | 24                    |  | $ | (808 | )
|                                                                      |  |           |        |                      |   |                       |  |   |      |  



52



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##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005, 2004 and 2003

(Dollar amounts in thousands, except per share amounts)

NOTE 2 - SECURITIES(Continued)



|                                                                      |  |           |        |                      |   |                       |  |   |      |  
|--------------------------------------------------------------------- |  | --------- | ------ | -------------------- | - | --------------------- |  | - | ---- | -
|Available-for-Sale                                                    |  | FairValue |        | GrossUnrealizedGains |   | GrossUnrealizedLosses | 
|2004                                                                  |  |           |        |                      |   |                       |  |   |      |  
|U.S. Government, federal agencies andGovernment sponsored enterprises |  | $         | 43,447 |                      | $ | 41                    |  | $ | (163 | )
|Mortgage-backed                                                       |  |           | 7,302  |                      |   | 74                    |  |   | (106 | )
|Corporate                                                             |  |           | 1,455  |                      |   |                      |  |   |     |  
|                                                                      |  |           |        |                      |   |                       |  |   |      |  
|                                                                      |  | $         | 52,204 |                      | $ | 115                   |  | $ | (269 | )
|                                                                      |  |           |        |                      |   |                       |  |   |      |  

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



|                                |  |                |        |                         |   |                         |  |   |           |   |  |   |       
|------------------------------- |  | -------------- | ------ | ----------------------- | - | ----------------------- |  | - | --------- | - |  | - | ------
|Held-to-Maturity                |  | CarryingAmount |        | Gross UnrecognizedGains |   | GrossUnrecognizedLosses |  |   | FairValue
|2005                            |  |                |        |                         |   |                         |  |   |           |   |  |   |       
|Municipal and other obligations |  | $              | 14,823 |                         | $ | 16                      |  | $ | (288      | ) |  | $ | 14,551
|                                |  |                |        |                         |   |                         |  |   |           |   |  |   |       
|                                |  | $              | 14,823 |                         | $ | 16                      |  | $ | (288      | ) |  | $ | 14,551
|                                |  |                |        |                         |   |                         |  |   |           |   |  |   |       
|2004                            |  |                |        |                         |   |                         |  |   |           |   |  |   |       
|Municipal and other obligations |  | $              | 12,062 |                         | $ | 107                     |  | $ | (40       | ) |  | $ | 12,129
|                                |  |                |        |                         |   |                         |  |   |           |   |  |   |       
|                                |  | $              | 12,062 |                         | $ | 107                     |  | $ | (40       | ) |  | $ | 12,129
|                                |  |                |        |                         |   |                         |  |   |           |   |  |   |       

(Continued)



53



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##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005, 2004 and 2003

(Dollar amounts in thousands, except per share amounts)

NOTE 2 - SECURITIES(Continued)

The fair value of debt securities and carrying amount, if different, at
year-end 2005 by contractual maturity were as follows. Securities not due at a single maturity date, primarily mortgage backed securities, are shown separately.



|                                       |  |                    |        |                  |   |           |  |   |       
|-------------------------------------- |  | ------------------ | ------ | ---------------- | - | --------- |  | - | ------
|                                       |  | Available-for-Sale |        | Held-to-Maturity
|                                       |  | Fair Value         |        | CarryingValue    |   | FairValue
|Due in one year or less                |  | $                  | 37,928 |                  | $ | 1,138     |  | $ | 1,135 
|Due after one year through five years  |  |                    | 34,781 |                  |   | 8,580     |  |   | 8,461 
|Due after five years through ten years |  |                    |       |                  |   | 5,105     |  |   | 4,955 
|Due after ten years                    |  |                    | 1,405  |                  |   |          |  |   |      
|Mortgage-backed                        |  |                    | 5,438  |                  |   |          |  |   |      
|                                       |  |                    |        |                  |   |           |  |   |       
|                                       |  | $                  | 79,552 |                  | $ | 14,823    |  | $ | 14,551
|                                       |  |                    |        |                  |   |           |  |   |       

Sales of available for sale securities were as follows:



|             |  |      |   |      |   |       |      |  |   |  
|------------ |  | ---- | - | ---- | - | ----- | ---- |  | - | -
|             |  | 2005 |   | 2004 |   |       | 2003
|Proceeds     |  | $    |  |      | $ | 3,016 |      |  | $ | 
|Gross gains  |  |      |  |      |   | 15    |      |  |   | 
|Gross losses |  |      |  |      |   | (5    | )    |  |   | 

The tax benefit (provision) related to these net realized gains and losses was $0, $3 and $0, respectively.

At December 31, 2005 and 2004, securities with a carrying value of $90,478 and $57,303 were pledged to secure public deposits and repurchase
agreements.

(Continued)



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##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005, 2004 and 2003

(Dollar amounts in thousands, except per share amounts)

NOTE 2 - SECURITIES(Continued)

Securities with unrealized losses at year-end 2005 and 2004, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows:



|                                                                       |  |                     |        |                |                   |      |           |       |                |        |  |           |      |                |  |   |        |  |   |        |  
|---------------------------------------------------------------------- |  | ------------------- | ------ | -------------- | ----------------- | ---- | --------- | ----- | -------------- | ------ |  | --------- | ---- | -------------- |  | - | ------ |  | - | ------ | -
|                                                                       |  | Less than 12 Months |        |                | 12 Months or More |      |           | Total |               
|Description of Securities                                              |  | FairValue           |        | UnrealizedLoss |                   |      | FairValue |       | UnrealizedLoss |        |  | FairValue |      | UnrealizedLoss | 
|2005                                                                   |  |                     |        |                |                   |      |           |       |                |        |  |           |      |                |  |   |        |  |   |        |  
|U.S. Government, federal agencies and government sponsored enterprises |  | $                   | 32,548 |                | $                 | (232 | )         |       | $              | 23,686 |  | $         | (434 | )              |  | $ | 56,234 |  | $ | (666   | )
|Mortgage-backed                                                        |  |                     | 243    |                |                   | (0   | )         |       |                | 3,669  |  |           | (142 | )              |  |   | 3,912  |  |   | (142   | )
|Municipal & other obligations                                          |  |                     | 8,554  |                |                   | (151 | )         |       |                | 3,427  |  |           | (137 | )              |  |   | 11,981 |  |   | (288   | )
|                                                                       |  |                     |        |                |                   |      |           |       |                |        |  |           |      |                |  |   |        |  |   |        |  
|Total temporarily impaired                                             |  | $                   | 41,345 |                | $                 | (383 | )         |       | $              | 30,782 |  | $         | (713 | )              |  | $ | 72,127 |  | $ | (1,096 | )
|                                                                       |  |                     |        |                |                   |      |           |       |                |        |  |           |      |                |  |   |        |  |   |        |  

Securities with unrealized losses at year end 2004 not recognized in income are as follows:



|                                                                       |  |                     |        |                |                   |      |           |       |                |       |  |           |     |                |  |   |        |  |   |      |  
|---------------------------------------------------------------------- |  | ------------------- | ------ | -------------- | ----------------- | ---- | --------- | ----- | -------------- | ----- |  | --------- | --- | -------------- |  | - | ------ |  | - | ---- | -
|                                                                       |  | Less than 12 Months |        |                | 12 Months or More |      |           | Total |               
|Description of Securities                                              |  | FairValue           |        | UnrealizedLoss |                   |      | FairValue |       | UnrealizedLoss |       |  | FairValue |     | UnrealizedLoss | 
|2004                                                                   |  |                     |        |                |                   |      |           |       |                |       |  |           |     |                |  |   |        |  |   |      |  
|U.S. Government, federal agencies and government sponsored enterprises |  | $                   | 25,960 |                | $                 | (149 | )         |       | $              | 986   |  | $         | (14 | )              |  | $ | 26,946 |  | $ | (163 | )
|Mortgage-backed                                                        |  |                     | 2,585  |                |                   | (67  | )         |       |                | 2,105 |  |           | (39 | )              |  |   | 4,690  |  |   | (106 | )
|Municipal & other obligations                                          |  |                     | 266    |                |                   | (5   | )         |       |                | 3,848 |  |           | (35 | )              |  |   | 4,114  |  |   | (40  | )
|                                                                       |  |                     |        |                |                   |      |           |       |                |       |  |           |     |                |  |   |        |  |   |      |  
|Total temporarily impaired                                             |  | $                   | 28,811 |                | $                 | (221 | )         |       | $              | 6,939 |  | $         | (88 | )              |  | $ | 35,750 |  | $ | (309 | )
|                                                                       |  |                     |        |                |                   |      |           |       |                |       |  |           |     |                |  |   |        |  |   |      |  

Unrealized losses on these securities have not been recognized into income because the issuers bonds are of high
credit quality (US government agencies and government sponsored enterprises and A rated or better Kentucky municipalities), management has the intent and ability to hold for the foreseeable future, and the decline in fair value is
largely due to increases in market interest rates. The fair value is expected to recover as the bonds approach their maturity date and/or market rates decline.

(Continued)



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##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005, 2004 and 2003

(Dollar amounts in thousands, except per share amounts)

NOTE 3 - LOANS

Year-end loans are as follows:



|                                     |  |      |         |   |      |   |         |  
|------------------------------------ |  | ---- | ------- | - | ---- | - | ------- | -
|                                     |  | 2005 |         |   | 2004 |  
|Commercial                           |  | $    | 136,693 |   |      | $ | 130,760 |  
|Residential real estate              |  |      | 183,644 |   |      |   | 188,140 |  
|Nonresidential real estate           |  |      | 295,326 |   |      |   | 290,684 |  
|Construction                         |  |      | 89,847  |   |      |   | 84,690  |  
|Consumer                             |  |      | 20,046  |   |      |   | 20,606  |  
|Municipal obligations                |  |      | 6,171   |   |      |   | 5,074   |  
|                                     |  |      |         |   |      |   |         |  
|Gross loans                          |  |      | 731,727 |   |      |   | 719,954 |  
|Less: Deferred loan origination fees |  |      | (668    | ) |      |   | (797    | )
|Allowance for loan losses            |  |      | (7,581  | ) |      |   | (7,214  | )
|                                     |  |      |         |   |      |   |         |  
|Net loans                            |  | $    | 723,478 |   |      | $ | 711,943 |  
|                                     |  |      |         |   |      |   |         |  

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



|                                          |  |      |       
|----------------------------------------- |  | ---- | ------
|                                          |  | 2005
|Beginning balance                         |  | $    | 12,260
|New loans and advances on lines of credit |  |      | 14,914
|Loan reductions                           |  |      | 14,285
|Other changes, net                        |  |      |      
|                                          |  |      |       
|Ending balance                            |  | $    | 12,889
|                                          |  |      |       

(Continued)



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##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005, 2004 and 2003

(Dollar amounts in thousands, except per share amounts)

NOTE 4 - ALLOWANCE FOR LOAN LOSSES

Activity in the allowance for loan losses is as follows:



|                                |  |      |        |   |      |   |        |      |  |   |       |  
|------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ----- | -
|                                |  | 2005 |        |   | 2004 |   |        | 2003 | 
|Beginning balance               |  | $    | 7,214  |   |      | $ | 6,855  |      |  | $ | 6,408 |  
|Provision charged to operations |  |      | 1,825  |   |      |   | 1,675  |      |  |   | 1,090 |  
|Loans charged off               |  |      | (1,536 | ) |      |   | (1,326 | )    |  |   | (676  | )
|Recoveries                      |  |      | 78     |   |      |   | 10     |      |  |   | 33    |  
|                                |  |      |        |   |      |   |        |      |  |   |       |  
|Ending balance                  |  | $    | 7,581  |   |      | $ | 7,214  |      |  | $ | 6,855 |  
|                                |  |      |        |   |      |   |        |      |  |   |       |  

Nonperforming and impaired loans are as follows



|                                                        |  |      |        |      |   |       |  |   |      
|------------------------------------------------------- |  | ---- | ------ | ---- | - | ----- |  | - | -----
|                                                        |  | 2005 |        | 2004 |   | 2003 
|Nonaccrual loans at year end                            |  | $    | 6,696  |      | $ | 3,487 |  | $ | 1,466
|Loans past due over 90 days, still accruing at year-end |  |      | 2,349  |      |   | 1,658 |  |   | 2,007
|Average impaired loans during the year                  |  |      | 10,318 |      |   | 4,138 |  |   | 1,909
|Interest income recognized during impairment            |  |      | 669    |      |   | 162   |  |   | 74   
|Interest income received during impairment              |  |      | 675    |      |   | 133   |  |   | 77   
|Loans designated as impaired at year end                |  |      | 8,925  |      |   | 6,024 |  |   | 1,659
|Allowance allocated to impaired loans at year end       |  |      | 3,136  |      |   | 2,550 |  |   | 575  

There were no loans designated as impaired for which there was no allowance for loan losses allocated.
Nonperforming loans includes both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

(Continued)



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##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005, 2004 and 2003

(Dollar amounts in thousands, except per share amounts)

NOTE 5 - PREMISES AND EQUIPMENT

Year-end premises and equipment are as follows:



|                                  |  |      |        |   |      |   |        |  
|--------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                  |  | 2005 |        |   | 2004 |  
|Land and improvements             |  | $    | 5,087  |   |      | $ | 4,817  |  
|Leasehold improvements            |  |      | 1,521  |   |      |   | 1,458  |  
|Buildings                         |  |      | 11,585 |   |      |   | 10,954 |  
|Furniture, fixtures and equipment |  |      | 8,194  |   |      |   | 6,708  |  
|                                  |  |      |        |   |      |   |        |  
|Total                             |  |      | 26,387 |   |      |   | 23,937 |  
|Accumulated depreciation          |  |      | (8,908 | ) |      |   | (7,472 | )
|                                  |  |      |        |   |      |   |        |  
|Net premises and equipment        |  | $    | 17,479 |   |      | $ | 16,465 |  
|                                  |  |      |        |   |      |   |        |  

Depreciation expense was $1,436, $1,252 and $1,286 for 2005, 2004, and 2003.

NOTE 6 - GOODWILL AND ACQUISITION INTANGIBLES

Goodwill

There was no goodwill activity in any period presented.

Acquisition Intangibles

Acquisition intangibles were as follows as of year-end:



|                                        |  |      |       |      |   |      
|--------------------------------------- |  | ---- | ----- | ---- | - | -----
|                                        |  | 2005 |       | 2004
|Core deposit intangibles                |  | $    | 2,863 |      | $ | 2,863
|Other customer relationship intangibles |  |      | 2,045 |      |   | 2,045
|                                        |  |      |       |      |   |      
|Total                                   |  |      | 4,908 |      |   | 4,908
|Accumulated amortization                |  |      | 1,973 |      |   | 1,327
|                                        |  |      |       |      |   |      
|Net                                     |  | $    | 2,935 |      | $ | 3,581
|                                        |  |      |       |      |   |      

(Continued)



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THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005, 2004 and 2003

(Dollar amounts in thousands, except per share amounts)

NOTE 6 - GOODWILL AND ACQUISITION INTANGIBLES(Continued)

Aggregate amortization expense was $646, $645 and
$645 for 2005, 2004 and 2003.

Estimated amortization expense for each of the next five years:



|     |  |   |    
|---- |  | - | ---
|2006 |  | $ | 645
|2007 |  |   | 645
|2008 |  |   | 645
|2009 |  |   | 645
|2010 |  |   | 353

NOTE 7 - INTEREST BEARING DEPOSITS

Time deposits of $100 or more were $105,369 and $81,629 at year-end 2005 and 2004.

Scheduled maturities of time deposits
are as follows:



|           |  |   |         
|---------- |  | - | --------
|2006       |  | $ | 170,215 
|2007       |  |   | 123,256 
|2008       |  |   | 14,260  
|2009       |  |   | 2,914   
|2010       |  |   | 669     
|Thereafter |  |   | 28      
|           |  |   |         
|           |  |   | $311,342
|           |  |   |         

Deposits from directors, and their affiliates at year-end 2005 and 2004 were $13,056 and $13,404, comprising 1.57%
and 1.78% of total deposits at those dates.

NOTE 8 - SHORT-TERM BORROWINGS

Short-term borrowings consisted of daily federal funds purchased and retail repurchase agreements of $0 and $4,225, and $3,922 and $5,239 at year-end 2005 and 2004. Repurchase agreements outstanding at year-end 2005
had remaining maturities ranging from one day up to one year.

(Continued)



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##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005, 2004 and 2003

(Dollar amounts in thousands, except per share amounts)

NOTE 8 - SHORT-TERM BORROWINGS(Continued)

Information regarding repurchase agreements for the years ended
December 31, 2005 and 2004 is presented below:



|                                          |  |      |       |   |      |   |       |  
|----------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | -
|                                          |  | 2005 |       |   | 2004 |  
|Average balance during the year           |  | $    | 4,632 |   |      | $ | 4,802 |  
|Maximum month end balance during the year |  |      | 5,884 |   |      |   | 6,150 |  
|Average rate paid during the year         |  |      | 2.46  | % |      |   | 1.54  | %

NOTE 9 - NOTES PAYABLE

Notes payable consist of the following:



|                        |  |      |        |      |   |       
|----------------------- |  | ---- | ------ | ---- | - | ------
|                        |  | 2005 |        | 2004
|FHLB advances           |  | $    | 16,460 |      | $ | 19,700
|Subordinated debentures |  |      | 17,526 |      |   | 17,526
|Other notes payable     |  |      | 305    |      |   | 347   
|                        |  |      |        |      |   |       
|                        |  | $    | 34,291 |      | $ | 37,573
|                        |  |      |        |      |   |       

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:



|                                                                                                                                                |  |      |        |      |   |       
|----------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------ | ---- | - | ------
|                                                                                                                                                |  | 2005 |        | 2004
|Convertible fixed rate advances with maturity dates ranging from 2008 to 2011 with interest rates ranging from 4.22% to 5.01%, averaging
4.74%. |  | $    | 16,000 |      | $ | 19,000
|Remaining premium reflecting market rate adjustment of assumed advances.                                                                        |  |      | 460    |      |   | 700   
|                                                                                                                                                |  |      |        |      |   |       
|                                                                                                                                                |  | $    | 16,460 |      | $ | 19,700
|                                                                                                                                                |  |      |        |      |   |       

Principal payments on FHLB advances for the next five years consist of $4,000 due in 2008, and $6,000 due in 2010.

(Continued)



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THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005, 2004 and 2003

(Dollar amounts in thousands, except per share amounts)

NOTE 9 - NOTES PAYABLE(Continued)

In November 2002, The Bank of Kentucky Capital Trust I (Trust), a
wholly-owned unconsolidated subsidiary of the Company, issued $17,000 of LIBOR plus 3.35% floating rate redeemable preferred securities (Trust Preferred Securities) as part of a pooled offering. The Trust may redeem the securities, in whole but not
in part, any time after November 2007 at face value. Final maturity is November of 2032. The sole asset of the Trust represents the proceeds of the offering loaned to the Company in exchange for subordinated debentures which have terms that are
virtually identical to the Trust Preferred Securities. 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. These limitations do
not restrict the Companys ability to use the entire amount as Tier 1 capital.

Other notes payable include a mortgage payable secured by a branch
building and a capitalized lease obligation.

The Bank maintains a $100,000 letter of credit from the Federal Home Loan Bank of Cincinnati. 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.

The
Company maintains a $10,000 revolving credit line from US Bank. The credit line is secured with 100% of the voting shares of the Bank. The Company is not restricted on the use of the funds from the credit line. The balance on the line of credit was
$0 at December 31, 2005.

(Continued)



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##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005, 2004 and 2003

(Dollar amounts in thousands, except per share amounts)

NOTE 10 - 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 $432, $480 and $393 for the years ended December 31, 2005, 2004 and 2003.

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 10 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 $511 and $294 at December 31, 2005 and 2004. Expense related to the program was $217 and $226 for the years ended December 31, 2005 and 2004.

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 1,080,000 shares. 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.

(Continued)



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##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005, 2004 and 2003

(Dollar amounts in thousands, except per share amounts)

NOTE 11 - EMPLOYEE BENEFITS(Continued)

A summary of the Companys stock option activity and related per
share information follows. All data is restated for stock splits.



|                                                               |  |         |   |      |                               |            |         |         |   |                              |   |            |  |         |                              |  |   |           
|-------------------------------------------------------------- |  | ------- | - | ---- | ----------------------------- | ---------- | ------- | ------- | - | ---------------------------- | - | ---------- |  | ------- | ---------------------------- |  | - | ----------
|                                                               |  | 2005    |   | 2004 |                               | 2003      
|                                                               |  | Options |   |      | Weighted-AverageExercisePrice |            | Options |         |   | WeightedAverageExercisePrice |   | Options    |  |         | WeightedAverageExercisePrice
|Outstanding beginning of year                                  |  | 393,863 |   |      | $                             | 25.58      |         | 343,208 |   |                              | $ | 23.89      |  | 278,058 |                              |  | $ | 20.63     
|Granted                                                        |  | 108,300 |   |      |                               | 26.28      |         | 102,150 |   |                              |   | 29.88      |  | 100,600 |                              |  |   | 30.25     
|Exercised                                                      |  | (5,800  | ) |      |                               | 20.13      |         | (30,930 | ) |                              |   | 20.06      |  | (31,200 | )                            |  |   | 15.49     
|Forfeited                                                      |  | (7,490  | ) |      |                               | 26.74      |         | (20,565 | ) |                              |   | 27.46      |  | (4,250  | )                            |  |   | 22.79     
|Expired                                                        |  | (20,250 | ) |      |                               | 27.83      |         |        |   |                              |   |           |  |        |                              |  |   |          
|                                                               |  |         |   |      |                               |            |         |         |   |                              |   |            |  |         |                              |  |   |           
|Outstanding at end of year                                     |  | 468,623 |   |      | $                             | 25.69      |         | 393,863 |   |                              | $ | 25.58      |  | 343,208 |                              |  | $ | 23.89     
|                                                               |  |         |   |      |                               |            |         |         |   |                              |   |            |  |         |                              |  |   |           
|Exercisable at end of year                                     |  | 302,151 |   |      | $                             | 24.92      |         | 255,960 |   |                              | $ | 24.66      |  | 220,853 |                              |  | $ | 23.43     
|                                                               |  |         |   |      |                               |            |         |         |   |                              |   |            |  |         |                              |  |   |           
|Weighted average contractual remaining life of outstanding     |  |         |   |      |                               | 5.15 years |         |         |   |                              |   | 5.09 years |  |         |                              |  |   | 5.35 years
|                                                               |  |         |   |      |                               |           
|Weighted average fair value of options granted during the year |  |         |   |      | $                             | 8.81       |         |         |   |                              | $ | 11.64      |  |         |                              |  | $ | 9.00      

(Continued)



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THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005, 2004 and 2003

(Dollar amounts in thousands, except per share amounts)

NOTE 10 - EMPLOYEE BENEFITS (Continued)

The following table details total options outstanding and exerciseable at December 31, 2005.



|                         |  |             |  |                                         |  |                              |  |         |  |                             
|------------------------ |  | ----------- |  | --------------------------------------- |  | ---------------------------- |  | ------- |  | ----------------------------
|                         |  | Outstanding |  | Exerciseable                           
|Range of Exercise Prices |  | Number      |  | WeightedAverageRemainingContractualLife |  | WeightedAverageExercisePrice |  | Number  |  | WeightedAverageExercisePrice
|$8-$9                    |  | 15,948      |  | 2.09                                    |  | 8.17                         |  | 15,948  |  | 8.17                        
|$19-$23                  |  | 136,460     |  | 3.44                                    |  | 20.25                        |  | 117,178 |  | 20.38                       
|$25-$27                  |  | 107,500     |  | 7.44                                    |  | 26.28                        |  | 36,750  |  | 26.07                       
|$29-$32                  |  | 208,715     |  | 5.36                                    |  | 30.28                        |  | 132,275 |  | 30.63                       
|                         |  |             |  |                                         |  |                              |  |         |  |                             
|Outstanding at year end  |  | 468,623     |  |                                         |  |                              |  | 302,151 |  |                             
|                         |  |             |  |                                         |  |                              |  |         |  |                             

Proceeds recorded upon exercise of the stock options include cash received from the option holder and the tax
benefit derived by the Company. During 2005, 2004 and 2003, proceeds from the exercise of stock options totaled $117, $617 and $484. The tax benefit recognized was $9, $84 and $75.

NOTE 11 - FEDERAL INCOME TAXES

Federal income taxes consist of the following components:



|                     |  |      |       |   |      |   |       |  |   |      
|-------------------- |  | ---- | ----- | - | ---- | - | ----- |  | - | -----
|                     |  | 2005 |       |   | 2004 |   | 2003 
|Income tax/(benefit) |  | $    | 4,863 |   |      | $ | 4,901 |  | $ | 4,240
|Currently payable    |  |      | (268  | ) |      |   | 28    |  |   | 446  
|                     |  |      |       |   |      |   |       |  |   |      
|Deferred             |  | $    | 4,595 |   |      | $ | 4,929 |  | $ | 4,686
|                     |  |      |       |   |      |   |       |  |   |      

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:



|                                                     |  |      |       |   |      |   |       |      |  |   |       |  
|---------------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                                     |  | 2005 |       |   | 2004 |   |       | 2003 | 
|Statutory rate applied to income before income taxes |  | $    | 5,153 |   |      | $ | 5,245 |      |  | $ | 4,915 |  
|Tax exempt income                                    |  |      | (188  | ) |      |   | (158  | )    |  |   | (176  | )
|Company owned life insurance income                  |  |      | (159  | ) |      |   | (163  | )    |  |   | (69   | )
|Low-income housing tax credit                        |  |      | (133  | ) |      |   |      |      |  |   |      |  
|Other                                                |  |      | (78   | ) |      |   | 5     |      |  |   | 16    |  
|                                                     |  |      |       |   |      |   |       |      |  |   |       |  
|                                                     |  | $    | 4,595 |   |      | $ | 4,929 |      |  | $ | 4,686 |  
|                                                     |  |      |       |   |      |   |       |      |  |   |       |  

(Continued)



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THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005, 2004 and 2003

(Dollar amounts in thousands, except per share amounts)

NOTE 11 - FEDERAL INCOME TAXES(Continued)

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



|                                                     |  |      |        |   |      |   |        |  
|---------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                                     |  | 2005 |        |   | 2004 |  
|Deferred tax assets from:                            |  |      |        |   |      |   |        |  
|Allowance for loan losses                            |  | $    | 2,600  |   |      | $ | 2,525  |  
|Benefit plans                                        |  |      | 293    |   |      |   | 243    |  
|Net unrealized loss on available for sale securities |  |      | 276    |   |      |   | 56     |  
|Other                                                |  |      | 80     |   |      |   | 73     |  
|                                                     |  |      |        |   |      |   |        |  
|                                                     |  |      | 3,249  |   |      |   | 2,897  |  
|Deferred tax liabilities for:                        |  |      |        |   |      |   |        |  
|FHLB stock dividends                                 |  |      | (775   | ) |      |   | (718   | )
|Premises and equipment                               |  |      | (13    | ) |      |   | (190   | )
|Acquisition intangibles                              |  |      | (949   | ) |      |   | (894   | )
|Other                                                |  |      | (3     | ) |      |   | (74    | )
|                                                     |  |      |        |   |      |   |        |  
|                                                     |  |      | (1,740 | ) |      |   | (1,876 | )
|                                                     |  |      |        |   |      |   |        |  
|Net deferred tax asset                               |  | $    | 1,509  |   |      | $ | 1,021  |  
|                                                     |  |      |        |   |      |   |        |  

NOTE 12 - EARNINGS PER SHARE

Earnings per share are computed based upon the weighted average number of shares outstanding during the period which were 5,909,087 for 2005, 5,950,508 for 2004 and 5,969,118 for 2003. Diluted earnings per share are
computed assuming that the stock options outstanding are exercised and the proceeds used entirely to reacquire shares at the years average price. For 2005, 2004 and 2003 this would result in an additional 37,814, 52,214 and 72,931 shares
outstanding. For 2005, 2004 and 2003, 290,970, 225,315 and 71,025 options were not considered, as they were not dilutive.

(Continued)



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THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005, 2004 and 2003

(Dollar amounts in thousands, except per share amounts)

NOTE 13 - 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 $914, $822 and
$818 for 2005, 2004 and 2003. Minimum lease payments at December 31, 2005 for all non-cancelable leases are as follows:



|                             |  |   |      
|---------------------------- |  | - | -----
|2006                         |  | $ | 788  
|2007                         |  |   | 627  
|2008                         |  |   | 599  
|2009                         |  |   | 520  
|2010                         |  |   | 337  
|Thereafter                   |  |   | 1,121
|                             |  |   |      
|Total minimum lease payments |  | $ | 3,992
|                             |  |   |      

On February 16, 2005, the Bank entered into an agreement to lease space for its cash management operation
center. The lease has a term of five years with an annual cost which escalates from $79 for the first year to $89 by the fifth year. The expense for this lease is included in the preceding minimum lease payments.

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.



|                                            |  |       |       |          |   |         |  |          |       |  |   |        
|------------------------------------------- |  | ----- | ----- | -------- | - | ------- |  | -------- | ----- |  | - | -------
|                                            |  | 2005  |       | 2004    
|                                            |  | Fixed |       | Variable |   | Fixed   |  | Variable
|                                            |  | Rate  |       | Rate     |   | Rate    |  | Rate    
|Commitments to make loans (at market rates) |  | $     | 1,177 |          | $ | 35,093  |  | $        | 3,163 |  | $ | 6,498  
|Unused lines of credit                      |  | $     |       |          | $ | 176,318 |  | $        |      |  | $ | 171,655
|Unused letters of credit                    |  | $     |       |          | $ | 66,453  |  | $        |      |  | $ | 60,668 

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 6.00% to 6.50% in 2005 and 4.88% to 6.25% in 2004.

(Continued)



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THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005, 2004 and 2003

(Dollar amounts in thousands, except per share amounts)

NOTE 13 - COMMITMENTS AND OFF BALANCE SHEET ACTIVITIES(Continued)

At December 31, 2005 and 2004, the Bank was required to have $4,296 and $29,976, 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 will grant to the Bank the naming rights for the new
Northern Kentucky University Arena to be constructed on the campus of the University for a term commencing immediately upon execution of the document and expiring twenty years after the opening of the Arena. In consideration the Bank will pay the
lesser of 10% of the total construction cost of the Arena or $6,000, 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.

NOTE 14 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements
can result in certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the financial statements. These guidelines and the regulatory framework for prompt corrective
action involve quantitative measures of capital, assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices as well as qualitative judgments by the regulators about components, risk weightings, and
other factors.

Compliance with these regulations can limit dividends paid by either entity. Both entities must comply with regulations that establish
minimum levels of capital adequacy. The Bank must also comply with capital requirements promulgated by the FDIC under its prompt corrective action rules. The Banks deposit insurance assessment rate is based, in part, on these
measurements. At December 31, 2005 and 2004, the Banks capital levels result in it being designated well capitalized under these guidelines. There are no conditions or events since that notification that management believes
have changed the institutions category.

(Continued)



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##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005, 2004 and 2003

(Dollar amounts in thousands, except per share amounts)

NOTE 14 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS(Continued)

The consolidated and the
Banks capital amounts and ratios, at December 31, 2005 and 2004 are presented below:



|                                              |  |        |        |       |                   |   |             |                   |        |                   |      |                             |  |        |  |       |  
|--------------------------------------------- |  | ------ | ------ | ----- | ----------------- | - | ----------- | ----------------- | ------ | ----------------- | ---- | --------------------------- |  | ------ |  | ----- | -
|                                              |  |        |        |       |                   |   |             |                   |        |                   |      | To Be WellCapitalized Under | 
|                                              |  |        |        |       |                   |   | For Capital |                   |        | Prompt Corrective |     
|                                              |  | Actual |        |       | Adequacy Purposes |   |             | Action Provisions |       
|                                              |  | Amount |        | Ratio |                   |   | Amount      |                   | Ratio  |                   |      | Amount                      |  | Ratio  | 
|2005                                          |  |        |        |       |                   |   |             |                   |        |                   |      |                             |  |        |  |       |  
|Total Capital to risk weighted assets         |  |        |        |       |                   |   |             |                   |        |                   |      |                             |  |        |  |       |  
|Consolidated                                  |  | $      | 92,734 |       | 10.66             | % |             | $                 | 69,568 |                   | 8.00 | %                           |  | N/A    |  | N/A   |  
|Bank                                          |  |        | 91,650 |       | 10.56             | % |             |                   | 69,463 |                   | 8.00 | %                           |  | 86,829 |  | 10.00 | %
|Tier 1 (Core) Capital to risk weighted assets |  |        |        |       |                   |   |             |                   |        |                   |      |                             |  |        |  |       |  
|Consolidated                                  |  | $      | 85,153 |       | 9.79              | % |             | $                 | 34,784 |                   | 4.00 | %                           |  | N/A    |  | N/A   |  
|Bank                                          |  |        | 84,069 |       | 9.68              | % |             |                   | 34,731 |                   | 4.00 | %                           |  | 52,097 |  | 6.00  | %
|Tier 1 (Core) Capital to average assets       |  |        |        |       |                   |   |             |                   |        |                   |      |                             |  |        |  |       |  
|Consolidated                                  |  | $      | 85,153 |       | 9.21              | % |             | $                 | 36,984 |                   | 4.00 | %                           |  | N/A    |  | N/A   |  
|Bank                                          |  |        | 84,069 |       | 9.10              | % |             |                   | 36,943 |                   | 4.00 | %                           |  | 46,178 |  | 5.00  | %
|                                              |  |        |        |       |                  
|                                              |  |        |        |       |                   |   |             |                   |        |                   |      | To Be WellCapitalized Under | 
|                                              |  |        |        |       |                   |   | For Capital |                   |        | Prompt Corrective |     
|                                              |  | Actual |        |       | Adequacy Purposes |   |             | Action Provisions |       
|                                              |  | Amount |        | Ratio |                   |   | Amount      |                   | Ratio  |                   |      | Amount                      |  | Ratio  | 
|2004                                          |  |        |        |       |                   |   |             |                   |        |                   |      |                             |  |        |  |       |  
|Total Capital to risk weighted assets         |  |        |        |       |                   |   |             |                   |        |                   |      |                             |  |        |  |       |  
|Consolidated                                  |  | $      | 84,998 |       | 10.38             | % |             | $                 | 65,520 |                   | 8.00 | %                           |  | N/A    |  | N/A   |  
|Bank                                          |  |        | 83,838 |       | 10.25             | % |             |                   | 65,418 |                   | 8.00 | %                           |  | 81,772 |  | 10.00 | %
|Tier 1 (Core) Capital to risk weighted assets |  |        |        |       |                   |   |             |                   |        |                   |      |                             |  |        |  |       |  
|Consolidated                                  |  | $      | 77,784 |       | 9.50              | % |             | $                 | 32,760 |                   | 4.00 | %                           |  | N/A    |  | N/A   |  
|Bank                                          |  |        | 76,624 |       | 9.37              | % |             |                   | 32,709 |                   | 4.00 | %                           |  | 49,063 |  | 6.00  | %
|Tier 1 (Core) Capital to average assets       |  |        |        |       |                   |   |             |                   |        |                   |      |                             |  |        |  |       |  
|Consolidated                                  |  | $      | 77,784 |       | 9.08              | % |             | $                 | 34,278 |                   | 4.00 | %                           |  | N/A    |  | N/A   |  
|Bank                                          |  |        | 76,624 |       | 8.96              | % |             |                   | 34,225 |                   | 4.00 | %                           |  | 42,781 |  | 5.00  | %

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.

(Continued)



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THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005, 2004 and 2003

(Dollar amounts in thousands, except per share amounts)

NOTE 14 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS(Continued)

During 2006, the Bank could,
without prior approval, declare dividends of approximately $15 million plus any 2006 net profits retained to the date of the dividend declaration.

On
November 29, 2004, the Companys Board of Directors approved the extension of the share repurchase program it previously approved in June of 2003. This repurchase program, which was scheduled to expire on December 31, 2004, expired on
December 31, 2005. The repurchase program authorized the repurchase up to 200,000 shares of the Companys outstanding common shares in the over-the-counter market from time to time. At December 31, 2005 a total of 135,000 of the
200,000 shares had been repurchased.

On December 16, 2005, the Companys Board of Directors approved a new share repurchase program. The
repurchase program will begin January 1, 2006 and expire on December 31, 2006. The repurchase program authorized the repurchase up to 200,000 shares of the Companys outstanding common shares in the over-the-counter market from time
to time. Any repurchases will be funded, as needed, by dividends from the Bank, or from the Companys revolving line of credit.

NOTE 15 -
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

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



|                                     |  |               |          |   |            |   |          |               |  |   |            |   |  |   |          |  
|------------------------------------ |  | ------------- | -------- | - | ---------- | - | -------- | ------------- |  | - | ---------- | - |  | - | -------- | -
|                                     |  | 2005          |          |   | 2004       |  
|                                     |  | CarryingValue |          |   | Fair Value |   |          | CarryingValue |  |   | Fair Value |  
|Financial assets                     |  |               |          |   |            |   |          |               |  |   |            |   |  |   |          |  
|Cash and cash equivalents            |  | $             | 71,344   |   |            | $ | 71,344   |               |  | $ | 47,406     |   |  | $ | 47,406   |  
|Interest-bearing deposits with banks |  |               | 100      |   |            |   | 100      |               |  |   |           |   |  |   |         |  
|Available-for-sale securities        |  |               | 79,552   |   |            |   | 79,552   |               |  |   | 52,204     |   |  |   | 52,204   |  
|Held-to-maturity securities          |  |               | 14,823   |   |            |   | 14,551   |               |  |   | 12,062     |   |  |   | 12,129   |  
|Loans held for sale                  |  |               | 1,609    |   |            |   | 1,630    |               |  |   | 1,391      |   |  |   | 1,408    |  
|Loans (net)                          |  |               | 723,478  |   |            |   | 713,392  |               |  |   | 711,943    |   |  |   | 707,291  |  
|Federal Home Loan Bank stock         |  |               | 4,283    |   |            |   | 4,283    |               |  |   | 4,075      |   |  |   | 4,075    |  
|Accrued interest receivable          |  |               | 3,811    |   |            |   | 3,811    |               |  |   | 3,065      |   |  |   | 3,065    |  
|                                     |  |               |          |  
|Financial liabilities                |  |               |          |   |            |   |          |               |  |   |            |   |  |   |          |  
|Deposits                             |  |               | (831,110 | ) |            |   | (831,036 | )             |  |   | (752,800   | ) |  |   | (752,776 | )
|Short-term borrowings                |  |               | (4,225   | ) |            |   | (4,225   | )             |  |   | (9,161     | ) |  |   | (9,161   | )
|Notes payable                        |  |               | (34,291  | ) |            |   | (34,022  | )             |  |   | (37,573    | ) |  |   | (37,729  | )
|Accrued interest payable             |  |               | (3,917   | ) |            |   | (3,917   | )             |  |   | (2,216     | ) |  |   | (2,216   | )

(Continued)



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THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005, 2004 and 2003

(Dollar amounts in thousands, except per share amounts)

NOTE 15 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS(Continued)

The estimated fair value
approximates carrying amount for all items except those described below. Estimated fair value for securities is based on quoted market values for the individual securities or for equivalent securities. 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 off-balance-sheet loan commitments are considered nominal.

NOTE 16 - 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, 2005 and 2004



|                                     |  |      |        |      |   |       
|------------------------------------ |  | ---- | ------ | ---- | - | ------
|                                     |  | 2005 |        | 2004
|Assets                               |  |      |        |      |   |       
|Cash                                 |  | $    | 460    |      | $ | 466   
|Investment in bank subsidiary        |  |      | 96,363 |      |   | 89,503
|Investment in trust                  |  |      | 526    |      |   | 526   
|Other assets                         |  |      | 791    |      |   | 818   
|                                     |  |      |        |      |   |       
|                                     |  | $    | 98,140 |      | $ | 91,313
|                                     |  |      |        |      |   |       
|Liabilities and shareholders equity |  |      |        |      |   |       
|Subordinated debentures              |  | $    | 17,526 |      | $ | 17,526
|Other liabilities                    |  |      | 167    |      |   | 123   
|                                     |  |      |        |      |   |       
|Total liabilities                    |  |      | 17,693 |      |   | 17,649
|Shareholders equity                 |  |      | 80,447 |      |   | 73,664
|                                     |  |      |        |      |   |       
|                                     |  | $    | 98,140 |      | $ | 91,313
|                                     |  |      |        |      |   |       

(Continued)



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THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005, 2004 and 2003

(Dollar amounts in thousands, except per share amounts)

NOTE 16 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)

CONDENSED STATEMENTS OF INCOME

Years ended December 31, 2005 and 2004



|                                                         |  |      |        |   |      |   |        |      |  |   |       |  
|-------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ----- | -
|                                                         |  | 2005 |        |   | 2004 |   |        | 2003 | 
|Dividends from subsidiary                                |  | $    | 3,700  |   |      | $ | 3,000  |      |  | $ | 1,300 |  
|Interest expense                                         |  |      | (1,146 | ) |      |   | (830   | )    |  |   | (795  | )
|Operating expenses                                       |  |      | (137   | ) |      |   | (175   | )    |  |   | (155  | )
|Tax benefit                                              |  |      | 440    |   |      |   | 352    |      |  |   | 333   |  
|                                                         |  |      |        |   |      |   |        |      |  |   |       |  
|Income before equity in undistributed income of the Bank |  |      | 2,857  |   |      |   | 2,347  |      |  |   | 683   |  
|                                                         |  |      |       
|Equity in undistributed income of the Bank               |  |      | 7,270  |   |      |   | 7,711  |      |  |   | 8,676 |  
|                                                         |  |      |        |   |      |   |        |      |  |   |       |  
|Net income                                               |  | $    | 10,127 |   |      | $ | 10,058 |      |  | $ | 9,359 |  
|                                                         |  |      |        |   |      |   |        |      |  |   |       |  

(Continued)



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THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005, 2004 and 2003

(Dollar amounts in thousands, except per share amounts)

NOTE 16 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)

CONDENSED STATEMENTS OF CASH FLOWS

Years ended December 31, 2005, 2004 and 2003



|                                                                          |  |      |        |   |      |   |        |      |  |   |        |  
|------------------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                          |  | 2005 |        |   | 2004 |   |        | 2003 | 
|Cash flows from operating activities                                      |  |      |        |   |      |   |        |      |  |   |        |  
|Net income                                                                |  | $    | 10,127 |   |      | $ | 10,058 |      |  | $ | 9,359  |  
|Adjustments to reconcile net income to net cash from operating activities |  |      |        |   |      |   |        |      |  |   |        |  
|Equity in undistributed income of the Bank                                |  |      | (7,270 | ) |      |   | (7,711 | )    |  |   | (8,676 | )
|Change in other assets and other liabilities                              |  |      | 80     |   |      |   | 225    |      |  |   | 222    |  
|                                                                          |  |      |        |   |      |   |        |      |  |   |        |  
|Net cash from operating activities                                        |  |      | 2,937  |   |      |   | 2,572  |      |  |   | 905    |  
|Cash flows from investing activities                                      |  |      |       |   |      |   |       |      |  |   |       |  
|                                                                          |  |      |       
|Cash flows from financing activities                                      |  |      |        |   |      |   |        |      |  |   |        |  
|Dividends paid                                                            |  |      | (1,772 | ) |      |   | (1,370 | )    |  |   | (1,015 | )
|Exercise of stock options                                                 |  |      | 117    |   |      |   | 617    |      |  |   | 484    |  
|Stock repurchase and retirement                                           |  |      | (1,288 | ) |      |   | (2,179 | )    |  |   | (410   | )
|                                                                          |  |      |        |   |      |   |        |      |  |   |        |  
|Net cash from financing activities                                        |  |      | (2,943 | ) |      |   | (2,932 | )    |  |   | (941   | )
|                                                                          |  |      |        |   |      |   |        |      |  |   |        |  
|Net change in cash                                                        |  |      | (6     | ) |      |   | (360   | )    |  |   | (36    | )
|                                                                          |  |      |       
|Cash at beginning of year                                                 |  |      | 466    |   |      |   | 826    |      |  |   | 862    |  
|                                                                          |  |      |        |   |      |   |        |      |  |   |        |  
|Cash at end of year                                                       |  | $    | 460    |   |      | $ | 466    |      |  | $ | 826    |  
|                                                                          |  |      |        |   |      |   |        |      |  |   |        |  

(Continued)



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THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005, 2004 and 2003

(Dollar amounts in thousands, except per share amounts)

NOTE 17 - OTHER COMPREHENSIVE INCOME (LOSS)

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



|                                                                   |  |      |      |   |      |   |      |      |  |   |      |  
|------------------------------------------------------------------ |  | ---- | ---- | - | ---- | - | ---- | ---- |  | - | ---- | -
|                                                                   |  | 2005 |      |   | 2004 |   |      | 2003 | 
|Unrealized holding gains (losses) on available-for-sale securities |  | $    | (630 | ) |      | $ | (351 | )    |  | $ | (345 | )
|Reclassification adjustment for losses (gains) realized in income  |  |      |     |   |      |   | (10  | )    |  |   |     |  
|                                                                   |  |      |      |   |      |   |      |      |  |   |      |  
|Net unrealized gains (losses)                                      |  |      | (630 | ) |      |   | (361 | )    |  |   | (345 | )
|Tax effect                                                         |  |      | 220  |   |      |   | 126  |      |  |   | 118  |  
|                                                                   |  |      |      |   |      |   |      |      |  |   |      |  
|                                                                   |  | $    | (410 | ) |      | $ | (235 | )    |  | $ | (227 | )
|                                                                   |  |      |      |   |      |   |      |      |  |   |      |  

(Continued)



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THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005, 2004 and 2003

(Dollar amounts in thousands, except per share amounts)

NOTE 18 - SELECTED QUARTERLY DATA (Unaudited)

Presented below is a summary of the consolidated quarterly financial
data for the years ended December 31, 2005 and 2004.



|              |  |                 |        |                   |   |                     |       |                           |         |            |   |                    |  |   |       |  |   |     |  |   |    
|------------- |  | --------------- | ------ | ----------------- | - | ------------------- | ----- | ------------------------- | ------- | ---------- | - | ------------------ |  | - | ----- |  | - | --- |  | - | ---
|              |  | 2005           
|              |  | Interest Income |        | Interest Expenset |   | Net Interest Income |       | Provision for Loan Losses |         | Net Income |   | Earnings Per Share
|              |  |                 |        |                   |   |                     | Basic |                           | Diluted
|Quarter ended |  |                 |        |                   |   |                     |       |                           |         |            |   |                    |  |   |       |  |   |     |  |   |    
|March 31      |  | $               | 11,436 |                   | $ | 3,525               |       | $                         | 7,911   |            | $ | 350                |  | $ | 2,545 |  | $ | .43 |  | $ | .43
|June 30       |  |                 | 12,289 |                   |   | 4,052               |       |                           | 8,237   |            |   | 475                |  |   | 2,615 |  |   | .44 |  |   | .44
|September 30  |  |                 | 13,089 |                   |   | 4,773               |       |                           | 8,316   |            |   | 650                |  |   | 2,468 |  |   | .42 |  |   | .42
|December 31   |  |                 | 13,941 |                   |   | 5,782               |       |                           | 8,159   |            |   | 350                |  |   | 2,499 |  |   | .42 |  |   | .42
|              | 
|              |  | 2004           
|              |  | Interest Income |        | Interest Expense  |   | Net Interest Income |       | Provision for Loan Losses |         | Net Income |   | Earnings Per Share
|              |  |                 |        |                   |   |                     | Basic |                           | Diluted
|Quarter ended |  |                 |        |                   |   |                     |       |                           |         |            |   |                    |  |   |       |  |   |     |  |   |    
|March 31      |  | $               | 9,777  |                   | $ | 2,713               |       | $                         | 7,064   |            | $ | 325                |  | $ | 2,311 |  | $ | .39 |  | $ | .38
|June 30       |  |                 | 10,041 |                   |   | 2,707               |       |                           | 7,334   |            |   | 350                |  |   | 2,602 |  |   | .44 |  |   | .43
|September 30  |  |                 | 10,632 |                   |   | 2,918               |       |                           | 7,714   |            |   | 500                |  |   | 2,465 |  |   | .42 |  |   | .41
|December 31   |  |                 | 11,141 |                   |   | 3,260               |       |                           | 7,881   |            |   | 500                |  |   | 2,680 |  |   | .45 |  |   | .45



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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, 2005. 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 2005, 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 Rules 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, 2005.
Managements assessment of the effectiveness of internal control over financial reporting as of December 31, 2005 has been audited by Crowe Chizek and Company LLC, an independent registered public accounting firm, as stated in their report
which is contained herein.



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



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##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL

CONTROL OVER FINANCIAL REPORTING

Board of Directors and Shareholders

The Bank of Kentucky Financial Corporation

Crestview Hills, Kentucky

We have audited
managements assessment, included in the accompanying Managements Report on Internal Control Over Financial Reporting, that The Bank of Kentucky Financial Corporation maintained effective internal control over financial reporting as of
December 31, 2005, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Bank of Kentucky Financial
Corporations management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on
managements assessment and an opinion on the effectiveness of the companys internal control over financial reporting based on our audit.

We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control
over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating managements assessment, testing and evaluating the design and operating
effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

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, managements assessment that The Bank of Kentucky Financial Corporation maintained effective internal control over financial
reporting as of December 31, 2005, is fairly stated, in all material respects, based on the COSO criteria. 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, 2005, based on the COSO criteria.

We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of The Bank of Kentucky Financial Corporation as of December 31, 2005 and 2004, 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, 2005, and our report dated February 11, 2006 expressed an unqualified opinion on those consolidated financial statements.

Crowe Chizek and Company LLC

Columbus,
Ohio

February 11, 2006



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Item 9B. Other Information

None.

PART III

Item 10. Directors and Executive Officers of the Registrant

Information in response to this item is incorporated by
reference from BKFCs definitive Proxy Statement for the 2005 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 2005 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 2005 Annual Meeting of Shareholders.

Item 13. Certain Relationships and Related Transactions

Information in response to this item is incorporated by reference from BKFCs definitive Proxy Statement for the 2005 Annual Meeting of Shareholders.



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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 2005 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.



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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 10th day of March 2006.



THE BANK OF KENTUCKY FINANCIAL CORPORATIONBy

/s/ Robert W. ZappRobert W. Zapp,President, Chief ExecutiveOfficer and a Director


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



|                                                                                                 |  |  |  |                                                                          |  | 
|------------------------------------------------------------------------------------------------ |  |  |  | ------------------------------------------------------------------------ |  | 
|/s/ Martin J. Gerrety Martin J.
Gerrety Treasurer March 10, 2006                                 |  |  |  | /s/ Charles M. Berger* Charles M.
Berger Director March 10, 2006         |  | 
|                                                                                                 |  |  | 
|/s/ Robert W. Zapp Robert W.
Zapp President, Chief Executive Officer and Director March 10, 2006 |  |  |  | /s/ Rodney S. Cain* Rodney S.
Cain Director March 10, 2006               |  | 
|                                                                                                 |  |  | 
|/s/ Mary Sue Rudicill* Mary Sue
Rudicill Director March 10, 2006                                 |  |  |  | /s/ John F. Miracle, M.D.* John F.
Miracle, M.D. Director March 10, 2006 |  | 
|                                                                                                 |  |  | 
|/s/ Harry J. Humpert* Harry J.
Humpert Director March 10, 2006                                   |  |  |  | /s/ Herbert H. Works* Herbert H.
Works Director March 10, 2006           |  | 
|                                                                                                 |  |  | 
|/s/ David E. Meyer* David E.
Meyer Director March 10, 2006                                       |  |  |  | /s/ R.C. Durr* R.C. Durr Chairman Emeritus, and Director March 10, 2006  |  | 
|                                                                                                 |  |  | 
|                                                                                                 |  |  |  | /s/ John P. Williams, Jr.* John P.
Williams, Jr. Director March 10, 2006 |  | 



|        |  |                                                           
|------- |  | ----------------------------------------------------------
|        | 
|*    By |  | /s/ Martin J. Gerrety                                     
|        |  | Martin J. Gerrety                                         
|        |  | Attorney-in-fact for the persons indicated above with
an *



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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           |  | Article of Incorporation of the Bank of Kentucky Financial Corporation(2)                                                                                                                                                                                                           
|              | 
|3.2           |  | 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)
|              | 
|10.1          |  | The Bank of Kentucky Financial Corporation 1997 Stock Option and Incentive Plan(5)                                                                                                                                                                                                  
|              | 
|10.2          |  | The Bank of Kentucky, Inc. Executive Deferred Contribution Plan(6)                                                                                                                                                                                                                  
|              | 
|10.3          |  | The Bank of Kentucky, Inc. Executive Private Pension Plan(6)                                                                                                                                                                                                                        
|              | 
|10.4          |  | The Bank of Kentucky, Inc. Group Insurance Endorsement Plan(6)                                                                                                                                                                                                                      
|              | 
|10.5          |  | 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(4)                                                                                                                  
|              | 
|21.1          |  | Subsidiaries of BKFC                                                                                                                                                                                                                                                                
|              | 
|23.1          |  | Consent of Crowe Chizek and Company LLC                                                                                                                                                                                                                                             
|              | 
|24            |  | Power of Attorney                                                                                                                                                                                                                                                                   
|              | 
|31.1          |  | Certifications of Robert W. Zapp, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                
|              | 
|31.2          |  | Certifications of Martin J. Gerrety, Treasurer and Assistant Secretary, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                   
|              | 
|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                                                                                                                                                                                                        

---

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

|(2) | Incorporated by reference to Form S-4, filed with the Commission on March 24, 2000.
|--- | -----------------------------------------------------------------------------------

|(3) | Incorporated by reference to Exhibit 2(d) of the Form 8-A, filed with the Commission on
April 28,1995.
|--- | ------------------------------------------------------------------------------------------------------

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

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

|(6) | Incorporated by reference to the Form 10-K, filed on March 12, 2004.
|--- | --------------------------------------------------------------------



82