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U.S. Securities and Exchange Commission

Washington, D.C. 20549





FORM 10-K





(Mark One)

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

For the Fiscal Year December 31, 2007

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





THE BANK OF KENTUCKY FINANCIAL CORPORATION

(Exact name of registrant as
specified in its charter)







|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Kentucky                                                       |  | 61-1256535                             
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)

111 Lookout Farm Drive, Crestview Hills, Kentucky 41017

(Address of principal executive offices) (Zip Code)

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

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

None

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

Common Stock, no par value

(Title of Class)





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

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

Indicate by check mark whether the registrant has (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No   ̈

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

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

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

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

The aggregate market value of the voting Common Stock held by non-affiliates of the registrant as of June 30, 2007 (the last business day of the registrants most recently completed second fiscal quarter) was approximately
$81,500,000.

At March 1, 2008, there were 5,645,107 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   |  |                                                                                                              |  | 3 
| |  | Item 1.  |  | Business                                                                                                     |  | 3 
| |  | Item 1A. |  | Risk Factors                                                                                                 |  | 18
| |  | Item 1B. |  | Unresolved Staff Comments                                                                                    |  | 21
| |  | Item 2.  |  | Properties                                                                                                   |  | 21
| |  | Item 3.  |  | Legal Proceedings                                                                                            |  | 21
| |  | Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                          |  | 21
| |  |          | 
| |  | PART II  |  |                                                                                                              |  | 22
| |  | Item 5.  |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 22
| |  | Item 6.  |  | Selected Financial Data                                                                                      |  | 24
| |  | Item 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operation                         |  | 25
| |  | Item 7A. |  | Quantitative and Qualitative Disclosure about Market Risk                                                    |  | 43
| |  | Item 8.  |  | Financial Statements and Supplementary Data                                                                  |  | 46
| |  | Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  | 86
| |  | Item 9A. |  | Controls and Procedures                                                                                      |  | 86
| |  | Item 9B. |  | Other Information                                                                                            |  | 86
| |  |          | 
| |  | PART III |  |                                                                                                              |  | 87
| |  | Item 10. |  | Directors, Executive Officers and Corporate Governance                                                       |  | 87
| |  | Item 11. |  | Executive Compensation                                                                                       |  | 87
| |  | Item 12. |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 87
| |  | Item 13. |  | Certain Relationships and Related Transactions, and Director Independence                                    |  | 87
| |  | Item 14. |  | Principal Accountant Fees and Services                                                                       |  | 87
| |  |          | 
| |  | PART IV  |  |                                                                                                              |  | 87
| |  | Item 15. |  | Exhibits and Financial Statement Schedules                                                                   |  | 87

|                  |  |  |  |  |  |   
|----------------- |  |  |  |  |  | --
|                  |  |  | 
|SIGNATURES        |  |  |  |  |  | 88
|INDEX TO EXHIBITS |  |  |  |  |  | 89

|             |  |  |  |                                                                                                                        |  | 
|------------ |  |  |  | ---------------------------------------------------------------------------------------------------------------------- |  | 
|Exhibit 31.1 |  |  |  | CERTIFICATIONS                                                                                                         |  | 
|Exhibit 31.2 |  |  |  | CERTIFICATIONS                                                                                                         |  | 
|Exhibit 21   |  |  |  | SUBSIDIARIES OF THE REGISTRANT                                                                                         |  | 
|Exhibit 23   |  |  |  | CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                                                               |  | 
|Exhibit 32.1 |  |  |  | CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 |  | 
|Exhibit 32.2 |  |  |  | CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 |  | 



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PART I



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

General

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

Formed in 1990, the Bank provides 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.

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

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 Securities and Exchange Commission (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 free of charge upon
request.



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Lending Activities

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

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



|                                        |  |                        |         |   |       |   |        |      |         |  |       |        |  |      |         |  |        |   |   |   |         |        |       |   |  |   |         |  |       |  
|--------------------------------------- |  | ---------------------- | ------- | - | ----- | - | ------ | ---- | ------- |  | ----- | ------ |  | ---- | ------- |  | ------ | - | - | - | ------- | ------ | ----- | - |  | - | ------- |  | ----- | -
|                                        |  | As of December 31,     |        
|                                        |  | 2007                   |         |   | 2006  |   |        | 2005 |         |  | 2004  |        |  | 2003 |        
|                                        |  | Amount                 |         | % |       |   | Amount |      | %       |  |       | Amount |  | %    |         |  | Amount |   | % |   |         | Amount |       | % | 
|                                        |  | (Dollars in thousands) |        
|Type of Loan:                           |  |                        |         |   |       |   |        |      |         |  |       |        |  |      |         |  |        |   |   |   |         |        |       |   |  |   |         |  |       |  
|Nonresidential real estate loans        |  | $                      | 387,234 |   | 40.7  | % |        | $    | 359,943 |  | 44.2  | %      |  | $    | 295,326 |  | 40.4   | % |   | $ | 290,684 |        | 40.3  | % |  | $ | 249,683 |  | 37.8  | %
|Residential real estate loans           |  |                        | 215,915 |   | 22.7  |   |        |      | 181,534 |  | 22.3  |        |  |      | 183,644 |  | 25.1   |   |   |   | 188,140 |        | 26.1  |   |  |   | 175,492 |  | 26.5  |  
|Commercial loans                        |  |                        | 182,431 |   | 19.2  |   |        |      | 151,213 |  | 18.6  |        |  |      | 136,693 |  | 18.7   |   |   |   | 130,760 |        | 18.2  |   |  |   | 130,022 |  | 19.7  |  
|Consumer loans                          |  |                        | 20,601  |   | 2.2   |   |        |      | 19,260  |  | 2.3   |        |  |      | 20,046  |  | 2.7    |   |   |   | 20,606  |        | 2.9   |   |  |   | 19,367  |  | 2.9   |  
|Construction and land development loans |  |                        | 134,807 |   | 14.2  |   |        |      | 95,812  |  | 11.8  |        |  |      | 89,847  |  | 12.3   |   |   |   | 84,690  |        | 11.8  |   |  |   | 82,356  |  | 12.5  |  
|Municipal obligations                   |  |                        | 9,354   |   | 1.0   |   |        |      | 6,970   |  | 0.8   |        |  |      | 6,171   |  | 0.8    |   |   |   | 5,074   |        | 0.7   |   |  |   | 4,183   |  | 0.6   |  
|                                        |  |                        |         |   |       |   |        |      |         |  |       |        |  |      |         |  |        |   |   |   |         |        |       |   |  |   |         |  |       |  
|Total loans                             |  | $                      | 950,342 |   | 100.0 | % |        | $    | 814,732 |  | 100.0 | %      |  | $    | 731,727 |  | 100.0  | % |   | $ | 719,954 |        | 100.0 | % |  | $ | 661,103 |  | 100.0 | %
|                                        |  |                        |         |   |       |   |        |      |         |  |       |        |  |      |         |  |        |   |   |   |         |        |       |   |  |   |         |  |       |  
|Less:                                   |  |                        |         |   |       |   |        |      |         |  |       |        |  |      |         |  |        |   |   |   |         |        |       |   |  |   |         |  |       |  
|Deferred loan fees                      |  |                        | 628     |   |       |   |        |      | 631     |  |       |        |  |      | 668     |  |        |   |   |   | 797     |        |       |   |  |   | 661     |  |       |  
|Allowance for loan losses               |  |                        | 8,505   |   |       |   |        |      | 6,918   |  |       |        |  |      | 7,581   |  |        |   |   |   | 7,214   |        |       |   |  |   | 6,855   |  |       |  
|                                        |  |                        |         |   |       |   |        |      |         |  |       |        |  |      |         |  |        |   |   |   |         |        |       |   |  |   |         |  |       |  
|Net loans                               |  | $                      | 941,209 |   |       |   |        | $    | 807,183 |  |       |        |  | $    | 723,478 |  |        |   |   | $ | 711,943 |        |       |   |  | $ | 653,587 |  |       |  
|                                        |  |                        |         |   |       |   |        |      |         |  |       |        |  |      |         |  |        |   |   |   |         |        |       |   |  |   |         |  |       |  



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Loan Maturity Schedule. The following table sets forth certain information, as of
December 31, 2007, 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 2007:



|                                        |  |                        |         |                            |   |                  |  |       |     |  |   |        
|--------------------------------------- |  | ---------------------- | ------- | -------------------------- | - | ---------------- |  | ----- | --- |  | - | -------
|                                        |  | Due within one year    |         | Due after 1 yearto 5 years |   | Due after 5years |  | Total
|                                        |  | (Dollars in thousands)
|Commercial loans                        |  | $                      | 99,557  |                            | $ | 82,006           |  | $     | 868 |  | $ | 182,431
|Construction and land development loans |  |                        | 134,807 |                            |   |                 |  |       |    |  |   | 134,807
|                                        |  |                        |         |                            |   |                  |  |       |     |  |   |        
|Total                                   |  | $                      | 234,364 |                            | $ | 82,006           |  | $     | 868 |  | $ | 317,238
|                                        |  |                        |         |                            |   |                  |  |       |     |  |   |        
|Interest sensitivity:                   |  |                        |         |                            |   |                  |  |       |     |  |   |        
|With fixed rates                        |  |                        |         |                            | $ | 48,653           |  | $     | 245 |  |   |        
|With variable rates                     |  |                        |         |                            |   | 33,353           |  |       | 623 |  |   |        
|                                        |  |                        |         |                            |   |                  |  |       |     |  |   |        
|Total                                   |  |                        |         |                            | $ | 82,006           |  | $     | 868 |  |   |        
|                                        |  |                        |         |                            |   |                  |  |       |     |  |   |        

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

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

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

At December 31, 2007, the Bank had a total of $387 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 41% of the Banks total loans at such date, $1.69 million of which were non-performing.

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

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

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

The aggregate amount of the Banks residential real estate loans equaled approximately $216 million at December 31, 2007, and represented 23%
of total loans at such date. At December 31, 2007, the Bank had $3.47 million of non-performing loans of this type.



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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, 2007, these loans totaled $2.67 million.

Commercial Loans. The Bank offers commercial loans to individuals and businesses located throughout Northern Kentucky and the metropolitan area.
The typical commercial borrower is a small to mid-sized company with annual sales under $10 million. The majority of commercial loans are made with adjustable rates of interest tied to the Banks prime interest rate. Commercial loans typically
have terms of one to five years. Commercial lending entails significant risks. Such loans are subject to greater risk of default during periods of adverse economic conditions. Because such loans are secured by equipment, inventory, accounts
receivable and other non-real estate assets, the collateral may not be sufficient to ensure full payment of the loan in the event of a default. To reduce such risk, the Bank generally obtains personal guarantees from one or more of the principals
backing the borrower. At December 31, 2007, the Bank had $182 million, or 19% of total loans, invested in commercial loans, $1.21 million 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, 2007, the Bank had $21
million, or 2% of total loans, invested in consumer loans, $192,000 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 dispose of the unfinished project. At December 31, 2007, a
total of $135 million, or approximately 14% of the Banks total loans, consisted of construction and land development loans, $2.49 million of which were non-performing.

Municipal Obligations. The Bank makes loans to various Kentucky municipalities for various purposes, including the construction of municipal
buildings and equipment purchases. Loans made to municipalities are usually secured by mortgages on the properties financed 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, 2007, the Bank had $9 million, or 1.0% of total loans, invested in municipal obligation loans, none of which were non-performing.

Loan Solicitation and Processing. The Banks loan originations are developed from a number of sources, including continuing business with depositors, borrowers and real estate developers, periodic
newspaper and radio advertisements, solicitations by the Banks lending staff, walk-in customers, director referrals and an officer call program. For nonresidential real estate loans, the Bank obtains information with respect to the credit and
business history of the borrower and prior projects completed by the borrower. Personal guarantees of one or more principals of the borrower are generally obtained. An environmental study of such real estate is normally conducted. Upon the
completion of the appraisal of the nonresidential real estate and the receipt of information on the borrower, the loan application is submitted to the Banks Loan Committee if it exceeds the officers lending authority for approval or
rejection. If, however, the loan relationship is in excess of $1.75 million, the loan will be submitted to the Banks Executive Committee for approval or rejection.



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

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

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

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

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

Loans that are 90 days past due are not 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 one to nine for each loan. Classified commercial loans are those with risk ratings of seven or higher. Each loan rating is determined by analyzing the borrowers management, financial ability,
sales trends, operating results, financial conditions, asset protection, contingencies, payment history, financial flexibility, credit enhancements and other relevant factors. Loans that fall into the classified categories are monitored on a regular
basis and proper action is taken to minimize the Banks exposure. Losses or partial losses will be taken when they are recognized.

The Banks risk rating system 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 as a 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.

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.



7



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##### Table of Contents

The aggregate amounts of the Banks classified assets at December 31, 2007 and 2006 were as
follows:



|                            |  |                        |        |          |   |       
|--------------------------- |  | ---------------------- | ------ | -------- | - | ------
|                            |  | 12/31/07               |        | 12/31/06
|                            |  | (Dollars in thousands)
|Substandard (risk rating 7) |  | $                      | 21,248 |          | $ | 12,370
|Doubtful (risk rating 8)    |  |                        | 3,040  |          |   | 1,519 
|Loss (risk rating 9)        |  |                        |       |          |   |      
|                            |  |                        |        |          |   |       
|Total classified assets     |  | $                      | 24,288 |          | $ | 13,889
|                            |  |                        |        |          |   |       

The following table reflects the amount of loans that are in delinquent status of 30 to 89 days as
of December 31, 2007 and 2006. Loans that are delinquent 90 days or more or are in non-accrual status are detailed below.



|                                                             |  |                        |       |   |          |   |        |  
|------------------------------------------------------------ |  | ---------------------- | ----- | - | -------- | - | ------ | -
|                                                             |  | 12/31/07               |       |   | 12/31/06 |  
|                                                             |  | (Dollars in thousands) |      
|Loans delinquent                                             |  |                        |       |   |          |   |        |  
|30 to 59 days                                                |  | $                      | 5,649 |   |          | $ | 12,340 |  
|60 to 89 days                                                |  |                        | 920   |   |          |   | 2,102  |  
|                                                             |  |                        |       |   |          |   |        |  
|Total delinquent loans                                       |  | $                      | 6,569 |   |          | $ | 14,442 |  
|                                                             |  |                        |       |   |          |   |        |  
|Ratio of total delinquent loans 30 to 89 days to total loans |  |                        | 0.69  | % |          |   | 1.77   | %
|                                                             |  |                        |       |   |          |   |        |  

The following table sets forth information with respect to the Banks non-performing 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, 2007, the Bank had designated $7.9 million as impaired loans, a portion of these loans were included in the
non-accrual and 90 days past due totals below. Management evaluates for impairment all loans selected for specific review during the quarterly allowance analysis. Generally, that analysis will not address smaller balance consumer credits.



|                                                                 |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|---------------------------------------------------------------- |  | ---------------------- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | - |  | ---- | ----- | - |  | - | ----- | -
|                                                                 |  | At December 31,        |      
|                                                                 |  | 2007                   |       |   | 2006 |   |       | 2005 |  |   | 2004  |   |  | 2003 |      
|                                                                 |  | (Dollars in thousands) |      
|Loans accounted for on a non-accrual basis:(1)                   |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Real estate:                                                     |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Nonresidential                                                   |  | $                      | 1,391 |   |      | $ | 318   |      |  | $ | 2,996 |   |  | $    | 1,319 |   |  | $ | 489   |  
|Residential                                                      |  |                        | 1,731 |   |      |   | 1,630 |      |  |   | 95    |   |  |      | 941   |   |  |   | 181   |  
|Construction                                                     |  |                        | 2,281 |   |      |   | 601   |      |  |   | 941   |   |  |      | 217   |   |  |   | 174   |  
|Commercial                                                       |  |                        | 851   |   |      |   | 356   |      |  |   | 2,664 |   |  |      | 1,010 |   |  |   | 622   |  
|Consumer and other                                               |  |                        | 135   |   |      |   |      |      |  |   |      |   |  |      |      |   |  |   |      |  
|                                                                 |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Total                                                            |  | $                      | 6,389 |   |      | $ | 2,905 |      |  | $ | 6,696 |   |  | $    | 3,487 |   |  | $ | 1,466 |  
|                                                                 |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Accruing loans which are contractually past due 90 days or more: |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Real estate:                                                     |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Nonresidential                                                   |  | $                      | 297   |   |      | $ | 271   |      |  | $ | 67    |   |  | $    | 361   |   |  | $ | 800   |  
|Residential                                                      |  |                        | 1,739 |   |      |   | 799   |      |  |   | 1,225 |   |  |      | 1,115 |   |  |   | 843   |  
|Construction                                                     |  |                        | 205   |   |      |   |      |      |  |   | 114   |   |  |      |      |   |  |   |      |  
|Commercial                                                       |  |                        | 360   |   |      |   | 959   |      |  |   | 850   |   |  |      | 113   |   |  |   | 310   |  
|Consumer and other loans                                         |  |                        | 57    |   |      |   | 39    |      |  |   | 93    |   |  |      | 69    |   |  |   | 54    |  
|                                                                 |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Total                                                            |  | $                      | 2,658 |   |      | $ | 2,068 |      |  | $ | 2,349 |   |  | $    | 1,658 |   |  | $ | 2,007 |  
|                                                                 |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Total of non-accrual and 90 days past due loans                  |  | $                      | 9,047 |   |      | $ | 4,973 |      |  | $ | 9,045 |   |  | $    | 5,145 |   |  | $ | 3,473 |  
|                                                                 |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Percentage of total loans                                        |  |                        | 0.95  | % |      |   | 0.61  | %    |  |   | 1.24  | % |  |      | 0.72  | % |  |   | 0.53  | %
|                                                                 |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Other non-performing assets(2)                                   |  | $                      | 4,117 |   |      | $ | 2,981 |      |  | $ | 5,063 |   |  | $    | 1,434 |   |  | $ | 1,239 |  
|                                                                 |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  



|(1) | Non-accrual status denotes loans in 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 accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual method.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



8



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##### Table of Contents

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, 2007, the Banks allowance for loan losses totaled $8.5 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 provides an allocation of the Banks allowance for loan losses as of each of the following dates:



|                                |  |                        |       |      |   |       |  |      |       |      |   |       |  |   |      
|------------------------------- |  | ---------------------- | ----- | ---- | - | ----- |  | ---- | ----- | ---- | - | ----- |  | - | -----
|                                |  | At December 31,       
|                                |  | 2007                   |       | 2006 |   | 2005  |  | 2004 |       | 2003
|                                |  | (Dollars in thousands)
|Loan type:                      |  |                        |       |      |   |       |  |      |       |      |   |       |  |   |      
|Commercial                      |  | $                      | 4,772 |      | $ | 3,360 |  | $    | 3,827 |      | $ | 3,537 |  | $ | 3,369
|Real estate                     |  |                        | 2,851 |      |   | 2,520 |  |      | 2,571 |      |   | 2,528 |  |   | 2,499
|Consumer, CRA and credit cards  |  |                        | 882   |      |   | 1,038 |  |      | 1,183 |      |   | 1,149 |  |   | 987  
|                                |  |                        |       |      |   |       |  |      |       |      |   |       |  |   |      
|Total allowance for loan losses |  | $                      | 8,505 |      | $ | 6,918 |  | $    | 7,581 |      | $ | 7,214 |  | $ | 6,855
|                                |  |                        |       |      |   |       |  |      |       |      |   |       |  |   |      

The Bank increased its allowance for loan losses from $6.9 million at December 31, 2006, to
$8.5 million at December 31, 2007, due primarily to the amount of the allowance allocated to impaired loans and the First Bank acquisition. Because the loan loss allowance is based on estimates, it is monitored on an ongoing basis and adjusted
as necessary to provide an adequate allowance. For further discussion on the allowance for loan losses see Management Discussion and Analysis of this Form 10-K.



9



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##### Table of Contents

Investment Activities

The investment policy of the Bank is both to manage the utilization of excess funds and to provide for the liquidity needs of the Bank as loan demand and daily operations dictate. The Banks federal income tax
position is also 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,       
|                                    |  | 2007                   |         | 2006      |   | 2005         
|                                    |  | AmortizedCost          |         | FairValue |   | AmortizedCost |  | FairValue |         | AmortizedCost |   | FairValue
|                                    |  | (Dollars in thousands)
|Held-to-maturity securities:        |  |                        |         |           |   |               |  |           |         |               |   |           |  |   |        |  |   |       
|Municipal and other obligations     |  | $                      | 16,230  |           | $ | 16,170        |  | $         | 12,028  |               | $ | 11,815    |  | $ | 14,823 |  | $ | 14,551
|                                    |  |                        |         |           |   |               |  |           |         |               |   |           |  |   |        |  |   |       
|Total held-to-maturity securities   |  | $                      | 16,230  |           | $ | 16,170        |  | $         | 12,028  |               | $ | 11,815    |  | $ | 14,823 |  | $ | 14,551
|                                    |  |                        |         |           |   |               |  |           |         |               |   |           |  |   |        |  |   |       
|Available-for-sale securities:      |  |                        |         |           |   |               |  |           |         |               |   |           |  |   |        |  |   |       
|U.S.Treasury                        |  |                        | 39,999  |           |   | 39,995        |  |           | 14,995  |               |   | 14,996    |  |   |       |  |   |      
|U.S. Government agency obligations  |  |                        | 110,444 |           |   | 110,774       |  |           | 90,958  |               |   | 90,575    |  |   | 78,931 |  |   | 78,147
|Corporate obligations               |  |                        | 1,300   |           |   | 1,300         |  |           | 1,355   |               |   | 1,355     |  |   | 1,405  |  |   | 1,405 
|                                    |  |                        |         |           |   |               |  |           |         |               |   |           |  |   |        |  |   |       
|Total available-for-sale securities |  | $                      | 151,743 |           | $ | 152,069       |  | $         | 107,308 |               | $ | 106,926   |  | $ | 80,336 |  | $ | 79,552
|                                    |  |                        |         |           |   |               |  |           |         |               |   |           |  |   |        |  |   |       

The following table sets forth the carrying value of the Banks securities portfolio at
December 31, 2007 by contractual or expected maturity. Securities with call features are presented at call date if management expects that option to be exercised.



|                                    |  |                         |        |              |                                         |   |                        |                                         |              |  |                         |               |  |              |        |  |               |   |              |   |       |               |      |              |  |   |         |  |      |  
|----------------------------------- |  | ----------------------- | ------ | ------------ | --------------------------------------- | - | ---------------------- | --------------------------------------- | ------------ |  | ----------------------- | ------------- |  | ------------ | ------ |  | ------------- | - | ------------ | - | ----- | ------------- | ---- | ------------ |  | - | ------- |  | ---- | -
|                                    |  | Maturing withinone year |        |              | Maturing after oneand within five years |   |                        | Maturing after fiveand within ten years |              |  | Maturing afterten years |               |  | Total        |       
|                                    |  | AmortizedCost           |        | AverageYield |                                         |   | AmortizedCost          |                                         | AverageYield |  |                         | AmortizedCost |  | AverageYield |        |  | AmortizedCost |   | AverageYield |   |       | AmortizedCost |      | AverageYield | 
|                                    |  |                         |        |              |                                         |   | (Dollars in thousands) |                                         |              |  |                         |               |  |              |        |  |               |   |              |  
|Held-to-maturity:                   |  |                         |        |              |                                         |   |                        |                                         |              |  |                         |               |  |              |        |  |               |   |              |   |       |               |      |              |  |   |         |  |      |  
|Municipal and other obligations (1) |  | $                       | 3,147  |              | 3.08                                    | % |                        | $                                       | 8,134        |  | 3.64                    | %             |  | $            | 4,949  |  | 3.29          | % |              | $ |      |               | 0.00 | %            |  | $ | 16,230  |  | 3.42 | %
|                                    |  |                         |        |              |                                         |   |                        |                                         |              | 
|Available for sale:                 |  |                         |        |              |                                         |   |                        |                                         |              |  |                         |               |  |              |        |  |               |   |              |   |       |               |      |              |  |   |         |  |      |  
|U.S. Treasury                       |  |                         | 39,995 |              | 0.91                                    | % |                        |                                         |             |  | 0.00                    | %             |  |              |       |  | 0.00          | % |              |   |      |               | 0.00 | %            |  |   | 39,995  |  | 0.91 | %
|Corporate obligations               |  |                         |       |              | 0.00                                    | % |                        |                                         |             |  | 0.00                    | %             |  |              |       |  | 0.00          | % |              |   | 1,300 |               | 5.11 | %            |  |   | 1,300   |  | 5.11 | %
|U.S. Government agency obligations  |  |                         | 69,265 |              | 4.45                                    | % |                        |                                         | 24,244       |  | 5.32                    | %             |  |              | 17,265 |  | 4.93          | % |              |   |      |               | 0.00 | %            |  |   | 110,774 |  | 4.71 | %



|(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.



10



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##### Table of Contents

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, 2007, the Bank had $17.8 million in retail repurchase agreements.

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

Deposits. Deposits are attracted principally from within the Banks designated lending area through the offering of numerous
deposit instruments, including regular passbook savings accounts, negotiable order of withdrawal (NOW) accounts, money market deposit accounts, term certificate accounts and individual retirement accounts (IRAs). Interest
rates paid, maturity terms, service fees and withdrawal penalties for the various types of accounts are established periodically by the Banks Board of Directors based on the Banks liquidity requirements, growth goals and market trends.
The Bank may on occasion use brokers to attract deposits. The Bank did not have any brokered deposits as of December 31, 2007.

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, 2007:



|                           |  |                      |        
|-------------------------- |  | -------------------- | -------
|Maturity                   |  | At December 31, 2007
|                           |  | (In thousands)      
|Three months or less       |  | $                    | 35,726 
|Over 3 months to 6 months  |  |                      | 35,075 
|Over 6 months to 12 months |  |                      | 36,503 
|Over 12 months             |  |                      | 18,273 
|                           |  |                      |        
|Total                      |  | $                    | 125,577
|                           |  |                      |        

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, 2007, 2006 and 2005, along with the average aggregate balances of the Banks outstanding short-term borrowings for such
periods:



|                                                   |  |                                |        |   |      |   |        |      |  |   |        |  
|-------------------------------------------------- |  | ------------------------------ | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                   |  | During year ended December 31, |       
|                                                   |  | 2007                           |        |   | 2006 |   |        | 2005 | 
|                                                   |  | (Dollars in thousands)         |       
|Maximum balance at any month-end during the period |  | $                              | 22,789 |   |      | $ | 46,486 |      |  | $ | 39,656 |  
|Average balance                                    |  |                                | 17,371 |   |      |   | 16,904 |      |  |   | 9,632  |  
|Weighted average interest rate                     |  |                                | 3.75   | % |      |   | 4.81   | %    |  |   | 2.97   | %

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



|                                  |  |              |        |   |      |   |        |      |  |   |       |  
|--------------------------------- |  | ------------ | ------ | - | ---- | - | ------ | ---- |  | - | ----- | -
|                                  |  | December 31, |       
|                                  |  | 2007         |        |   | 2006 |   |        | 2005 | 
|Short-term borrowings outstanding |  | $            | 22,789 |   |      | $ | 15,960 |      |  | $ | 4,225 |  
|Weighted average interest rate    |  |              | 3.12   | % |      |   | 3.96   | %    |  |   | 3.21  | %



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##### Table of Contents

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. For more information on the Banks interest rate risk see the Asset/Liability Management and Market Risk section of the Managements Discussion and Analysis of Financial Condition.

The following table sets forth the amounts of the Banks interest-earning assets and interest-bearing liabilities outstanding at
December 31, 2007, 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 a twelve-month period by $240.6 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 negative gap of $152.6 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.



12



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##### Table of Contents

|                                                                              |  |                        |          |    |               |   |          |                   |  |   |              |   |  |       |         |   |  |   |          
|----------------------------------------------------------------------------- |  | ---------------------- | -------- | -- | ------------- | - | -------- | ----------------- |  | - | ------------ | - |  | ----- | ------- | - |  | - | ---------
|                                                                              |  | Within 3 months        |          |    | 4 - 12 months |   |          | 1 through 5 years |  |   | Over 5 years |   |  | Total
|                                                                              |  | (Dollars in thousands) |          |    |              
|Interest-earning assets:                                                      |  |                        |          |    |               |   |          |                   |  |   |              |   |  |       |         |   |  |   |          
|Federal funds sold                                                            |  | $                      | 569      |    |               | $ |         |                   |  | $ |             |   |  | $     |        |   |  | $ | 569      
|Interest bearing deposits with banks                                          |  |                        | 100      |    |               |   |         |                   |  |   |             |   |  |       |        |   |  |   | 100      
|Securities                                                                    |  |                        | 96,378   |    |               |   | 10,060   |                   |  |   | 37,154       |   |  |       | 29,473  |   |  |   | 173,065  
|Loans receivable (1)                                                          |  |                        | 176,477  |    |               |   | 364,449  |                   |  |   | 394,092      |   |  |       | 16,132  |   |  |   | 951,150  
|                                                                              |  |                        |          |    |               |   |          |                   |  |   |              |   |  |       |         |   |  |   |          
|Total interest-earning assets                                                 |  |                        | 273,524  |    |               |   | 374,509  |                   |  |   | 431,246      |   |  |       | 45,605  |   |  |   | 1,124,884
|                                                                              |  |                        |          |    |               |   |          |                   |  |   |              |   |  |       |         |   |  |   |          
|Interest-bearing liabilities:                                                 |  |                        |          |    |               |   |          |                   |  |   |              |   |  |       |         |   |  |   |          
|Savings deposits                                                              |  |                        | 30,530   |    |               |   |         |                   |  |   |             |   |  |       |        |   |  |   | 30,530   
|Money market deposit accounts                                                 |  |                        | 244,860  |    |               |   |         |                   |  |   |             |   |  |       |        |   |  |   | 244,860  
|NOW accounts                                                                  |  |                        | 245,604  |    |               |   |         |                   |  |   |             |   |  |       |        |   |  |   | 245,604  
|Certificates of deposit                                                       |  |                        | 75,665   |    |               |   | 193,105  |                   |  |   | 50,807       |   |  |       |        |   |  |   | 319,577  
|IRAs                                                                          |  |                        | 9,470    |    |               |   | 31,577   |                   |  |   | 12,883       |   |  |       |        |   |  |   | 53,930   
|Federal funds purchased                                                       |  |                        | 2,770    |    |               |   |         |                   |  |   |             |   |  |       |        |   |  |   | 2,770    
|Repurchase agreements                                                         |  |                        | 17,819   |    |               |   |         |                   |  |   |             |   |  |       |        |   |  |   | 17,819   
|Other borrowings                                                              |  |                        | 2,200    |    |               |   |         |                   |  |   |             |   |  |       |        |   |  |   | 2,200    
|Notes payable                                                                 |  |                        | 35,000   |    |               |   |         |                   |  |   | 6,000        |   |  |       | 1,340   |   |  |   | 42,340   
|                                                                              |  |                        |          |    |               |   |          |                   |  |   |              |   |  |       |         |   |  |   |          
|Total interest-bearing liabilities                                            |  |                        | 663,918  |    |               |   | 224,682  |                   |  |   | 69,690       |   |  |       | 1,340   |   |  |   | 959,630  
|                                                                              |  |                        |          |    |               |   |          |                   |  |   |              |   |  |       |         |   |  |   |          
|Interest-earning assets less                                                  |  |                        |          |    |               |   |          |                   |  |   |              |   |  |       |         |   |  |   |          
|Interest-bearing liabilities                                                  |  | $                      | (390,394 | )  |               | $ | 149,827  |                   |  | $ | 361,556      |   |  | $     | 44,265  |   |  | $ | 165,254  
|                                                                              |  |                        |          |    |               |   |          |                   |  |   |              |   |  |       |         |   |  |   |          
|Cumulative interest-rate sensitivity gap                                      |  | $                      | (390,394 | )  |               | $ | (240,567 | )                 |  | $ | 120,989      |   |  | $     | 165,254 |   |  |   |          
|                                                                              |  |                        |          |    |               |   |          |                   |  |   |              |   |  |       |         |   |  |   |          
|Cumulative interest-rate gap as a percentage of total interest earning assets |  |                        | (34.71   | )% |               |   | (21.39   | )%                |  |   | 10.76        | % |  |       | 14.69   | % |  |   |          
|                                                                              |  |                        |          |    |               |   |          |                   |  |   |              |   |  |       |         |   |  |   |          



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

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 locations. 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, 2007, the Bank had 267 full-time employees and 65 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.



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Regulation and Supervision

The following discussion describes elements of an extensive regulatory framework applicable to bank holding companies and banks and specific information about BKFC. Federal and state regulation of banks and their
holding companies is intended primarily for the protection of depositors and the Deposit Insurance Fund, rather than for the protection of stockholders and creditors.

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 the regulation, supervision and examination by, the FRB. Such examination by the FRB determines whether BKFC is operating in accordance
with various regulatory requirements and in a safe and sound manner. The FRB may initiate enforcement proceedings against BKFC for violations of laws or regulations or for engaging in unsafe and unsound practices, particularly if such conduct could
or does adversely impact the Bank. BKFC is also subject to the disclosure and regulatory requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, as administered by the SEC.

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

It is the policy of the FRB that a bank holding company be ready and able to use its resources to provide capital to its subsidiary banks during periods
of financial stress or adversity. The FRB could require BKFC to provide such support at times when BKFC lacks the resources to do so. See Regulatory Capital Requirements and Dividend Restrictions regarding minimum capital
levels to which BKFC is subject and regulatory limits on BKFCs ability to pay dividends to 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 the regulation, supervision and examination by the Department and the FDIC. Both the Department and the FDIC have the authority to
issue cease-and-desist orders if either determines that the activities of the Bank represent unsafe and unsound banking practices. If the grounds provided by law exist, the Department or the FDIC may appoint a conservator or receiver for the Bank.

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

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



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Kentucky law limits loans or other extensions of credit to any borrower to 20% of the Banks paid-in
capital and actual surplus. Such limit is increased to 30% if the borrower provides good collateral security or executes to it a mortgage upon real or personal property with a cash value exceeding the amount of the loan. Loans or extensions of
credit to certain borrowers are aggregated, and loans secured by certain government obligations are exempt from these limits. At December 31, 2007, the maximum the Bank could lend to any one borrower generally equaled $16 million and equaled
$24 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% must be composed of Tier 1 Capital, which consists of common shareholders equity, minority interests in the equity of consolidated subsidiaries and a limited amount
of perpetual preferred stock, less goodwill and certain other intangibles (Tier 1 Risk-Based Ratio). The remainder of total capital may consist of subordinated and qualifying convertible debt, other preferred stock and a limited amount
of loan and lease loss allowances.

The FRB also has established minimum leverage ratio guidelines for bank holding companies. The
guidelines provide for a minimum ratio of Tier 1 Capital to average total assets (excluding the loan and lease loss allowance, goodwill and certain other intangibles, and portions of certain nonfinancial equity investments) (the Leverage
Ratio) of 3% for bank holding companies that meet specified criteria, including having the highest regulatory rating. All other bank holding companies must maintain a Leverage Ratio of 4% to 5%. The guidelines further provide that bank holding
companies making acquisitions 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, 2007:



|                  |  |                        |         |         |       |   |        |   |         |  |       |  
|----------------- |  | ---------------------- | ------- | ------- | ----- | - | ------ | - | ------- |  | ----- | -
|                  |  | At December 31, 2007   |        
|                  |  | BKFC                   |         |         | Bank  |  
|                  |  | Amount                 |         | Percent |       |   | Amount |   | Percent | 
|                  |  | (Dollars in thousands) |        
|Tier 1 risk-based |  | $                      | 93,385  |         | 8.34  | % |        | $ | 106,426 |  | 9.52  | %
|Requirement       |  |                        | 44,808  |         | 4.00  |   |        |   | 44,731  |  | 4.00  |  
|                  |  |                        |         |         |       |   |        |   |         |  |       |  
|Excess            |  | $                      | 48,577  |         | 4.34  | % |        | $ | 61,695  |  | 5.52  | %
|                  |  |                        |         |         |       |   |        |   |         |  |       |  
|Total risk-based  |  | $                      | 113,390 |         | 10.12 | % |        | $ | 114,931 |  | 10.28 | %
|Requirement       |  |                        | 89,616  |         | 8.00  |   |        |   | 89,463  |  | 8.00  |  
|                  |  |                        |         |         |       |   |        |   |         |  |       |  
|Excess            |  | $                      | 23,774  |         | 2.12  | % |        | $ | 25,468  |  | 2.28  | %
|                  |  |                        |         |         |       |   |        |   |         |  |       |  
|Leverage ratio    |  | $                      | 93,385  |         | 7.91  | % |        | $ | 106,426 |  | 9.03  | %
|Requirement       |  |                        | 47,215  |         | 4.00  |   |        |   | 47,139  |  | 4.00  |  
|                  |  |                        |         |         |       |   |        |   |         |  |       |  
|Excess            |  | $                      | 46,170  |         | 3.91  | % |        | $ | 59,287  |  | 5.03  | %
|                  |  |                        |         |         |       |   |        |   |         |  |       |  

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.



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Prompt Corrective Regulatory Action. The FDIC has adopted regulations governing prompt
corrective action to resolve the problems of capital deficient and otherwise troubled banks under its regulation. For these purposes, the law establishes three categories of capital deficient institutions: undercapitalized, significantly
undercapitalized and critically undercapitalized. At each successively lower defined capital category, an institution is subject to more restrictive and numerous mandatory or discretionary regulatory actions or limits, and the FDIC has less
flexibility in determining how to resolve the problems of the institution. The FDIC generally can downgrade an institutions capital category, notwithstanding its capital level, if, after notice and opportunity for hearing, the institution is
deemed to be engaging in an unsafe or unsound practice because it has not corrected deficiencies that resulted in it receiving a less than satisfactory examination rating on matters other than capital or it is deemed to be in an unsafe or unsound
condition. An undercapitalized institution must submit a capital restoration plan to the FDIC within 45 days after it becomes undercapitalized. Such institution will be subject to increased monitoring and asset growth restrictions and will be
required to obtain prior approval for acquisitions, branching and engaging in new lines of business. Furthermore, critically undercapitalized institutions must be placed in conservatorship or receivership within 270 days of reaching that
capitalization level, except under limited circumstances. At year-end 2007 the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or
events since that notification that management believes have changed the institutions category.

The FDIC has adopted regulations to
implement the prompt corrective action legislation. An institution is deemed to be well capitalized if it has a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 6% or greater, and a leverage ratio of
5% or greater. An institution is adequately capitalized if it has a total risk-based capital ratio of 8% or greater, a Tier 1 risk-based capital ratio of 4% or greater and generally a leverage ratio of 4% or greater. An institution is
undercapitalized if it has a total risk-based capital ratio of less than 8%, a Tier 1 risk-based capital ratio of less than 4%, or generally a leverage ratio of less than 4% (3% or less for institutions with the highest examination
rating). An institution is deemed to be significantly undercapitalized if it has a total risk-based capital ratio of less than 6%, a Tier 1 risk-based capital ratio of less than 3%, or a leverage ratio of less than 3%. An institution is
considered to be critically undercapitalized if it has a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2%. The Banks capital levels at December 31, 2007 met the
standards for the highest level, a well-capitalized institution.

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

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 the ability of BKFC to draw on its $10 million borrowing line of credit, which currently has $2.2 million 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 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, 2007, the Bank had capital in excess of the FDICs most restrictive minimum capital requirements in an amount equal to $3.2
million from which dividends could be paid, subject to the FDICs general safety and soundness review. In 2007, BKFC paid a cash dividend of $0.46 per share totaling approximately $2.65 million.

FDIC Deposit Insurance and Assessments. The FDIC is an independent federal agency that insures deposits, up to prescribed statutory limits, of
federally insured banks and thrifts and safeguards the safety and soundness of the banking and thrift industries. The Banks deposits are insured by the Deposit Insurance Fund of the FDIC. The Deposit



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Insurance Fund is the successor to the Bank Insurance Fund and the Savings Association Insurance Fund, which were merged in 2006. The FDIC amended its
risk-based assessment system for 2007 to implement authority granted by the Federal Deposit Insurance Reform Act of 2005 (the Reform Act). Under the revised system, insured institutions are assigned to one of four risk categories based
on supervisory evaluations, regulatory capital levels and certain other factors. An institutions assessment rate depends upon the category to which it is assigned. Risk Category I, which contains the least risky depository institutions, is
expected to include 90% of all institutions. Unlike the other categories, Risk Category I contains further risk differentiation based on the FDICs analysis of financial ratios, examination component ratings and other information. Assessment
rates are determined by the FDIC and currently range from five to seven basis points for the healthiest institutions (Risk Category I) to 43 basis points of assessable deposits for the riskiest (Risk Category IV). The FDIC may adjust rates uniformly
from one quarter to the next, except that no single adjustment can exceed three basis points. No institution may pay a dividend if in default of the FDIC assessment.

Insurance premiums are based on a number of factors, primarily the risk of loss that insured institutions pose to the Deposit Insurance Fund. Under the Reform Act, the FDIC has the ability to adjust the insurance
funds reserve ratio between 1.15% and 1.5%, depending on projected losses, economic changes and assessment rate at the end of a calendar year, in contrast to the prior statutorily fixed ratio of 1.25%. The ratio, which is viewed by the FDIC as
the level that the fund should achieve, was established by the agency at 1.25% for 2007. The FDIC announced in November of 2007 that the ratio would remain 1.25% for 2008. A change in insurance premiums could have an adverse effect on the operating
expenses and results of operations of the Bank. We cannot predict what insurance assessment rates will be in the future.

Insurance of
deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or
condition imposed by the FDIC. We do not know of any practice, condition or violation that might lead to termination of deposit insurance.

FRB Reserve Requirements.FRB regulations currently require banks to maintain reserves of 3% of net transaction accounts (primarily demand and NOW accounts) up to $43.9 million of such accounts (subject to an exemption of up to $9.3
million), and of 10% of net transaction accounts in excess of $43.9 million. At December 31, 2007, the Bank was in compliance with this reserve requirement, which was $4,676,000.

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

Federal Home Loan Banks. The 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 0.15% of the Banks total assets, the second
is an activity component that is equal to 2% to 4% of the Banks outstanding advances. The Bank is in compliance with this requirement with an investment in stock of the FHLB of Cincinnati of $4,766,000 at December 31, 2007. 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.

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



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Kentucky Taxation

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

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

The Kentucky property tax extends to bank deposits (theDeposits Tax). The tax is levied at a rate of 0.0001% 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.

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.



|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 area 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



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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 locations. 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. Many of the institutions against whom we compete are significantly larger than us and, therefore, have significantly greater resources. We expect competition
to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Our profitability depends upon our continued ability to compete successfully in
our market area.

Our nonresidential real estate loans expose us to increased lending risks.

At December 31, 2007, $387 million, or 41%, of our loan portfolio consisted of nonresidential real estate loans. Nonresidential real estate loans
generally expose a lender to greater risk of non-payment and loss than residential mortgage loans because repayment of the loans often depends on the successful operation of the property and the income stream of the borrowers. Such loans expose us
to additional risks because they typically are made on the basis of the borrowers ability to make repayments from the cash flow of the borrowers business and are secured by collateral that may depreciate over time. These loans typically
involve larger loan balances to single borrowers or groups of related borrowers compared to residential mortgage loans. Because such loans generally entail greater risk than residential mortgage loans, we may need to increase our allowance for loan
losses in the future to account for the likely increase in probable incurred credit losses associated with the growth of such loans. Also, many of our nonresidential real estate borrowers have more than one loan outstanding with us. Consequently, an
adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss compared to an adverse development with respect to a residential mortgage loan.

We may require further additions to our allowance for loan losses, which would reduce net income.

If our borrowers do not repay their loans or if the collateral securing their loans is insufficient to provide for the full repayment, we may suffer
credit losses. Credit losses are inherent in the lending business and could have a material adverse effect on our operating results. We make various assumptions and judgments about the collectability of our loan portfolio and provide an allowance
for loan losses based on a number of factors. If our assumptions and judgments are wrong, our allowance for loan losses may not be sufficient to cover our losses. If we determine that our allowance for loan losses is insufficient, we would be
required to take additional provisions for loan losses, which would reduce net income during the period those provisions are taken. In addition, our regulators periodically review our allowance for loan losses and may require us to increase our
allowance for loan losses or to charge off particular loans.

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.



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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.

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.



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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.

Our acquisition of FNB Bancorporation resulted in goodwill, which if it becomes impaired would be required to be written down, which would negatively
impact earnings.

We acquired FNB Bancorporation on May 18, 2007 and we may pursue additional opportunities for acquisitions in the
future. The success of the FNB Bancorporation acquisition depends on many factors, including the long-term retention of key personnel and acquired customer relationships. We recorded goodwill and other intangible assets in conjunction with the
acquisition, and such assets may be recorded in future acquisitions. If these assets were to become impaired, we would be required to write them down.



|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 28 branch locations operated by the Bank, 13 are owned and 15 are leased. Certain of these leases are with affiliates and affiliated entities. The
Bank also leases space for its cash management operations center.

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



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

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



|Item 4. | 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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PART II



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

LOGO



|                                       |  |               |  |          |  |          |  |          |  |          |  |         
|-------------------------------------- |  | ------------- |  | -------- |  | -------- |  | -------- |  | -------- |  | --------
|                                       |  | Period Ending
|Index                                  |  | 12/31/02      |  | 12/31/03 |  | 12/31/04 |  | 12/31/05 |  | 12/31/06 |  | 12/31/07
|Bank of Kentucky Financial Corporation |  | 100.00        |  | 107.09   |  | 92.50    |  | 93.57    |  | 95.86    |  | 92.92   
|Russell 2000                           |  | 100.00        |  | 147.25   |  | 174.24   |  | 182.18   |  | 215.64   |  | 212.26  
|SNL Bank $1B-$5B Index                 |  | 100.00        |  | 135.99   |  | 167.83   |  | 164.97   |  | 190.90   |  | 139.06  

Market Information. 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 2007 |  | High |       | Low |   |       |  | Fiscal Year 2006 |  | High           |  | Low
|First Quarter    |  | $    | 27.00 |     | $ | 25.90 |  |                  |  | First Quarter  |  | $   | 26.00 |  | $ | 25.00
|Second Quarter   |  |      | 26.25 |     |   | 25.70 |  |                  |  | Second Quarter |  |     | 28.00 |  |   | 25.00
|Third Quarter    |  |      | 26.50 |     |   | 25.25 |  |                  |  | Third Quarter  |  |     | 28.00 |  |   | 26.25
|Fourth Quarter   |  |      | 25.50 |     |   | 25.00 |  |                  |  | Fourth Quarter |  |     | 26.70 |  |   | 25.55

Holders and Dividends. There were 5,684,207 shares of common stock of BKFC
outstanding on December 31, 2007, which were held of record by 942 shareholders. The Board of Directors declared cash dividends of $.18 per share in March 2006, $.20 per share in September 2006, $.22 per share in March 2007, and $.24 per share
in September 2007.



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##### Table of Contents

Issuer Purchases. The following table shows information relating to the repurchase
of shares by the Company during the fourth quarter of 2007:



|                    |  |                                |  |                             |       |                                                                                 |         |                                                                           |       
|------------------- |  | ------------------------------ |  | --------------------------- | ----- | ------------------------------------------------------------------------------- | ------- | ------------------------------------------------------------------------- | ------
|Period              |  | Total numberof sharespurchased |  | Average pricepaid per share |       | Total number ofshares purchased aspart of
publiclyannounced plans orprograms(1) |         | Maximumnumber ofshares that mayyet be purchasedunder the plansor
programs
|October 1-31, 2007  |  | 16,000                         |  | $                           | 25.35 |                                                                                 | 131,645 |                                                                           | 68,355
|November 1-30, 2007 |  | 7,500                          |  |                             | 25.25 |                                                                                 | 139,145 |                                                                           | 60,855
|December 1-31, 2007 |  | 14,600                         |  |                             | 25.10 |                                                                                 | 153,745 |                                                                           | 46,255



|(1) | The Company maintained a share repurchase program that was approved by the Companys Board of Directors in December of 2006. This repurchase program, which expired on
December 31, 2007, 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, 153,745 of the 200,000 shares authorized for repurchase had been repurchased. The
Company did not terminate any plan prior to its expiration date.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In December of 2007, 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, 2008 and
expiring December 31, 2008.

Equity Compensation Plan Information. The following table reflects BKFCs equity compensation plan
information as of December 31, 2007.



|                                                        |  |                                                                      |  |                                                      |       |                                                            |          
|------------------------------------------------------- |  | -------------------------------------------------------------------- |  | ---------------------------------------------------- | ----- | ---------------------------------------------------------- | ---------
|                                                        |  | Number of Securitiesto be Issued Upon Exerciseof Outstanding Options |  | Weighted AverageExercise Price ofOutstanding Options |       | Number of SecuritiesRemaining Available forFuture Issuance
|Equity Compensation Plans Approved by Security Holders* |  | 599,575                                                              |  | $                                                    | 26.54 |                                                            | 1,186,000



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



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|Item 6. | 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, 2007. The summary should be read in conjunction with the Financial Statements and Notes to Consolidated Financial Statements.



|                                                 |  |                                                 |           |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|------------------------------------------------ |  | ----------------------------------------------- | --------- | - | ---- | - | --------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                                 |  | For Year Ended December 31                      |          
|                                                 |  | 2007                                            |           |   | 2006 |   |           | 2005 |  |   | 2004    |   |  | 2003 |        
|                                                 |  | (Dollars In Thousands Except Per Share Amounts) |          
|Earnings:                                        |  |                                                 |           |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total Interest Income                            |  | $                                               | 75,713    |   |      | $ | 63,617    |      |  | $ | 50,755  |   |  | $    | 41,591  |   |  | $ | 39,369  |  
|Total Interest Expense                           |  |                                                 | 38,477    |   |      |   | 29,324    |      |  |   | 18,132  |   |  |      | 11,598  |   |  |   | 12,690  |  
|                                                 |  |                                                 |           |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net Interest Income                              |  |                                                 | 37,236    |   |      |   | 34,293    |      |  |   | 32,623  |   |  |      | 29,993  |   |  |   | 26,679  |  
|Provision for Loan Losses                        |  |                                                 | 1,575     |   |      |   | 1,700     |      |  |   | 1,825   |   |  |      | 1,675   |   |  |   | 1,090   |  
|Noninterest Income                               |  |                                                 | 14,043    |   |      |   | 11,788    |      |  |   | 9,085   |   |  |      | 8,271   |   |  |   | 8,940   |  
|Noninterest Expense                              |  |                                                 | 33,719    |   |      |   | 29,142    |      |  |   | 25,161  |   |  |      | 21,602  |   |  |   | 20,484  |  
|                                                 |  |                                                 |           |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|Income Before Income Taxes                       |  |                                                 | 15,985    |   |      |   | 15,239    |      |  |   | 14,722  |   |  |      | 14,987  |   |  |   | 14,045  |  
|Federal Income Taxes                             |  |                                                 | 4,854     |   |      |   | 4,787     |      |  |   | 4,595   |   |  |      | 4,929   |   |  |   | 4,686   |  
|                                                 |  |                                                 |           |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net Income                                       |  | $                                               | 11,131    |   |      | $ | 10,452    |      |  | $ | 10,127  |   |  | $    | 10,058  |   |  | $ | 9,359   |  
|                                                 |  |                                                 |           |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|Per Common Share Data:                           |  |                                                 |           |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|Basic Earnings                                   |  | $                                               | 1.93      |   |      | $ | 1.79      |      |  | $ | 1.71    |   |  | $    | 1.69    |   |  | $ | 1.57    |  
|Diluted Earnings                                 |  |                                                 | 1.93      |   |      |   | 1.78      |      |  |   | 1.70    |   |  |      | 1.68    |   |  |   | 1.55    |  
|Dividends Declared and Paid                      |  |                                                 | 0.46      |   |      |   | 0.38      |      |  |   | 0.30    |   |  |      | 0.23    |   |  |   | 0.17    |  
|Balances at December 31:                         |  |                                                 |           |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total Investment Securities                      |  | $                                               | 168,299   |   |      | $ | 118,954   |      |  | $ | 94,375  |   |  | $    | 64,266  |   |  | $ | 59,535  |  
|Total Loans                                      |  |                                                 | 881,717   |   |      |   | 814,101   |      |  |   | 731,059 |   |  |      | 719,157 |   |  |   | 660,442 |  
|Allowance for Loan Losses                        |  |                                                 | 8,505     |   |      |   | 6,918     |      |  |   | 7,581   |   |  |      | 7,214   |   |  |   | 6,855   |  
|Total Assets                                     |  |                                                 | 1,232,724 |   |      |   | 1,051,563 |      |  |   | 957,338 |   |  |      | 878,129 |   |  |   | 815,976 |  
|Noninterest Bearing Deposits                     |  |                                                 | 167,578   |   |      |   | 149,519   |      |  |   | 135,620 |   |  |      | 121,454 |   |  |   | 106,451 |  
|Interest Bearing Deposits                        |  |                                                 | 894,501   |   |      |   | 764,908   |      |  |   | 695,490 |   |  |      | 631,346 |   |  |   | 592,276 |  
|Total Deposits                                   |  |                                                 | 1,062,079 |   |      |   | 914,427   |      |  |   | 831,110 |   |  |      | 752,800 |   |  |   | 698,727 |  
|Notes Payable                                    |  |                                                 | 42,340    |   |      |   | 23,907    |      |  |   | 34,291  |   |  |      | 37,573  |   |  |   | 37,850  |  
|Total Shareholders Equity                       |  |                                                 | 93,485    |   |      |   | 86,883    |      |  |   | 80,447  |   |  |      | 73,664  |   |  |   | 66,689  |  
|Other Statistical Information:                   |  |                                                 |           |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|Return on Average Assets                         |  |                                                 | .99       | % |      |   | 1.08      | %    |  |   | 1.14    | % |  |      | 1.21    | % |  |   | 1.19    | %
|Return on Average Equity                         |  |                                                 | 12.39     | % |      |   | 12.58     | %    |  |   | 13.11   | % |  |      | 14.39   | % |  |   | 14.84   | %
|Dividend Payout Ratio                            |  |                                                 | 23.83     | % |      |   | 21.22     | %    |  |   | 17.54   | % |  |      | 13.61   | % |  |   | 10.83   | %
|Capital Ratios at December 31:                   |  |                                                 |           |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total Equity to Total Assets                     |  |                                                 | 7.58      | % |      |   | 8.26      | %    |  |   | 8.40    | % |  |      | 8.39    | % |  |   | 8.17    | %
|Average Equity to Average Assets                 |  |                                                 | 8.01      | % |      |   | 8.55      | %    |  |   | 8.67    | % |  |      | 8.38    | % |  |   | 8.04    | %
|Tier 1 Leverage Ratio                            |  |                                                 | 7.91      | % |      |   | 9.13      | %    |  |   | 9.21    | % |  |      | 9.08    | % |  |   | 8.87    | %
|Tier 1 Capital to Risk-Weighted Assets           |  |                                                 | 8.34      | % |      |   | 9.48      | %    |  |   | 9.79    | % |  |      | 9.50    | % |  |   | 9.60    | %
|Total Risk-Based Capital to Risk-Weighted Assets |  |                                                 | 10.12     | % |      |   | 10.20     | %    |  |   | 10.66   | % |  |      | 10.38   | % |  |   | 10.54   | %
|Loan Quality Ratios:                             |  |                                                 |           |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|Allowance for Loan Losses                        |  |                                                 |           |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|To Total Loans at year-end                       |  |                                                 | .90       | % |      |   | .85       | %    |  |   | 1.04    | % |  |      | 1.00    | % |  |   | 1.04    | %
|Allowance for Loan Losses                        |  |                                                 |           |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|To Non-performing Loans at year end              |  |                                                 | 94.01     | % |      |   | 139.11    | %    |  |   | 83.81   | % |  |      | 140.21  | % |  |   | 197.38  | %
|Net Charge-Offs to Average Net Loans             |  |                                                 | 0.11      | % |      |   | 0.30      | %    |  |   | 0.20    | % |  |      | 0.19    | % |  |   | 0.10    | %



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

The objective of this section is to help shareholders and potential investors understand our views on our results of operations and financial condition. You should read this discussion in conjunction with the
consolidated financial statements and notes to the consolidated financial statements that appear elsewhere in this report.

FORWARD
LOOKING STATEMENTS

This report includes forward-looking statements by The Bank of Kentucky Financial Corporation (BKFC or 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 regulations or standards; material unforeseen changes in the financial condition or results of operations of the Corporations customers; 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 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.

There were a number of factors in 2007 that produced the Corporations record annual earnings of $11,131,000, which was an
increase of $679,000, or 7%, over 2006. These factors included strong balance sheet growth in loans and deposits and significant increases in non-interest income, the effects of which were partially offset by a volatile interest rate environment and
higher non-interest expense.



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##### Table of Contents

The balance sheet in 2007 increased $181,161,000, or 17% from 2006, and drove the $2,943,000, or 9%, increase in net
interest income. The balance sheet growth included strong organic growth and the added assets and liabilities from our mid-year acquisition of the First Bank of Northern Kentucky (the First Bank Acquisition). The First Bank Acquisition
added a banking office in the attractive Fort Mitchell market and included approximately $63,000,000 in both loans and deposits. The First Bank Acquisition is detailed further in Note 6 of the consolidated financial statements. While balance sheet
growth produced higher net interest income, the volatile interest rate environment contributed to the drop in the net interest margin, which decreased 24 basis points to 3.66% in 2007. In the period from September of 2007 until the end of 2007, the
Federal Reserve Bank lowered the federal funds rate a total of 100 basis points, in an effort to reduce the impact on consumers and the financial markets from the subprime mortgage and credit crisis. These actions have resulted in the decline of
other market interest rates, specifically the prime rate, but had a disproportionate impact on asset yields as compared to deposit costs. As a result, loans tied to the prime rate dropped with each of the Federal Reserves actions, while other
rates such as consumer certificates of deposit and borrowing costs tied to the LIBOR index remained relatively flat through the end of 2007.

Contributing
to the growth in non-interest income was revenue from the Banks new overdraft program implemented in the third quarter of 2006. The related fees from the overdraft program contributed to the $2,024,000, or 61%, increase in overdraft revenue
from 2006.

The largest increases in non-interest expense were salaries and employee benefits expense, which increased $1,452,000, or 10%, and an increase
of $596,000 in expenses associated with other real estate owned properties.

The provision for loan losses decreased slightly ($125,000 or 7%) from
$1,700,000 in 2006 to $1,575,000 in 2007, resulting primarily from lower levels of charge-offs. While non-performing loans increased $4,074,000, or 82%, from $4,973,000 at the end of 2006 to $9,047,000 at the end of 2007, net charge-offs for 2007
decreased to $998,000, or .11%, of average loans compared to the $2,363,000 or .30% in 2006. The Company does not originate or purchase sub-prime loans for its portfolio. Management will continue to monitor and evaluate the effects of the slumping
housing market conditions and the signs of deteriorating credit quality on the Banks loan portfolio.

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.



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

The Bank maintains an allowance to absorb probable, incurred loan losses inherent in the loan portfolio. The allowance for loan losses is maintained at a
level the Bank considers to be adequate and is based 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 its historical loan loss experience and such factors that, in managements judgment, deserve consideration under existing economic conditions in estimating probable loan
losses. The Banks strategy for credit risk management includes a combination of 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 Statement of Financial Accounting Standard No. 114, Accounting by Creditors for Impairment of a Loan. 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. In addition, the Bank evaluates the collectibility of both principal and interest when assessing the need for loans being placed on non-accrual status. Non-accrual
status denotes loans in which, in the opinion of management, the collection of additional interest is unlikely. 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.

Homogeneous loans, such as consumer installment, residential mortgage 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.



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

FINANCIAL CONDITION

Our total assets at December 31, 2007 were $1,232,724,000 as compared to $1,051,563,000 at December 31, 2006, an increase of $181,161,000 (17%). This growth
included the acquisition of First Bank which added approximately $74,000,000 in total assets, and included $63,000,000 in loans, and $63,000,000 in deposits on the liability side of the balance sheet. Total loans increased $135,613,000 (17%) to
$949,714,000 at December 31, 2007, compared to $814,101,000 at December 31, 2006. The growth in loans was distributed relatively evenly between construction, residential real estate, commercial and commercial real estate in 2007, with
increases of $38,995,000 (40%), $34,381,000 (19%), $31,218,000 (21%) and $27,291,000 (8%), respectively. The loan growth includes the addition of the First Bank loan portfolio, which was similar to the Bank portfolio in that the largest
percentage of the First Bank loan portfolio was concentrated in commercial and commercial real estate loans. The majority of the Banks asset growth was funded by increases in deposits. Total deposits increased $147,652,000 (16%) to
$1,062,079,000 at December 31, 2007, compared to $914,427,000 at December 31, 2006. The largest increase in deposits came from money market accounts, which increased $61,624,000, or 34%, from 2006. The Banks Money Market Index
account, which is indexed to short-term interest rates, saw the majority of the growth as depositors moved and invested funds into this attractive yielding account.

Increases in goodwill and acquisitions intangibles were the result of the First Bank acquisition, which included $5,432,000 in goodwill and $2,630,000 in intangibles. The First Bank acquisition also contributed to the
increase in other assets as a result of approximately $4,709,000 in a deferred tax asset resulting from a net operating loss carry-forward. Other changes on the asset side of the balance sheet included $49,345,000 (41%) growth in securities,
which was partially offset by a $17,566,000 decrease in short term investments. Investments in short-term discount notes, which the Bank invested in as an alternative to federal funds, contributed to the growth in the securities portfolio. Other
changes to liabilities included growth of $6,829,000 in short-term borrowings and an increase in notes payable of $18,433,000. The increase in notes payable resulted from $18,000,000 in trust preferred borrowings relating to the First Bank
Acquisition. Total shareholders equity increased $6,602,000 (8%) to $93,485,000 at December 31, 2007, compared to $86,883,000 at December 31, 2006.



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The following table illustrates the change in the mix of average assets during 2007 as compared to 2006 and 2005.

Table 1Average Assets 2007, 2006 and 2005

(Dollars in Thousands)

|                                         |  |      |           |                       |       |   |      |   |                       |  |       |      |  |                       |         |  |       |  
|---------------------------------------- |  | ---- | --------- | --------------------- | ----- | - | ---- | - | --------------------- |  | ----- | ---- |  | --------------------- | ------- |  | ----- | -
|Average Assets:                          |  | 2007 |           | As a % oftotal assets |       |   | 2006 |   | As a % oftotal assets |  |       | 2005 |  | As a % oftotal assets |        
|Cash and due from banks                  |  | $    | 29,157    |                       | 2.6   | % |      | $ | 28,716                |  | 3.0   | %    |  | $                     | 34,654  |  | 3.9   | %
|Short term investments                   |  |      | 39,922    |                       | 3.6   | % |      |   | 13,464                |  | 1.4   | %    |  |                       | 13,339  |  | 1.5   | %
|Other interest-earning assets            |  |      | 4,772     |                       | .4    | % |      |   | 4,477                 |  | .4    | %    |  |                       | 4,236   |  | .5    | %
|Securities                               |  |      | 99,544    |                       | 8.9   | % |      |   | 89,191                |  | 9.2   | %    |  |                       | 67,062  |  | 7.5   | %
|Loans (net of allowance for loan losses) |  |      | 875,853   |                       | 78.1  | % |      |   | 772,188               |  | 79.5  | %    |  |                       | 720,528 |  | 80.9  | %
|Premises and equipment                   |  |      | 17,240    |                       | 1.5   | % |      |   | 17,492                |  | 1.8   | %    |  |                       | 17,163  |  | 1.9   | %
|Goodwill and acquisition intangibles     |  |      | 15,403    |                       | 1.4   | % |      |   | 12,474                |  | 1.3   | %    |  |                       | 13,080  |  | 1.5   | %
|Cash surrender value of life insurance   |  |      | 20,153    |                       | 1.8   | % |      |   | 19,407                |  | 2.0   | %    |  |                       | 12,786  |  | 1.4   | %
|Other assets                             |  |      | 19,339    |                       | 1.7   | % |      |   | 13,905                |  | 1.4   | %    |  |                       | 8,019   |  | .9    | %
|                                         |  |      |           |                       |       |   |      |   |                       |  |       |      |  |                       |         |  |       |  
|Total average assets                     |  | $    | 1,121,383 |                       | 100.0 | % |      | $ | 971,314               |  | 100.0 | %    |  | $                     | 890,867 |  | 100.0 | %
|                                         |  |      |           |                       |       |   |      |   |                       |  |       |      |  |                       |         |  |       |  

RESULTS OF OPERATIONS

SUMMARY

2007 vs. 2006. Our net income was $11,131,000 for the year ended December 31, 2007, compared to
$10,452,000 for the year ended December 31, 2006, an increase of $679,000 (7%). Net income for the year ended December 31, 2006 increased $325,000 (3%) from the $10,127,000 for the year ended December 31, 2005. The growth in
earnings from 2006 to 2007 was driven by increases in non-interest income of $2,255,000 (19%) and net interest income of $2,943,000 (9%), and was offset by an increase in non-interest expense of $4,577,000 (16%). Increases in overdraft charges
contributed to the growth in non-interest income. The growth in the net interest income was driven by the strong balance sheet growth and was offset by the negative impact of the volatile interest rate environment. The increase in non-interest
expense was due to salaries and benefits, which increased $1,452,000 (10%) in 2007 compared to 2006, an increase of $596,000 in expenses associated with other real estate owned properties and an increase of $445,000 in amortization of
intangible assets for 2007 are a result of the First Bank Acquisition.

2006 vs. 2005. The 2006 results reflected a $1,670,000, or 5%, increase in net
interest income from 2005, which was offset by a $3,981,000, or 16%, increase in non-interest expense.



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Contributing to the increase in non-interest expense was increased expense for stock options and additional compensation
costs for added staffing at the Banks cash management operations center, which opened in February of 2005.

NET INTEREST INCOME

2007 vs. 2006. Net interest income grew to $37,236,000 in 2007, an increase of $2,943,000 (9%) over the $34,293,000 earned in 2006. The increase was driven by the
growth in the balance sheet. As illustrated in Table 3, net interest income was positively impacted by the volume additions to the balance sheet by $4,186,000, which was partially offset by the rate variance, which had a $1,197,000 negative impact
on net interest income. The volatile interest rate environment contributed to the unfavorable rate variance. The effects of this rate environment are demonstrated in Table 2, where the yield on interest earning assets increased by 19 basis points
from 7.21% in 2006 to 7.40% in 2007, while the cost of interest bearing liabilities increased 41 basis points from 3.87% to 4.28%. The result of the rate variance was a decrease in the net interest margin from 3.90% in 2006 to 3.66% in 2007.

2006 vs. 2005. Net interest income grew to $34,293,000 in 2006, an increase of $1,670,000 (5%) over the $32,623,000 earned in 2005. The increase was
driven by the growth in the balance sheet and an increase in the effect of net free funds (non-interest bearing liabilities and equity funded earning assets). As illustrated in Table 3, net interest income was positively impacted by the volume
additions to the balance sheet by $2,785,000, which was partially offset by the rate variance, having a $1,127,000 negative impact on net interest income. Contributing to the unfavorable rate variance was the flattening yield curve in 2006. The
flatness of the yield curve impacted interest on the Banks liabilities to a greater extent than interest income on assets, as more immediately repriceable deposits and certificates of deposit repriced more quickly than short-term assets. Also,
long-term assets repriced at relatively lower rates. The effect of the flat yield contributed to the decrease in the net interest margin from 4.06% in 2005 to 3.90% in 2006. As illustrated in Table 2, rising interest levels had a positive effect on
net free funds, which increased from 39 basis points in 2005 to 56 basis points in 2006.

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



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Table 2Average Balance Sheet Rates 2007, 2006 and 2005 (presented on a tax equivalent basis in thousands)



|                                                                                                       |  |                           |                        |   |                     |   |            |      |      |                           |  |   |                     |   |            |   |        |                           |      |   |                     |   |            |   |  |   |        |  |      |  
|------------------------------------------------------------------------------------------------------ |  | ------------------------- | ---------------------- | - | ------------------- | - | ---------- | ---- | ---- | ------------------------- |  | - | ------------------- | - | ---------- | - | ------ | ------------------------- | ---- | - | ------------------- | - | ---------- | - |  | - | ------ |  | ---- | -
|                                                                                                       |  | Year ended December 31,   |                       
|                                                                                                       |  | 2007                      |                        |   | 2006                |   |            | 2005 |     
|                                                                                                       |  | Averageoutstandingbalance |                        |   | Interestearned/paid |   | Yield/rate |      |      | Averageoutstandingbalance |  |   | Interestearned/paid |   | Yield/rate |   |        | Averageoutstandingbalance |      |   | Interestearned/paid |   | Yield/rate |  
|                                                                                                       |  |                           | (Dollars in thousands) |  
|Interest-earning assets:                                                                               |  |                           |                        |   |                     |   |            |      |      |                           |  |   |                     |   |            |   |        |                           |      |   |                     |   |            |   |  |   |        |  |      |  
|Loans receivable (1)(2)                                                                                |  | $                         | 883,893                |   |                     | $ | 68,949     |      | 7.80 | %                         |  | $ | 779,568             |   |            | $ | 59,256 |                           | 7.60 | % |                     | $ | 727,924    |   |  | $ | 47,944 |  | 6.59 | %
|Securities (2)                                                                                         |  |                           | 99,544                 |   |                     |   | 4,737      |      | 4.76 |                           |  |   | 89,191              |   |            |   | 3,760  |                           | 4.22 |   |                     |   | 67,062     |   |  |   | 2,436  |  | 3.63 |  
|Other interest-earning assets                                                                          |  |                           | 44,694                 |   |                     |   | 2,395      |      | 5.36 |                           |  |   | 17,941              |   |            |   | 923    |                           | 5.14 |   |                     |   | 17,575     |   |  |   | 709    |  | 4.03 |  
|                                                                                                       |  |                           |                        |   |                     |   |            |      |      |                           |  |   |                     |   |            |   |        |                           |      |   |                     |   |            |   |  |   |        |  |      |  
|Total interest-earning assets                                                                          |  |                           | 1,028,131              |   |                     |   | 76,081     |      | 7.40 |                           |  |   | 886,700             |   |            |   | 63,939 |                           | 7.21 |   |                     |   | 812,561    |   |  |   | 51,089 |  | 6.29 |  
|                                                                                                       |  |                           |                        |   |                     |   |            |      |      |                           |  |   |                     |   |            |   |        |                           |      |   |                     |   |            |   |  |   |        |  |      |  
|Non-interest-earning assets                                                                            |  |                           | 93,252                 |   |                     |   |            |      |      |                           |  |   | 84,614              |   |            |   |        |                           |      |   |                     |   | 78,306     |   |  |   |        |  |      |  
|                                                                                                       |  |                           |                        |   |                     |   |            |      |      |                           |  |   |                     |   |            |   |        |                           |      |   |                     |   |            |   |  |   |        |  |      |  
|Total assets                                                                                           |  | $                         | 1,121,383              |   |                     |   |            |      |      |                           |  | $ | 971,314             |   |            |   |        |                           |      |   |                     | $ | 890,867    |   |  |   |        |  |      |  
|                                                                                                       |  |                           |                        |   |                     |   |            |      |      |                           |  |   |                     |   |            |   |        |                           |      |   |                     |   |            |   |  |   |        |  |      |  
|Interest-bearing liabilities:                                                                          |  |                           |                        |   |                     |   |            |      |      |                           |  |   |                     |   |            |   |        |                           |      |   |                     |   |            |   |  |   |        |  |      |  
|Transaction accounts                                                                                   |  |                           | 474,367                |   |                     |   | 17,555     |      | 3.70 |                           |  |   | 397,819             |   |            |   | 13,092 |                           | 3.29 |   |                     |   | 360,492    |   |  |   | 6,780  |  | 1.88 |  
|Time deposits                                                                                          |  |                           | 372,575                |   |                     |   | 17,752     |      | 4.76 |                           |  |   | 315,071             |   |            |   | 13,623 |                           | 4.32 |   |                     |   | 285,305    |   |  |   | 9,255  |  | 3.24 |  
|Borrowings                                                                                             |  |                           | 51,950                 |   |                     |   | 3,170      |      | 6.10 |                           |  |   | 44,450              |   |            |   | 2,609  |                           | 5.87 |   |                     |   | 47,028     |   |  |   | 2,097  |  | 4.46 |  
|                                                                                                       |  |                           |                        |   |                     |   |            |      |      |                           |  |   |                     |   |            |   |        |                           |      |   |                     |   |            |   |  |   |        |  |      |  
|Total interest-bearing liabilities                                                                     |  |                           | 898,892                |   |                     |   | 38,477     |      | 4.28 |                           |  |   | 757,340             |   |            |   | 29,324 |                           | 3.87 |   |                     |   | 692,825    |   |  |   | 18,132 |  | 2.62 |  
|                                                                                                       |  |                           |                        |   |                     |   |            |      |      |                           |  |   |                     |   |            |   |        |                           |      |   |                     |   |            |   |  |   |        |  |      |  
|Non-interest-bearing liabilities                                                                       |  |                           | 132,657                |   |                     |   |            |      |      |                           |  |   | 130,921             |   |            |   |        |                           |      |   |                     |   | 120,780    |   |  |   |        |  |      |  
|                                                                                                       |  |                           |                        |   |                     |   |            |      |      |                           |  |   |                     |   |            |   |        |                           |      |   |                     |   |            |   |  |   |        |  |      |  
|Total liabilities                                                                                      |  |                           | 1,031,549              |   |                     |   |            |      |      |                           |  |   | 888,261             |   |            |   |        |                           |      |   |                     |   | 813,605    |   |  |   |        |  |      |  
|Shareholders equity                                                                                   |  |                           | 89,834                 |   |                     |   |            |      |      |                           |  |   | 83,053              |   |            |   |        |                           |      |   |                     |   | 77,262     |   |  |   |        |  |      |  
|                                                                                                       |  |                           |                        |   |                     |   |            |      |      |                           |  |   |                     |   |            |   |        |                           |      |   |                     |   |            |   |  |   |        |  |      |  
|Total liabilities and shareholders equity                                                             |  | $                         | 1,121,383              |   |                     |   |            |      |      |                           |  | $ | 971,314             |   |            |   |        |                           |      |   |                     | $ | 890,867    |   |  |   |        |  |      |  
|                                                                                                       |  |                           |                        |   |                     |   |            |      |      |                           |  |   |                     |   |            |   |        |                           |      |   |                     |   |            |   |  |   |        |  |      |  
|Net interest income                                                                                    |  |                           |                        |   |                     | $ | 37,604     |      |      |                           |  |   |                     |   |            | $ | 34,615 |                           |      |   |                     |   |            |   |  | $ | 32,957 |  |      |  
|                                                                                                       |  |                           |                        |   |                     |   |            |      |      |                           |  |   |                     |   |            |   |        |                           |      |   |                     |   |            |   |  |   |        |  |      |  
|Interest rate spread                                                                                   |  |                           |                        |   |                     |   |            |      | 3.12 | %                         |  |   |                     |   |            |   |        |                           | 3.34 | % |                     |   |            |   |  |   |        |  | 3.67 | %
|                                                                                                       |  |                           |                        |   |                     |   |            |      |      |                           |  |   |                     |   |            |   |        |                           |      |   |                     |   |            |   |  |   |        |  |      |  
|Net interest margin (net interest income as a percent of average interest-earning assets)              |  |                           |                        |   |                     |   |            |      | 3.66 | %                         |  |   |                     |   |            |   |        |                           | 3.90 | % |                     |   |            |   |  |   |        |  | 4.06 | %
|                                                                                                       |  |                           |                        |   |                     |   |            |      |      |                           |  |   |                     |   |            |   |        |                           |      |   |                     |   |            |   |  |   |        |  |      |  
|Effect of Net Free Funds (the difference between the net interest margin and the interest rate spread) |  |                           |                        |   |                     |   |            |      | .54  | %                         |  |   |                     |   |            |   |        |                           | .56  | % |                     |   |            |   |  |   |        |  | .39  | %
|                                                                                                       |  |                           |                        |   |                     |   |            |      |      |                           |  |   |                     |   |            |   |        |                           |      |   |                     |   |            |   |  |   |        |  |      |  
|Average interest-earning assets to interest-bearing liabilities                                        |  |                           | 114.38                 | % |                     |   |            |      |      |                           |  |   | 117.08              | % |            |   |        |                           |      |   |                     |   | 117.28     | % |  |   |        |  |      |  
|                                                                                                       |  |                           |                        |   |                     |   |            |      |      |                           |  |   |                     |   |            |   |        |                           |      |   |                     |   |            |   |  |   |        |  |      |  



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

|(2) | Income presented on a tax equivalent basis using a 34.25% tax rate in 2007 and 2006 and a 35% tax rate in 2005. The tax equivalent adjustment was $368,000, $322,000,and $334,000, in
2007, 2006, and 2005, respectively.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

Volume/Rate Analysis. The below table 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.

Table 3Volume/Rate Analysis (in thousands)



|                                           |  |                           |       |                           |   |        |       |  |        |        |  |      |       |   |       |   |        |   |  |   |       
|------------------------------------------ |  | ------------------------- | ----- | ------------------------- | - | ------ | ----- |  | ------ | ------ |  | ---- | ----- | - | ----- | - | ------ | - |  | - | ------
|                                           |  | Year ended December 31,  
|                                           |  | 2007 vs. 2006             |       | 2006 vs. 2005            
|                                           |  | Increase (Decrease)Due to |       | Increase (Decrease)Due to
|                                           |  | Volume                    |       | Rate                      |   |        | Total |  | Volume |        |  | Rate |       |   | Total
|                                           |  | (Dollars in thousands)   
|Interest income attributable to:           |  |                           |       |                           |   |        |       |  |        |        |  |      |       |   |       |   |        |   |  |   |       
|Loans receivable                           |  | $                         | 8,104 |                           | $ | 1,589  |       |  | $      | 9,693  |  | $    | 3,567 |   |       | $ | 7,745  |   |  | $ | 11,312
|Securities                                 |  |                           | 463   |                           |   | 514    |       |  |        | 977    |  |      | 891   |   |       |   | 433    |   |  |   | 1,324 
|Other interest-earning assets(1)           |  |                           | 1,432 |                           |   | 40     |       |  |        | 1,472  |  |      | 15    |   |       |   | 199    |   |  |   | 214   
|                                           |  |                           |       |                           |   |        |       |  |        |        |  |      |       |   |       |   |        |   |  |   |       
|Total interest-earning assets              |  |                           | 9,999 |                           |   | 2,145  |       |  |        | 12,142 |  |      | 4,473 |   |       |   | 8,377  |   |  |   | 12,850
|                                           |  |                           |       |                           |   |        |       |  |        |        |  |      |       |   |       |   |        |   |  |   |       
|Interest expense attributable to:          |  |                           |       |                           |   |        |       |  |        |        |  |      |       |   |       |   |        |   |  |   |       
|Transaction accounts                       |  |                           | 2,710 |                           |   | 1,753  |       |  |        | 4,463  |  |      | 766   |   |       |   | 5,546  |   |  |   | 6,312 
|Time deposits                              |  |                           | 2,649 |                           |   | 1,480  |       |  |        | 4,129  |  |      | 1,042 |   |       |   | 3,326  |   |  |   | 4,368 
|Borrowings                                 |  |                           | 454   |                           |   | 107    |       |  |        | 561    |  |      | (120  | ) |       |   | 632    |   |  |   | 512   
|                                           |  |                           |       |                           |   |        |       |  |        |        |  |      |       |   |       |   |        |   |  |   |       
|Total interest-bearing liabilities         |  |                           | 5,813 |                           |   | 3,340  |       |  |        | 9,153  |  |      | 1,688 |   |       |   | 9,504  |   |  |   | 11,192
|                                           |  |                           |       |                           |   |        |       |  |        |        |  |      |       |   |       |   |        |   |  |   |       
|Increase (decrease) in net interest income |  | $                         | 4,186 |                           | $ | (1,197 | )     |  | $      | 2,989  |  | $    | 2,785 |   |       | $ | (1,127 | ) |  | $ | 1,658 
|                                           |  |                           |       |                           |   |        |       |  |        |        |  |      |       |   |       |   |        |   |  |   |       



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

PROVISION FOR LOAN LOSSES

2007 vs. 2006. The provision for loan losses was $1,575,000 for the year ended
December 31, 2007, compared to $1,700,000 for 2006. The decrease of $125,000 (7%) reflected a decrease in loans chargedoff in 2007, which was offset by a higher level of non-performing loans. For the year ended December 31,
2007, net charge-offs were $998,000 or .11% of average loan balances compared to 2006 figures of $2,363,000 or .30% of average loan balances. The majority of the loans charged-off in 2007 had been reserved for in previous periods. Total non-accrual
loans and loans past due 90 days or more were $9,047,000 (.95% of loans outstanding) at December 31, 2007, compared to $4,973,000 (.61% of loans outstanding) at December 31, 2006. The largest increase in non-performing loans since
December 31, 2006 was a $1,700,000 residential development loan which resulted in the specific impairment reserve in the first quarter of 2007 and $350,000 of this relationship was charged-off in the fourth quarter of 2007. As the
non-performing loan balances increased, the ratio of the allowance to nonperforming loans (coverage ratio) decreased from 139% at the end of 2006 to 94% at the end of 2007. Managements



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evaluation of the inherent risk in the loan portfolio considers both historic losses and information regarding specific borrowers. The increase in the loan
loss allowance to total loans ratio, from .85% at December 31, 2006 to .90% at December 31, 2007, was in part due to the allowance brought over in the First Bank Acquisition, which had relatively higher historical losses associated with
its loan portfolio. Management continues to monitor the nonperforming relationships and has established appropriate reserves.

Non-performing assets, which
include non-performing loans, other real estate owned and repossessed assets, totaled $13,164,000 at December 31, 2007 and $7,954,000 at December 31, 2006. This represents 1.07% of total assets at December 31, 2007 compared to .76% at
December 31, 2006. The largest property included in the other real estate owned at December 31, 2007 was a repossessed commercial office building valued at $2,700,000 that was acquired in 2006.

2006 vs 2005. The provision for loan losses was $1,700,000 for the year ended December 31, 2006, compared to $1,825,000 for 2005. The decrease of $125,000
(7%) reflected an improvement in the level of non-performing loans in 2006. For the year ended December 31, 2006, net charge-offs were $2,363,000, or .30%, of average loan balances compared to 2005 figures of $1,458,000, or .20%, of
average loan balances. The majority of the loans charged-off in 2006, including a $1,400,000 commercial loan charged off in the third quarter of 2006, had been reserved for in previous periods. Total non-accrual loans and loans past due 90 days or
more were $4,973,000 (.61% of loans outstanding) at December 31, 2006 compared to $9,045,000 (1.24% of loans outstanding) at December 31, 2005. As the non-performing loan balances decreased, the ratio of the allowance to nonperforming
loans (coverage ratio) increased from 84% at the end of 2005 to 139% at the end of 2006. In addition to the $1,400,000 loan charged off in the third quarter, the decrease in non-performing loans from December 31, 2005 included a $2,800,000
commercial loan that was foreclosed on by the Bank and classified as other real estate owned.

Allowance for Loan Losses. The allowance for
loan losses as a percentage of total loans was .90% on December 31, 2007, which was an increase from .85% at December 31, 2006. This percentage increase represented an increase of $1,587,000, or 23%, in the allowance for loan losses from
the end of 2006 to the end of 2007. The change in the loan loss allowance percentage was partially the result of the allowance brought over from the First Bank Acquisition. The amount of the allowance allocated to impaired loans at year end 2007 was
$2,833,000, which was up 59% from the $1,783,000 at year end 2006. This 2007 amount allocated reserves included $400,000 of First Bank loans which were added to the impaired balances in the fourth quarter of 2007. The largest increase in allocated
reserves was a $480,000 impairment of a $1,700,000 residential development loan. 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 provision for loan losses is directionally consistent with the changes in the probable losses inherent in the loan portfolio from 2006 to 2007. The Bank does not originate or purchase sub-prime
loans for its portfolio. Management will continue to monitor and evaluate the effects of the slumping housing market conditions and any signs of deteriorating credit quality on the Banks loan portfolio.



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Monitoring loan quality and maintaining an adequate allowance is an ongoing process overseen by senior management and the
loan review function. On at least a quarterly basis, a formal analysis of the adequacy of the 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.

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



|                                                        |  |                            |       |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|------------------------------------------------------- |  | -------------------------- | ----- | - | ---- | - | ------ | ---- |  | - | ------ | - |  | ---- | ------ | - |  | - | ------ | -
|                                                        |  | Year ended at December 31, |      
|                                                        |  | 2007                       |       |   | 2006 |   |        | 2005 |  |   | 2004   |   |  | 2003 |       
|                                                        |  | (Dollars in thousands)     |      
|Balance of allowance at beginning of period             |  | $                          | 6,918 |   |      | $ | 7,581  |      |  | $ | 7,214  |   |  | $    | 6,855  |   |  | $ | 6,408  |  
|Recoveries of loans previously charged off:             |  |                            |       |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Commercial loans                                        |  |                            | 369   |   |      |   | 41     |      |  |   | 67     |   |  |      | 8      |   |  |   | 5      |  
|Consumer loans                                          |  |                            | 106   |   |      |   | 40     |      |  |   | 11     |   |  |      | 2      |   |  |   | 26     |  
|Mortgage loans                                          |  |                            | 23    |   |      |   | 0      |      |  |   | 0      |   |  |      | 0      |   |  |   | 1      |  
|                                                        |  |                            |       |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Total recoveries                                        |  |                            | 498   |   |      |   | 81     |      |  |   | 78     |   |  |      | 10     |   |  |   | 32     |  
|                                                        |  |                            |       |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Loans charged off:                                      |  |                            |       |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Commercial loans                                        |  |                            | 1,097 |   |      |   | 2,208  |      |  |   | 1,127  |   |  |      | 936    |   |  |   | 335    |  
|Consumer loans                                          |  |                            | 368   |   |      |   | 185    |      |  |   | 277    |   |  |      | 360    |   |  |   | 226    |  
|Mortgage loans                                          |  |                            | 31    |   |      |   | 51     |      |  |   | 132    |   |  |      | 30     |   |  |   | 114    |  
|                                                        |  |                            |       |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Total charge-offs                                       |  |                            | 1,496 |   |      |   | 2,444  |      |  |   | 1,536  |   |  |      | 1,326  |   |  |   | 675    |  
|                                                        |  |                            |       |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Net charge-offs                                         |  |                            | (998  | ) |      |   | (2,363 | )    |  |   | (1,458 | ) |  |      | (1,316 | ) |  |   | (643   | )
|Provision for loan losses                               |  |                            | 1,575 |   |      |   | 1,700  |      |  |   | 1,825  |   |  |      | 1,675  |   |  |   | 1,090  |  
|Merger adjustment                                       |  |                            | 1,010 |   |      |   | 0      |      |  |   | 0      |   |  |      | 0      |   |  |   | 0      |  
|                                                        |  |                            |       |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Balance of allowance at end of period                   |  | $                          | 8,805 |   |      | $ | 6,918  |      |  | $ | 7,581  |   |  | $    | 7,214  |   |  | $ | 6,855  |  
|                                                        |  |                            |       |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Net charge-offs to average loans outstanding for period |  |                            | .11   | % |      |   | .30    | %    |  |   | .20    | % |  |      | .19    | % |  |   | .10    | %
|                                                        |  |                            |       |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Allowance at end of period to loans at end of period    |  |                            | .90   | % |      |   | .85    | %    |  |   | 1.04   | % |  |      | 1.00   | % |  |   | 1.04   | %
|                                                        |  |                            |       |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Allowance to nonperforming loans at end of period       |  |                            | 97.33 | % |      |   | 139.11 | %    |  |   | 83.81  | % |  |      | 140.21 | % |  |   | 197.38 | %
|                                                        |  |                            |       |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  



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NON-INTEREST INCOME

The following table shows the components of non-interest income and the percentage changes from 2007 to 2006 and from 2006 to 2005.

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



|                                      |  |                         |        |                                |   |        |  |           |       |  |           |   |  |    |  
|------------------------------------- |  | ----------------------- | ------ | ------------------------------ | - | ------ |  | --------- | ----- |  | --------- | - |  | -- | -
|                                      |  | Year ended December 31, |        | Percentage Increase/(Decrease) |  
|Non-interest income:                  |  | 2007                    |        | 2006                           |   | 2005   |  | 2007/2006 |       |  | 2006/2005 |  
|Service charges and fees              |  | $                       | 8,243  |                                | $ | 5,976  |  | $         | 4,297 |  | 38        | % |  | 39 | %
|Gains on sale of real estate loans    |  |                         | 919    |                                |   | 1,056  |  |           | 965   |  | (13       | ) |  | 9  |  
|Trust fee income                      |  |                         | 1,089  |                                |   | 1,088  |  |           | 928   |  | 0         |   |  | 17 |  
|Bankcard transaction revenue          |  |                         | 1,626  |                                |   | 1,298  |  |           | 1,050 |  | 25        |   |  | 24 |  
|Company owned life insurance earnings |  |                         | 749    |                                |   | 700    |  |           | 472   |  | 7         |   |  | 48 |  
|Other                                 |  |                         | 1,417  |                                |   | 1,670  |  |           | 1,373 |  | 15        |   |  | 22 |  
|                                      |  |                         |        |                                |   |        |  |           |       |  |           |   |  |    |  
|Total non-interest income             |  | $                       | 14,043 |                                | $ | 11,788 |  | $         | 9,085 |  | 19        | % |  | 30 | %
|                                      |  |                         |        |                                |   |        |  |           |       |  |           |   |  |    |  

2007 vs. 2006. Total non-interest income increased $2,255,000 (19%) in 2007 from $11,788,000 in 2006 to
$14,043,000 in 2007. Increases for 2007 included service charges and fees (up $2,267,000, or 38%), and bankcard transaction revenue (up $328,000, or 25%), which was partially offset by a decrease in other non-interest income (down $253,000, or 15%).
Contributing to the decrease in other non-interest income was $202,000 in gains on the payoff of certain Federal Home Loan Bank advances that were recognized in 2006.

Contributing to the growth in service charges and fees was revenue from the Banks new overdraft program that was implemented in the third quarter of 2006. This program allows qualified customers the courtesy of
the Bank paying items that overdraw the account up to a set limit. This new program contributed to the $2,024,000 or 61%, increase in overdraft revenue from $3,295,000 in 2006 to $5,320,000 in 2007.

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

2006 vs. 2005. Total non-interest income increased $2,703,000 (30%) in 2006 from $9,085,000 in 2005 to $11,788,000 in
2006. Increases for 2006 included service charges and fees (up $1,679,000, or 39%), bankcard transaction revenue (up $248,000, or 24%), trust fee income (up $160,000, or 17%), gains on the sale of real estate loans (up $91,000, or 9%), and standby
letters of credit fees (up $53,000, or 12%). Other non-interest income included $202,000 in gains on the payoff of certain Federal Home Loan Bank advances, due to the reversal of the remaining purchase accounting adjustment on such advances, which
was offset by $264,000 in losses from



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the sale of other real estate owned. The Federal Home Loan Bank long-term advances were callable advances that were part of the assets purchased in 2002, and
were assumed at their fair value at the date of purchase. As rates have risen, the assumed advances fair value has fallen below the amortized liability as of the date they were called, resulting in a gain. The losses on the sale of other real
estate were $133,000 more in 2006 than the losses in 2005.

Revenue from cash management products and service charge fees from the Banks new
overdraft program implemented in the third quarter of 2006, contributed to the growth in service charges and fees in 2006. This new program contributed to the $1,271,000 or 63% increase in overdraft revenue from $2,024,000 in 2005 to $3,295,000 in
2006. In 2005, the Bank began to provide a new cash management product by offering the service of consolidating returned checks for specific customers. The new cash management products included increased lockbox revenue and fees from the Banks
consolidated returns product. The related fees from the new lockbox customers and the consolidated returns was approximately $338,000, or 47%, higher in 2006 as compared to 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.

NON-INTEREST
EXPENSE

The following table shows the components of non-interest income and the percentage changes from 2007 to 2006 and from 2006 to 2005.

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



|                                  |  |                         |        |                                |   |        |  |           |        |  |           |   |  |     |  
|--------------------------------- |  | ----------------------- | ------ | ------------------------------ | - | ------ |  | --------- | ------ |  | --------- | - |  | --- | -
|                                  |  | Year ended December 31, |        | Percentage Increase/(Decrease) |  
|Non-interest expense:             |  | 2007                    |        | 2006                           |   | 2005   |  | 2007/2006 |        |  | 2006/2005 |  
|Salaries and employee benefits    |  | $                       | 16,402 |                                | $ | 14,950 |  | $         | 12,228 |  | 10        | % |  | 22  | %
|Occupancy and equipment           |  |                         | 4,517  |                                |   | 4,076  |  |           | 3,881  |  | 11        |   |  | 5   |  
|Data processing                   |  |                         | 1,433  |                                |   | 1,256  |  |           | 1,393  |  | 14        |   |  | (10 | )
|Advertising                       |  |                         | 854    |                                |   | 740    |  |           | 618    |  | 15        |   |  | 20  |  
|ATM processing fees               |  |                         | 875    |                                |   | 820    |  |           | 674    |  | 7         |   |  | 22  |  
|Outside service fees              |  |                         | 1,183  |                                |   | 934    |  |           | 828    |  | 27        |   |  | 13  |  
|State bank taxes                  |  |                         | 1,258  |                                |   | 1,192  |  |           | 1,007  |  | 5         |   |  | 20  |  
|Amortization of intangible assets |  |                         | 1,090  |                                |   | 645    |  |           | 646    |  | 69        |   |  | 0   |  
|Other                             |  |                         | 6,107  |                                |   | 4,529  |  |           | 3,886  |  | 35        |   |  | 16  |  
|                                  |  |                         |        |                                |   |        |  |           |        |  |           |   |  |     |  
|Total non-interest expense        |  | $                       | 33,719 |                                | $ | 29,142 |  | $         | 25,161 |  | 16        | % |  | 16  | %
|                                  |  |                         |        |                                |   |        |  |           |        |  |           |   |  |     |  

2007 vs. 2006. Non-interest expense increased $4,577,000 (16%) to 33,719,000 for 2007, compared to
$29,142,000 for 2006. The largest increase in non-interest expense was in salaries and benefits, which increased $1,452,000 (10%) in 2007 compared to 2006. The increase in salaries and benefits was the result of both annual merit increases and
an increase in the number of employees. The total number of employees increased 18 (6%) from 314 at the end of 2006 to 332 at the end of 2007, and included the added employees from the First Bank acquisition. Other expenses in 2007 included an
increase of $596,000 in expenses associated with other real estate owned properties from $270,000 in 2006 to $866,000 in 2007. The majority of this expense was



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the result of certain improvements made to a repossessed commercial office building. The increase of $445,000 in amortization of intangible assets for 2007
was the result of the First Bank Acquisition.

2006 vs. 2005. Non-interest expense increased $3,981,000 (16%) to $29,142,000 for 2006, compared to
$25,161,000 in 2005. The largest increase in non-interest expense was in salaries and benefits, which increased $2,722,000 (22%) in 2006 compared to 2005. The increase in salaries and benefits included the additional compensation cost for added
staffing in the Banks cash management operations center, which opened in February of 2005, and $755,000 in compensation cost for stock options. The Company recorded this stock option expense of $755,000 in 2006 in accordance with FAS 123(R),
adopted on January 1, 2006. For comparison purposes, applying the new standards of FAS 123(R) to 2005 would have resulted in recording stock option compensation expense of $633,000. The operations center was opened to handle the increased
lockbox item volume and expanded cash management product offerings, such as the service of consolidating returned checks. Other areas where additional staff was added in 2005 and 2006 included commercial and consumer lending, credit review,
information technology, human resources, audit and accounting. Other expenses in 2006 included an increase of $215,000 in expenses associated with other real estate owned properties from $55,000 in 2005 to $270,000 in 2006. These expenses reflect
the cost of maintaining these properties.

TAX EXPENSE

2007 vs. 2006. Federal income tax expense increased $67,000 (1%) to $4,854,000 for 2007 compared to $4,787,000 for 2006. The effective tax rate was 30.4% for 2007, which was a decrease of 1% from 31.4% in 2006. Contributing to the
decrease in the effective tax rate was higher tax free revenue and a $100,000 historic tax credit realized in 2007.

2006 vs. 2005. Federal income tax
expense increased $192,000 (4%) to $4,787,000 for 2006 compared to $4,595,000 for 2005. The effective tax rate was 31.4% for 2006, which was a slight increase of .2% from 31.2% in 2005.



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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, 2007, 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 than1 Year |   | 1-3Years |  | 3-5Years |       | More than5 Years
|FHLB advances                                    |  | $                  | 6,000  |                 | $ |         |  | $        |      |                  | $ | 6,000 |  | $ |      
|Subordinated debentures                          |  |                    | 36,083 |                 |   |         |  |          |      |                  |   |      |  |   | 36,083
|Other notes payable                              |  |                    | 257    |                 |   | 16       |  |          | 59    |                  |   | 182   |  |   |      
|Northern Kentucky University arena naming rights |  |                    | 6,000  |                 |   | 858      |  |          | 1,714 |                  |   | 1,714 |  |   | 1,714 
|Thomas More College athletic field naming rights |  |                    | 1,000  |                 |   | 1,000    |  |          |      |                  |   |      |  |   |      
|Lease commitments                                |  |                    | 3,602  |                 |   | 912      |  |          | 1,416 |                  |   | 741   |  |   | 533   
|                                                 |  |                    |        |                 |   |          |  |          |       |                  |   |       |  |   |       
|Total                                            |  | $                  | 52,942 |                 | $ | 2,786    |  | $        | 3,189 |                  | $ | 8,637 |  | $ | 38,330
|                                                 |  |                    |        |                 |   |          |  |          |       |                  |   |       |  |   |       

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

In order to meet the financing needs of its customers, the Bank is also a party to certain financial instruments with off-balance sheet risk in the normal course of
business. These financial instruments include 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, 2007, the Banks significant off-balance sheet commitments.

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



|                                            |  |                    |         |                 |   |          |  |          |        |                  |   |       |  |   |       
|------------------------------------------- |  | ------------------ | ------- | --------------- | - | -------- |  | -------- | ------ | ---------------- | - | ----- |  | - | ------
|                                            |  | Maturity by period
|                                            |  | Total              |         | Less than1 Year |   | 1-3Years |  | 3-5Years |        | More than5 Years
|Unused lines of credit and loan commitments |  | $                  | 258,263 |                 | $ | 136,353  |  | $        | 46,501 |                  | $ | 5,821 |  | $ | 69,588
|Standby letters of credit                   |  |                    | 65,304  |                 |   | 41,088   |  |          | 17,707 |                  |   | 3,568 |  |   | 2,941 
|FHLB letters of credit                      |  |                    | 124,800 |                 |   | 124,800  |  |          |       |                  |   |      |  |   |      

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.



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

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

On March 3, 2005, the Bank entered into an agreement
with Northern Kentucky University (the University) whereby the University granted to the Bank the naming rights for the new Northern Kentucky University Arena (the Arena) to be constructed on the campus of the University for
a term commencing immediately upon execution of the document and expiring 20 years after the opening of the Arena. In consideration of such naming rights, the Bank agreed to 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,
which will take place in 2008.

In the second quarter of 2007, the Bank and Thomas More College (the College) announced a naming rights
agreement for the new athletic field being constructed on the Colleges campus. The Bank committed $1,000,000 to the project, which will be named The Bank of Kentucky Field (the Field). The cost of the naming rights will be
amortized over the 25-year life of the agreement commencing on the opening of the Field.

Further discussion of the Banks contractual obligations and
off-balance sheet activities is included in Note 15 of the Corporations consolidated financial statements.



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LIQUIDITY AND CAPITAL RESOURCES

Liquidity refers to the availability of sufficient levels of cash to fund operations, such as meeting deposit withdrawals, funding loan commitments, paying expenses and meeting its quarterly payment obligations under
certain subordinated debentures issued by BKFC in connection with the issuance of floating rate redeemable trust preferred securities issued by BKFCs unconsolidated trust subsidiary. The source of the funds for BKFCs debt obligations is
dependent on the Bank and BKFCs line of credit. During 2007, the Bank funded its loan growth with growth in deposits and equity. At December 31, 2007, the Banks customers had available $314,265,000 in unused lines and letters of
credit, and the Bank has further extended loan commitments totaling $9,302,000. Historically, many such commitments have expired without being drawn and, accordingly, do not necessarily 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 $2,200,000 outstanding at December 31, 2007. Further, the Bank has $152,069,000 of securities designated as available-for-sale and an additional $3,147,000 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, 2007 to meet known and potential obligations.

As illustrated in the Companys statement of cash flows, the net change in cash and cash equivalents resulted in a decrease of $15,983,000. Net income provided
$11,131,000 of the $14,555,000 in the Banks cash flows from operating activities, while the largest cash outflow from investing activities was in the form of an increase in loans of $75,574,000. The largest source of cash from financing
activities came from the increase of $84,470,000 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 2007, BKFC paid cash dividends of $.46 per share totaling $2,651,000.

The FDIC has issued regulations relating a banks deposit insurance assessment and certain aspects of its operations to specified capital levels. A
well-capitalized bank, one with a leverage ratio of 5% or more and a total risk-based 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, 2007, BKFCs leverage and total risk-based capital ratios were 7.84% and 10.12%, respectively, which exceed all
required ratios established for bank holding companies.

EFFECT OF INFLATION AND CHANGING PRICES

The financial statements and related financial data presented in this annual report have been prepared in accordance with U.S. GAAP, which require the measurement of
financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our



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operations is reflected in increased operating costs. Unlike most industrial company, virtually all the assets and liabilities of a financial institution are
monetary in nature. As a result, interest rates generally have a more significant impact on a financial institutions performance than do general levels of inflation. Interest rates do not necessarily move in the same direction or to the same
extent as the prices of goods and services.

ADOPTION OF NEW ACCOUNTING STANDARDS:

The Company adopted the provisions of Financial Accounting Standards Board (the FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48),on
January 1, 2007. The adoption of FIN 48 had no effect on the Companys financial statements. The Company had no unrecognized tax benefits as of January 1, 2007, and did not recognize any increase in unrecognized benefits during 2007
relative to any tax positions taken in 2007. Should the accrual of any interest or penalties relative to unrecognized tax benefits be necessary, it is the Companys policy to record such accruals in its income tax accounts; no such accruals
exist as of December 31, 2007. The Company and its subsidiary file a consolidated U.S. federal income tax return, which is subject to examination for all years after 2003.

In February 2006, the FASB issued Statement No. 155, Accounting for Certain Hybrid Financial Instruments an Amendment to FASB Statements No. 133 and 140. This Statement permits fair value
re-measurement for any hybrid financial instruments, clarifies which instruments are subject to the requirements of Statement No. 133, and establishes a requirement to evaluate interests in securitized financial assets and other items. The new
standard is effective for financial assets acquired or issued after the beginning of the entitys first fiscal year that begins after September 15, 2006. The adoption of this standard did not have a material impact on the
Corporations financial statements.

In September 2006, the FASB Emerging Issues Task Force finalized Issue No. 06-5, Accounting for Purchases
of Life InsuranceDetermining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4 (Accounting for Purchases of Life Insurance).This issue requires that a policyholder consider contractual terms of a
life insurance policy in determining the amount that could be realized under the insurance contract. It also requires that if the contract provides for a greater surrender value if all individual policies in a group are surrendered at the same time,
that the surrender value be determined based on the assumption that policies will be surrendered on an individual basis. Lastly, the issue discusses whether the cash surrender value should be discounted when the policyholder is contractually limited
in its ability to surrender a policy. The adoption of this standard did not have a material impact on the Corporations financial statements.



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EFFECT OF NEWLY ISSUED BUT NOT YET EFFECTIVE ACCOUNTING STANDARDS

In September 2006, FASB, issued Statement No. 157, Fair Value Measurements. This Statement defines fair value, establishes a framework for
measuring fair value and expands disclosures about fair value measurements. This Statement establishes a fair value hierarchy about the assumptions used to measure fair value and clarifies assumptions about risk and the effect of a restriction on
the sale or use of an asset. The new standard is effective for fiscal years beginning after November 15, 2007. The Corporation does not believe the adoption of this issue will have a material impact on its financial statements.

In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities.The standard provides companies
with an option to report selected financial assets and liabilities at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar
types of assets and liabilities. The new standard is effective for the Company on January 1, 2008. The Company did not elect the fair value option for any financial assets or financial liabilities as of January 1, 2008.

In September 2006, the FASB Emerging Issues Task Force finalized Issue No. 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of
Endorsement Split-Dollar Life Insurance Arrangements. This issue requires that a liability be recorded during the service period when a split-dollar life insurance agreement continues after participants employment or retirement. The
required accrued liability will be based on either the post-employment benefit cost for the continuing life insurance or based on the future death benefit depending on the contractual terms of the underlying agreement. This issue is effective for
fiscal years beginning after December 15, 2007. The Corporation does not believe the adoption of this issue will have a material impact on its financial statements.

On November 5, 2007, the SEC issued Staff Accounting Bulletin No. 109, Written Loan Commitments Recorded at Fair Value through Earnings(SAB 109). Previously, SAB 105, Application of
Accounting Principles to Loan Commitments, stated that in measuring the fair value of a derivative loan commitment, a company should not incorporate the expected net future cash flows related to the associated servicing of the loan. SAB 109
supersedes SAB 105 and indicates that the expected net future cash flows related to the associated servicing of the loan should be included in measuring fair value for all written loan commitments that are accounted for at fair value through
earnings. SAB 105 also indicated that internally-developed intangible assets should not be recorded as part of the fair value of a derivative loan commitment, and SAB 109 retains that view. SAB 109 is effective for derivative loan commitments issued
or modified in fiscal quarters beginning after December 15, 2007. The Company does not expect the impact of this standard to be material.



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

ASSET/LIABILITY MANAGEMENT AND MARKET RISK

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

The Bank utilizes an earnings
simulation model to measure and define the amount of interest rate risk it assumes. Interest rate risk is the potential for economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest
income and/or a decline in fair market values. Interest rate risk results from the fact that the interest sensitive assets and liabilities can adjust their rates at different times and by different amounts. The goal of asset/liability management is
to maintain a high, yet stable, net interest margin and to manage the effect that changes in market interest rates will have on net interest income. A common measure of interest rate risk is interest rate gap measurement. The gap is the
difference, in dollars, between the amount of interest-earning assets and interest-bearing liabilities that will reprice within a certain time frame. Repricing can occur when an asset or liability matures or, if an adjustable rate instrument, when
it can be adjusted. Typically, the measurement will focus on the interest rate gap position over the next 12 months. An institution is said to have a negative gap position when more interest-bearing liabilities reprice within a certain period than
interest-earning assets, and a positive gap position when more interest-earning assets reprice than interest-bearing liabilities. Interest rate gap is considered an indicator of the effect that changing rates may have on net interest income.
Generally, an institution with a negative gap will benefit from declining market interest rates and be negatively impacted by rising interest rates. The Bank currently is in a negative gap position, $152,561,000 (12.37%), and as a result would,
without considering other factors, generally benefit from lower rates and be negatively impacted by higher interest rates. The ability to benefit from the Banks liability-sensitive position would depend on a number of factors, including: the
competitive pressures on consumer deposit and loan pricing, the movement of certain deposit rate indices in relationship to asset rate indices, and the extent of the decrease in the rate environment.

At December 31, 2007, BKFCs 12-month interest rate gap position, as measured by the Banks asset/liability model, was negative. Over the succeeding 12
months, interest rate sensitive liabilities exceeded interest rate sensitive assets by $152,561,000 (12.37% of total assets). At December 31, 2006, interest rate sensitive liabilities exceeded interest rate sensitive assets by $72,882,000
(6.93% of total assets). Contributing to the increased liability sensitive position from 2006 to 2007 was the increase in money market accounts and the addition of $18,000,000 in trust preferred securities issued in connection with the First Bank
Acquisition. An assumption, based on historical behavior, contributing to the Companys gap position is that the balances in NOW and savings accounts react within a two-year timeframe to market rate changes, rather than reacting immediately.
These instruments are not tied to specific indices and are only influenced by market conditions and other factors. The Banks experience with NOW and savings accounts has been that they have repriced at a pace equal to approximately 25% of a
prime change. Accordingly, a general movement in interest rates may not have an immediate effect on the rates paid on those deposit accounts.

The
Banks asset/liability management policy establishes guidelines governing the amount of interest income at risk, market value at risk and parameters for the gap position. Management continually monitors these risks through the use of gap
analysis and the earnings simulation model. The simulation model is used to estimate and evaluate the impact of changing interest rates on earnings and market value. The model projects the effect of instantaneous movements in interest rates of both
100 and 200 basis points. The 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. The results of the model are used by management to approximate the results of rate changes and do not indicate actual expected results. Actual results will differ from the models simulated results due to timing,
frequency of interest rate changes as well as changes in various management strategies and market conditions. Additionally, as seen in 2007, and discussed in the net interest income section of this report, actual results can differ materially from
the model if interest rates do not move equally across the yield curve.

The difference in the estimates of net interest income change, as shown below,
between 2006 to 2007 was a result of the same influences that increased the liability sensitivity of the Companys gap position. As shown below, the December 31, 2007 simulation analysis indicates that the Company is in a negative interest
rate sensitive position and would benefit from a decrease in market interest rates.



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Net interest income estimates are summarized below.



|                |  |                            |    |  |       |   
|--------------- |  | -------------------------- | -- |  | ----- | --
|                |  | Net Interest Income Change |   
|                |  | 2006                       |    |  | 2007  |   
|Increase 200 bp |  | (2.03                      | )% |  | (0.17 | )%
|Increase 100 bp |  | (1.01                      | )  |  | 0.01  |   
|Decrease 100 bp |  | 1.03                       |    |  | (0.02 | ) 
|Decrease 200 bp |  | 1.61                       |    |  | (0.54 | ) 

The table below provides information about the quantitative market risk of interest sensitive instruments at
December 31, 2007 (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. The amounts included in loans excludes allowance for loan losses, deferred fees, in process accounts and purchase accounting adjustments:



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Table 9Balance sheet repricing data (in thousands)



|                          |  |         |   |  |        |   |  |        |   |  |         |   |  |        |   |  |            |   |  |         |  |           
|------------------------- |  | ------- | - |  | ------ | - |  | ------ | - |  | ------- | - |  | ------ | - |  | ---------- | - |  | ------- |  | ----------
|                          |  | 2008    |   |  | 2009   |   |  | 2010   |   |  | 2011    |   |  | 2012   |   |  | Thereafter |   |  | Total   |  | Fair Value
|Repricing in:             |  |         |   |  |        |   |  |        |   |  |         |   |  |        |   |  |            |   |  |         |  |           
|Federal Funds Sold        |  | 569     |   |  |       |   |  |       |   |  |        |   |  |       |   |  |           |   |  | 569     |  | 569       
|Average Interest Rate     |  | 4.42    | % |  |       |   |  |       |   |  |        |   |  |       |   |  |           |   |  |        |  |          
|Interest Bearing Deposits |  | 100     |   |  |       |   |  |       |   |  |        |   |  |       |   |  |           |   |  | 100     |  | 100       
|Average Interest Rate     |  | 3.40    | % |  |       |   |  |       |   |  |        |   |  |       |   |  |           |   |  |        |  |          
|Securities                |  | 101,672 |   |  | 7,189  |   |  | 3,063  |   |  | 18,027  |   |  | 8,875  |   |  | 29,473     |   |  | 168,299 |  | 168,239   
|Average Interest Rate     |  | 3.02    | % |  | 4.48   | % |  | 4.96   | % |  | 4.99    | % |  | 4.80   | % |  | 4.49       | % |  |        |  |          
|FHLB Stock                |  | 4,766   |   |  |       |   |  |       |   |  |        |   |  |       |   |  |           |   |  | 4,766   |  | 4,766     
|Average Interest Rate     |  | 7.00    | % |  |       |   |  |       |   |  |        |   |  |       |   |  |           |   |  |        |  |          
|Loans                     |  | 540,926 |   |  | 63,453 |   |  | 57,499 |   |  | 118,090 |   |  | 63,097 |   |  | 108,085    |   |  | 951,150 |  | 955,779   
|Average Interest Rate     |  | 7.25    | % |  | 7.23   | % |  | 7.39   | % |  | 7.31    | % |  | 7.19   | % |  | 7.16       | % |  |        |  |          
|                          |  |         |   |  |        |   |  |       
|Liabilities               |  |         |   |  |        |   |  |        |   |  |         |   |  |        |   |  |            |   |  |         |  |           
|Savings, NOW, MMA         |  | 520,994 |   |  |       |   |  |       |   |  |        |   |  |       |   |  |           |   |  | 520,994 |  | 520,994   
|Average Interest Rate     |  | 3.33    | % |  |       |   |  |       |   |  |        |   |  |       |   |  |           |   |  |        |  |          
|CDs and IRAs              |  | 311,224 |   |  | 46,436 |   |  | 9,979  |   |  | 3,702   |   |  | 832    |   |  | 1,334      |   |  | 373,507 |  | 375,622   
|Average Interest Rate     |  | 4.97    | % |  | 4.81   | % |  | 4.81   | % |  | 4.52    | % |  | 4.92   | % |  | 4.44       | % |  |        |  |          
|Borrowings                |  | 22,789  |   |  |       |   |  |       |   |  |        |   |  |       |   |  |           |   |  | 22,789  |  | 22,789    
|Average Interest Rate     |  | 4.34    | % |  |       |   |  |       |   |  |        |   |  |       |   |  |           |   |  |        |  |          
|Notes Payable             |  | 35,000  |   |  |       |   |  |       |   |  |        |   |  | 6,000  |   |  | 1,340      |   |  | 42,340  |  | 42,542    
|Average Interest Rate     |  | 7.35    | % |  |       |   |  |       |   |  |        |   |  | 5.01   | % |  | 2.07       | % |  |        |  |          



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

THE
BANK OF KENTUCKY

FINANCIAL CORPORATION

FINANCIAL STATEMENTS

December 31, 2007, 2006 and 2005



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THE BANK OF KENTUCKY FINANCIAL CORPORATION

Florence, Kentucky

FINANCIAL STATEMENTS

December 31, 2007, 2006 and 2005

CONTENTS



|                                                           |  |   
|---------------------------------------------------------- |  | --
|REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM    |  | 48
|                                                           | 
|CONSOLIDATED FINANCIAL STATEMENTS                          |  |   
|                                                           | 
|CONSOLIDATED BALANCE SHEETS                                |  | 50
|                                                           | 
|CONSOLIDATED STATEMENTS OF INCOME                          |  | 51
|                                                           | 
|CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY |  | 52
|                                                           | 
|CONSOLIDATED STATEMENTS OF CASH FLOWS                      |  | 53
|                                                           | 
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 |  | 54



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders

The Bank of Kentucky Financial Corporation

Crestview Hills, Kentucky

We have audited the accompanying consolidated balance sheets of The Bank of Kentucky Financial Corporation as of December 31, 2007 and 2006 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, 2007. We also have audited The Bank of Kentucky Financial Corporations internal
control over financial reporting as of December 31, 2007, based on criteria established inInternal Control  Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Bank of
Kentucky Financial Corporations management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Managements Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the companys internal control over
financial reporting based on our audits.

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

A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting



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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.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Bank of Kentucky
Financial Corporation as of December 31, 2007 and 2006, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2007, in conformity with accounting principles generally accepted in
the United States of America. Also in our opinion The Bank of Kentucky Financial Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established in
Internal Control  Integrated Frameworkissued by the COSO.



|                  |  |                             
|----------------- |  | ----------------------------
|                  |  | Crowe Chizek and Company LLC
|Columbus, Ohio    |  |                             
|February 23, 2008 |  |                             



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THE BANK OF KENTUCKY FINANCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS

December 31, 2007 and 2006

(Dollar
amounts in thousands, except per share amounts)



|                                                                                                              |  |      |           |      |   |           |  
|------------------------------------------------------------------------------------------------------------- |  | ---- | --------- | ---- | - | --------- | -
|                                                                                                              |  | 2007 |           | 2006 |  
|ASSETS                                                                                                        |  |      |           |      |   |           |  
|Cash and due from banks                                                                                       |  | $    | 38,307    |      | $ | 36,724    |  
|Federal funds sold and other short-term investments                                                           |  |      | 569       |      |   | 18,135    |  
|                                                                                                              |  |      |           |      |   |           |  
|Total cash and cash equivalents                                                                               |  |      | 38,876    |      |   | 54,859    |  
|Interest bearing deposits with banks                                                                          |  |      | 100       |      |   | 100       |  
|Available-for-sale securities                                                                                 |  |      | 152,069   |      |   | 106,926   |  
|Held-to-maturity securities                                                                                   |  |      |           |      |   |           |  
|(Fair value of $16,170 and $11,815)                                                                           |  |      | 16,230    |      |   | 12,028    |  
|Loans held for sale                                                                                           |  |      | 2,673     |      |   | 4,009     |  
|Loans, net of allowance ($8,505 and $6,918)                                                                   |  |      | 941,209   |      |   | 807,183   |  
|Premises and equipment-net                                                                                    |  |      | 17,764    |      |   | 17,069    |  
|Federal Home Loan Bank stock, at cost                                                                         |  |      | 4,766     |      |   | 4,537     |  
|Goodwill                                                                                                      |  |      | 15,209    |      |   | 9,867     |  
|Acquisition intangibles                                                                                       |  |      | 3,830     |      |   | 2,290     |  
|Cash surrender value of life insurance                                                                        |  |      | 20,528    |      |   | 19,779    |  
|Accrued interest receivable and other assets                                                                  |  |      | 19,470    |      |   | 12,916    |  
|                                                                                                              |  |      |           |      |   |           |  
|                                                                                                              |  | $    | 1,232,724 |      | $ | 1,051,563 |  
|                                                                                                              |  |      |           |      |   |           |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                          |  |      |           |      |   |           |  
|Liabilities                                                                                                   |  |      |           |      |   |           |  
|Deposits                                                                                                      |  |      |           |      |   |           |  
|Noninterest bearing deposits                                                                                  |  | $    | 167,578   |      | $ | 149,519   |  
|Interest bearing deposits                                                                                     |  |      | 894,501   |      |   | 764,908   |  
|                                                                                                              |  |      |           |      |   |           |  
|Total deposits                                                                                                |  |      | 1,062,079 |      |   | 914,427   |  
|Short-term borrowings                                                                                         |  |      | 22,789    |      |   | 15,960    |  
|Notes payable                                                                                                 |  |      | 42,340    |      |   | 23,907    |  
|Accrued expenses and other liabilities                                                                        |  |      | 12,031    |      |   | 10,386    |  
|                                                                                                              |  |      |           |      |   |           |  
|                                                                                                              |  |      | 1,139,239 |      |   | 964,680   |  
|Commitments and contingent liabilities                                                                        |  |      |          |      |   |          |  
|Shareholders equity                                                                                          |  |      |           |      |   |           |  
|Common stock, no par value, 15,000,000 shares authorized, 5,684,207 (2007) and 5,794,699 (2006) shares issued |  |      | 3,098     |      |   | 3,098     |  
|Additional paid-in capital                                                                                    |  |      | 3,880     |      |   | 6,207     |  
|Retained earnings                                                                                             |  |      | 86,305    |      |   | 77,825    |  
|Accumulated other comprehensive income (loss)                                                                 |  |      | 202       |      |   | (247      | )
|                                                                                                              |  |      |           |      |   |           |  
|                                                                                                              |  |      | 93,485    |      |   | 86,883    |  
|                                                                                                              |  |      |           |      |   |           |  
|                                                                                                              |  | $    | 1,232,724 |      | $ | 1,051,563 |  
|                                                                                                              |  |      |           |      |   |           |  

See accompanying notes.



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THE BANK OF KENTUCKY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

Years ended December 31, 2007, 2006 and 2005

(Dollar amounts in thousands, except per share amounts)



|                                                    |  |      |        |      |   |        |  |   |       
|--------------------------------------------------- |  | ---- | ------ | ---- | - | ------ |  | - | ------
|                                                    |  | 2007 |        | 2006 |   | 2005  
|Interest income                                     |  |      |        |      |   |        |  |   |       
|Loans, including related fees                       |  | $    | 68,769 |      | $ | 59,131 |  | $ | 47,836
|Securities                                          |  |      |        |      |   |        |  |   |       
|Taxable                                             |  |      | 4,189  |      |   | 3,184  |  |   | 1,790 
|Tax exempt                                          |  |      | 360    |      |   | 379    |  |   | 420   
|Other                                               |  |      | 2,395  |      |   | 923    |  |   | 709   
|                                                    |  |      |        |      |   |        |  |   |       
|                                                    |  |      | 75,713 |      |   | 63,617 |  |   | 50,755
|                                                    |  |      |       
|Interest expense                                    |  |      |        |      |   |        |  |   |       
|Deposits                                            |  |      | 35,307 |      |   | 26,715 |  |   | 16,035
|Borrowings                                          |  |      | 3,170  |      |   | 2,609  |  |   | 2,097 
|                                                    |  |      |        |      |   |        |  |   |       
|                                                    |  |      | 38,477 |      |   | 29,324 |  |   | 18,132
|                                                    |  |      |        |      |   |        |  |   |       
|Net interest income                                 |  |      | 37,236 |      |   | 34,293 |  |   | 32,623
|                                                    |  |      |       
|Provision for loan losses                           |  |      | 1,575  |      |   | 1,700  |  |   | 1,825 
|                                                    |  |      |        |      |   |        |  |   |       
|Net interest income after provision for loan losses |  |      | 35,661 |      |   | 32,593 |  |   | 30,798
|                                                    |  |      |       
|Non-interest income                                 |  |      |        |      |   |        |  |   |       
|Service charges and fees                            |  |      | 8,243  |      |   | 5,976  |  |   | 4,297 
|Gain on sale of real estate loans                   |  |      | 919    |      |   | 1,056  |  |   | 965   
|Trust fee income                                    |  |      | 1,089  |      |   | 1,088  |  |   | 928   
|Bankcard transaction revenue                        |  |      | 1,626  |      |   | 1,298  |  |   | 1,050 
|Other                                               |  |      | 2,166  |      |   | 2,370  |  |   | 1,845 
|                                                    |  |      |        |      |   |        |  |   |       
|                                                    |  |      | 14,043 |      |   | 11,788 |  |   | 9,085 
|                                                    |  |      |       
|Non-interest expense                                |  |      |        |      |   |        |  |   |       
|Salaries and employee benefits                      |  |      | 16,402 |      |   | 14,950 |  |   | 12,228
|Occupancy and equipment                             |  |      | 4,517  |      |   | 4,076  |  |   | 3,881 
|Data processing                                     |  |      | 1,433  |      |   | 1,256  |  |   | 1,393 
|Advertising                                         |  |      | 854    |      |   | 740    |  |   | 618   
|Electronic banking processing fees                  |  |      | 875    |      |   | 820    |  |   | 674   
|Outside service fees                                |  |      | 1,183  |      |   | 934    |  |   | 828   
|State bank taxes                                    |  |      | 1,258  |      |   | 1,192  |  |   | 1,007 
|Amortization of intangible assets                   |  |      | 1,090  |      |   | 645    |  |   | 646   
|Other                                               |  |      | 6,107  |      |   | 4,529  |  |   | 3,886 
|                                                    |  |      |        |      |   |        |  |   |       
|                                                    |  |      | 33,719 |      |   | 29,142 |  |   | 25,161
|                                                    |  |      |        |      |   |        |  |   |       
|Income before income taxes                          |  |      | 15,985 |      |   | 15,239 |  |   | 14,722
|                                                    |  |      |       
|Federal income taxes                                |  |      | 4,854  |      |   | 4,787  |  |   | 4,595 
|                                                    |  |      |        |      |   |        |  |   |       
|Net income                                          |  | $    | 11,131 |      | $ | 10,452 |  | $ | 10,127
|                                                    |  |      |        |      |   |        |  |   |       
|Per share data                                      |  |      |        |      |   |        |  |   |       
|Earnings per share                                  |  | $    | 1.93   |      | $ | 1.79   |  | $ | 1.71  
|                                                    |  |      |        |      |   |        |  |   |       
|Earnings per share, assuming dilution               |  | $    | 1.93   |      | $ | 1.78   |  | $ | 1.70  
|                                                    |  |      |        |      |   |        |  |   |       

See accompanying notes.



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THE BANK OF KENTUCKY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS

OF CHANGES IN SHAREHOLDERS EQUITY

Years
ended December 31, 2007, 2006 and 2005

(Dollar amounts in thousands, except per share amounts)



|                                                  |  |           |   |  |             |       |                          |   |        |                  |  |   |                                            |   |  |       |      |   |  |   |        |  
|------------------------------------------------- |  | --------- | - |  | ----------- | ----- | ------------------------ | - | ------ | ---------------- |  | - | ------------------------------------------ | - |  | ----- | ---- | - |  | - | ------ | -
|                                                  |  | Shares    |   |  | CommonStock |       | AdditionalPaid-inCapital |   |        | RetainedEarnings |  |   | AccumulatedOtherComprehensiveIncome (Loss) |   |  | Total |     
|Balance January 1, 2005                           |  | 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, including tax benefit  |  | 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 |  
|                                                  |  |           |   |  |             |      
|Cumulative adjustment related to SAB 108 adoption |  |          |   |  |             |      |                          |   |       |                  |  |   | (379                                       | ) |  |       |     |   |  |   | (379   | )
|Comprehensive income                              |  |           |   |  |             |       |                          |   |        |                  |  |   |                                            |   |  |       |      |   |  |   |        |  
|Net income                                        |  |          |   |  |             |      |                          |   |       |                  |  |   | 10,452                                     |   |  |       |      |   |  |   | 10,452 |  
|Change in net unrealized gain (loss), net of tax  |  |          |   |  |             |      |                          |   |       |                  |  |   |                                           |   |  |       | 261  |   |  |   | 261    |  
|                                                  |  |           |   |  |             |       |                          |   |        |                  |  |   |                                            |   |  |       |      |   |  |   |        |  
|Total comprehensive income                        |  |           |   |  |             |       |                          |   |        |                  |  |   |                                            |   |  |       |      |   |  |   | 10,713 |  
|Cash dividends - $.38 per share                   |  |          |   |  |             |      |                          |   |       |                  |  |   | (2,217                                     | ) |  |       |     |   |  |   | (2,217 | )
|Stock-based compensation expense                  |  |          |   |  |             |      |                          |   | 775    |                  |  |   |                                           |   |  |       |     |   |  |   | 775    |  
|Exercise of stock options, including tax benefit  |  | 29,020    |   |  |             |      |                          |   | 621    |                  |  |   |                                           |   |  |       |     |   |  |   | 621    |  
|Repurchase and retirement of common shares        |  | (118,400  | ) |  |             |      |                          |   | (3,077 | )                |  |   |                                           |   |  |       |     |   |  |   | (3,077 | )
|                                                  |  |           |   |  |             |       |                          |   |        |                  |  |   |                                            |   |  |       |      |   |  |   |        |  
|Balance December 31, 2006                         |  | 5,794,699 |   |  |             | 3,098 |                          |   | 6,207  |                  |  |   | 77,825                                     |   |  |       | (247 | ) |  |   | 86,883 |  
|                                                  |  |           |   |  |             |      
|Comprehensive income                              |  |           |   |  |             |       |                          |   |        |                  |  |   |                                            |   |  |       |      |   |  |   |        |  
|Net income                                        |  |          |   |  |             |      |                          |   |       |                  |  |   | 11,131                                     |   |  |       |      |   |  |   | 11,131 |  
|Change in net unrealized gain (loss), net of tax  |  |          |   |  |             |      |                          |   |       |                  |  |   |                                           |   |  |       | 449  |   |  |   | 449    |  
|                                                  |  |           |   |  |             |       |                          |   |        |                  |  |   |                                            |   |  |       |      |   |  |   |        |  
|Total comprehensive income                        |  |           |   |  |             |       |                          |   |        |                  |  |   |                                            |   |  |       |      |   |  |   | 11,580 |  
|Cash dividends - $.46 per share                   |  |          |   |  |             |      |                          |   |       |                  |  |   | (2,651                                     | ) |  |       |     |   |  |   | (2,651 | )
|Stock-based compensation expense                  |  |          |   |  |             |      |                          |   | 839    |                  |  |   |                                           |   |  |       |     |   |  |   | 839    |  
|Exercise of stock options, including tax benefit  |  | 43,253    |   |  |             |      |                          |   | 777    |                  |  |   |                                           |   |  |       |     |   |  |   | 777    |  
|Repurchase and retirement of common shares        |  | (153,745  | ) |  |             |      |                          |   | (3,943 | )                |  |   |                                           |   |  |       |     |   |  |   | (3,943 | )
|                                                  |  |           |   |  |             |       |                          |   |        |                  |  |   |                                            |   |  |       |      |   |  |   |        |  
|Balance December 31, 2007                         |  | 5,684,207 |   |  | $           | 3,098 |                          | $ | 3,880  |                  |  | $ | 86,305                                     |   |  | $     | 202  |   |  | $ | 93,485 |  
|                                                  |  |           |   |  |             |       |                          |   |        |                  |  |   |                                            |   |  |       |      |   |  |   |        |  

See accompanying notes.



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THE BANK OF KENTUCKY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended December 31, 2007, 2006 and 2005

(Dollar amounts in thousands)



|                                                                                 |  |      |          |   |      |   |          |      |  |   |         |  
|-------------------------------------------------------------------------------- |  | ---- | -------- | - | ---- | - | -------- | ---- |  | - | ------- | -
|                                                                                 |  | 2007 |          |   | 2006 |   |          | 2005 | 
|Cash flows from operating activities                                             |  |      |          |   |      |   |          |      |  |   |         |  
|Net income                                                                       |  | $    | 11,131   |   |      | $ | 10,452   |      |  | $ | 10,127  |  
|Adjustments to reconcile net income to net cash from operating activities        |  |      |          |   |      |   |          |      |  |   |         |  
|Depreciation and amortization                                                    |  |      | 1,505    |   |      |   | 1,255    |      |  |   | 1,390   |  
|Net amortization (accretion) on securities                                       |  |      | (1,453   | ) |      |   | (824     | )    |  |   | 25      |  
|Provision for loan losses                                                        |  |      | 1,575    |   |      |   | 1,700    |      |  |   | 1,825   |  
|Federal Home Loan Bank stock dividend                                            |  |      |         |   |      |   | (254     | )    |  |   | (208    | )
|Amortization of acquisition intangibles                                          |  |      | 1,090    |   |      |   | 645      |      |  |   | 646     |  
|Earnings on life insurance                                                       |  |      | (749     | ) |      |   | (701     | )    |  |   | (472    | )
|Loss on sale/write-down of other real estate                                     |  |      | 312      |   |      |   | 224      |      |  |   | 123     |  
|Gains on sales of loans                                                          |  |      | (919     | ) |      |   | (1,056   | )    |  |   | (965    | )
|Proceeds from loans sold                                                         |  |      | 71,668   |   |      |   | 80,814   |      |  |   | 81,356  |  
|Origination of loans held for sale                                               |  |      | (69,413  | ) |      |   | (82,158  | )    |  |   | (80,609 | )
|Stock based compensation expense                                                 |  |      | 839      |   |      |   | 775      |      |  |   |        |  
|Net change in:                                                                   |  |      |          |   |      |   |          |      |  |   |         |  
|Accrued interest receivable and other assets                                     |  |      | (2,369   | ) |      |   | (2,153   | )    |  |   | (1,903  | )
|Accrued expenses and other liabilities                                           |  |      | 1,338    |   |      |   | 2,544    |      |  |   | 2,334   |  
|                                                                                 |  |      |          |   |      |   |          |      |  |   |         |  
|Net cash from operating activities                                               |  |      | 14,555   |   |      |   | 11,263   |      |  |   | 13,669  |  
|                                                                                 |  |      |         
|Cash flows from investing activities                                             |  |      |          |   |      |   |          |      |  |   |         |  
|Net change in interest-bearing deposits with banks                               |  |      |         |   |      |   |         |      |  |   | (100    | )
|Proceeds from maturities and principal reductions of held-to-maturity securities |  |      | 3,445    |   |      |   | 2,778    |      |  |   | 4,100   |  
|Purchase of held-to-maturity securities                                          |  |      | (7,662   | ) |      |   |         |      |  |   | (6,883  | )
|Proceeds from maturities and sales of available-for-sale securities              |  |      | 272,327  |   |      |   | 113,967  |      |  |   | 28,902  |  
|Purchase of available-for-sale securities                                        |  |      | (313,153 | ) |      |   | (140,098 | )    |  |   | (56,883 | )
|Loans made to customers, net of principal collections                            |  |      | (75,574  | ) |      |   | (89,817  | )    |  |   | (17,987 | )
|Property and equipment expenditures, net                                         |  |      | (2,095   | ) |      |   | (1,074   | )    |  |   | (2,850  | )
|Purchase of Company owned life insurance                                         |  |      |         |   |      |   |         |      |  |   | (6,500  | )
|Proceeds from the sale of other real estate                                      |  |      | 163      |   |      |   | 6,150    |      |  |   | 1,064   |  
|Net payments in acquisition                                                      |  |      | (12,014  | ) |      |   |         |      |  |   |        |  
|                                                                                 |  |      |          |   |      |   |          |      |  |   |         |  
|Net cash from investing activities                                               |  |      | (134,563 | ) |      |   | (108,094 | )    |  |   | (57,137 | )
|                                                                                 |  |      |         
|Cash flows from financing activities                                             |  |      |          |   |      |   |          |      |  |   |         |  
|Net change in deposits                                                           |  |      | 84,470   |   |      |   | 83,317   |      |  |   | 78,327  |  
|Net change in short-term borrowings                                              |  |      | 6,829    |   |      |   | 11,735   |      |  |   | (4,936  | )
|Advances on notes payable                                                        |  |      | 18,557   |   |      |   |         |      |  |   |        |  
|Payments on notes payable                                                        |  |      | (14      | ) |      |   | (10,033  | )    |  |   | (3,042  | )
|Dividends paid on common stock                                                   |  |      | (2,651   | ) |      |   | (2,217   | )    |  |   | (1,772  | )
|Stock repurchase and retirement                                                  |  |      | (3,943   | ) |      |   | (3,077   | )    |  |   | (1,288  | )
|Proceeds from exercise of stock options                                          |  |      | 777      |   |      |   | 621      |      |  |   | 117     |  
|                                                                                 |  |      |          |   |      |   |          |      |  |   |         |  
|Net cash from financing activities                                               |  |      | 104,025  |   |      |   | 80,346   |      |  |   | 67,406  |  
|                                                                                 |  |      |          |   |      |   |          |      |  |   |         |  
|Net change in cash and cash equivalents                                          |  |      | (15,983  | ) |      |   | (16,485  | )    |  |   | 23,938  |  
|                                                                                 |  |      |         
|Cash and cash equivalents at beginning of year                                   |  |      | 54,859   |   |      |   | 71,344   |      |  |   | 47,406  |  
|                                                                                 |  |      |          |   |      |   |          |      |  |   |         |  
|Cash and cash equivalents at end of year                                         |  | $    | 38,876   |   |      | $ | 54,859   |      |  | $ | 71,344  |  
|                                                                                 |  |      |          |   |      |   |          |      |  |   |         |  
|Supplemental cash flow information:                                              |  |      |          |   |      |   |          |      |  |   |         |  
|Cash paid for interest                                                           |  | $    | 37,145   |   |      | $ | 27,666   |      |  | $ | 16,550  |  
|Cash paid for income taxes                                                       |  |      | 5,503    |   |      |   | 4,203    |      |  |   | 4,920   |  
|Supplemental noncash disclosures:                                                |  |      |          |   |      |   |          |      |  |   |         |  
|Transfers from loans to other real estate                                        |  | $    | 1,612    |   |      | $ | 4,292    |      |  | $ | 4,416   |  
|Transfers from property and equipment to other real estate                       |  |      |         |   |      |   |         |      |  |   | 400     |  

See accompanying notes.



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##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007, 2006 and 2005

(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 and also in Greater Cincinnati. Operations consist of generating commercial, mortgage and consumer loans
and accepting deposits from customers. The loan portfolio is diversified and the ability of debtors to repay loans is not dependent upon any single industry. The majority of the institutions loans are secured by specific items of collateral
including business assets, real property and consumer assets.

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

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

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.

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

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 issuer, 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)



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##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007, 2006 and 2005

(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. Most loans are sold servicing released such that there would be no servicing asset recognized upon the sale.

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

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

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)



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##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007, 2006 and 2005

(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 less cost to sell when acquired, establishing a new cost basis. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Expenses incurred in carrying other real estate are charged to operations
as incurred. A total of $4,117 and $2,981 of other real estate was owned on December 31, 2007 and 2006, respectively, and included in other assets.

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

Company Owned Life Insurance: The Company has purchased life insurance policies on certain key executives. Upon adoption of EITF 06-5, which is discussed further
below, Company owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at
settlement. Prior to adoption of EITF 06-5, the Company recorded owned life insurance at its cash surrender value.

In September 2006, the FASB Emerging
Issues Task Force finalized Issue No. 06-5, Accounting for Purchases of Life InsuranceDetermining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4 (Accounting for Purchases of Life
Insurance){Issue}.This Issue requires that a policyholder consider contractual terms of a life insurance policy in determining the amount that could be realized under the insurance contract. It also requires that if the



(Continued)



56



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##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007, 2006 and 2005

(Dollar amounts in thousands, except per share amounts)



NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)



contract provides for a greater surrender value if all individual policies in a group are surrendered at the same time, that the surrender value be
determined based on the assumption that policies will be surrendered on an individual basis. Lastly, the Issue requires disclosure when there are contractual restrictions on the Companys ability to surrender a policy. The adoption of EITF 06-5
on January 1, 2007 had no impact on the Companys financial condition or results of operation.

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 either on the straight-line method or an accelerated method over their estimated useful lives of eight to ten years
for the core deposit intangible and seven to ten 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)



57



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##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007, 2006 and 2005

(Dollar amounts in thousands, except per share amounts)



NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)



Stock Based Compensation: Effective January 1, 2006, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 123(R), Share-based Payment, using the modified prospective transition method. Accordingly, the Company has recorded stock-based employee compensation cost using the fair value method starting
in 2006.

Prior to January 1, 2006, employee compensation expense under stock options was reported using the intrinsic value method; therefore, no
stock-based compensation cost is reflected in net income for the year ending December 31, 2005, 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,for the year ending December 31.



|                                                                                  |  |      |       
|--------------------------------------------------------------------------------- |  | ---- | ------
|                                                                                  |  | 2005
|Net income as reported                                                            |  | $    | 10,127
|Deduct: Stock-based compensation expense determined under fair value based method |  |      | 575   
|                                                                                  |  |      |       
|Pro forma net income                                                              |  |      | 9,552 
|                                                                                  | 
|Basic earnings per share as reported                                              |  |      | 1.71  
|Pro forma basic earnings per share                                                |  |      | 1.62  
|                                                                                  | 
|Diluted earnings per share as reported                                            |  |      | 1.70  
|Pro forma diluted earnings per share                                              |  |      | 1.61  

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.

The Company adopted FASB Interpretation 48, Accounting for Uncertainty in Income Taxes (FIN 48), as of January 1, 2007. A tax position is
recognized as a benefit only if it is more likely than not that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is
greater than 50% likely of being realized on examination. For tax positions not meeting the more likely than not test, no tax benefit is recorded. The adoption had no affect on the Companys financial statements.

(Continued)



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##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007, 2006 and 2005

(Dollar amounts in thousands, except per share amounts)



NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)



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

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

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

Dividend Restriction: Banking regulations require the maintenance of certain capital levels and may limit the amount of dividends which may be paid by the Bank to
the Company or by the Company to its shareholders. See Note 16 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.

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)



59



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##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007, 2006 and 2005

(Dollar amounts in thousands, except per share amounts)



NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)



Earnings Per Common Share: Basic earnings per common share is net income divided by the weighted average
number of common shares outstanding during the period. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable under stock options. Earnings and dividends per share are restated for all stock
splits and stock dividends through the date of issuance of the financial statements.

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

Adoption of New Accounting Standards: The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48),on January 1, 2007. The adoption of FIN
48 had no effect on the Companys financial statements. The Company has no unrecognized tax benefits as of January 1, 2007 and did not recognize any increase in unrecognized benefits during 2007 relative to any tax positions taken in 2007.
Should the accrual of any interest or penalties relative to unrecognized tax benefits be necessary, it is the Companys policy to record such accruals in its income taxes accounts; no such accruals existed as of December 31, 2007. The
Company and its corporate subsidiary file a consolidated U.S. federal income tax return, which is subject to examination for all years after 2003.

In
February 2006, the Financial Accounting Standards Board (FASB) issued Statement No. 155, Accounting for Certain Hybrid Financial Instruments-an amendment to FASB Statements No. 133 and 140. This Statement permits fair value
re-measurement for any hybrid financial instruments, clarifies which instruments are subject to the requirements of Statement No. 133, and establishes a requirement to evaluate interests in securitized financial assets and other items. The new
standard is effective for financial assets acquired or issued after the beginning of the entitys first fiscal year that begins after September 15, 2006. The adoption of this standard did not have a material impact on the
Corporations financial statements.

In September 2006, the FASB Emerging Issues Task Force finalized Issue No. 06-5, Accounting for Purchases
of Life Insurance - Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4 (Accounting for Purchases of Life Insurance).This issue requires that a policyholder consider contractual terms of a life
insurance policy in determining the amount that could be realized under the insurance contract. It also requires that if the contract provides for a greater surrender value if all individual policies in a group are surrendered at the same time, that
the surrender value be determined based on the assumption that policies will be surrendered on an individual basis. Lastly, the issue discusses whether the cash surrender



(Continued)



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##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007, 2006 and 2005

(Dollar amounts in thousands, except per share amounts)



NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)



value should be discounted when the policyholder is contractually limited in its ability to surrender a policy. The adoption of this standard did not have a
material impact on the Corporations financial statements.

Effect of Newly Issued But Not Yet Effective Accounting Standards: In September
2006, the Financial Accounting Standards Board, FASB, issued Statement No. 157, Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair
value measurements. This Statement establishes a fair value hierarchy about the assumptions used to measure fair value and clarifies assumptions about risk and the effect of a restriction on the sale or use of an asset. The new standard is effective
for fiscal years beginning after November 15, 2007. The Corporation does not believe the adoption of this issue will have a material impact on the financial statements.

In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities.The standard provides companies with an option to report selected financial assets
and liabilities at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. The new standard is
effective for the Company on January 1, 2008. The Company did not elect the fair value option for any financial assets or financial liabilities as of January 1, 2008.

In September 2006, the FASB Emerging Issues Task Force finalized Issue No. 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements. This issue requires that a liability be recorded during the service period when a split-dollar life insurance agreement continues after participants employment or retirement. The required accrued liability will be based on
either the post-employment benefit cost for the continuing life insurance or based on the future death benefit depending on the contractual terms of the underlying agreement. This issue is effective for fiscal years beginning after December 15,
2007. The Corporation does not believe the adoption of this issue will have a material impact on the financial statements.

On November 5, 2007, the
SEC issued Staff Accounting Bulletin No. 109, Written Loan Commitments Recorded at Fair Value through Earnings(SAB 109). Previously, SAB 105, Application of Accounting Principles to Loan Commitments, stated that in
measuring the fair value of a derivative loan commitment, a company should not incorporate the expected net future cash flows related to the associated servicing of the loan. SAB 109 supersedes SAB 105 and indicates that the expected net future cash
flows related to the associated servicing of the loan should be included in measuring fair value for all written loan commitments that are accounted for at fair value through earnings. SAB 105 also indicated that internally-developed intangible
assets should not be recorded as part of the fair value of a derivative loan commitment, and SAB 109 retains that view. SAB 109 is effective for derivative loan commitments issued or



(Continued)



61



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##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007, 2006 and 2005

(Dollar amounts in thousands, except per share amounts)



NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)



modified in fiscal quarters beginning after December 15, 2007. The Company does not expect the impact of this standard to be material.

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 | 
|2007                                                                   |  |           |         |                      |   |                       |  |   |      |  
|U.S. Government, federal agencies and Government sponsored enterprises |  | $         | 96,975  |                      | $ | 271                   |  | $ | (30  | )
|U.S. Treasury                                                          |  |           | 39,995  |                      |   |                      |  |   | (4   | )
|Mortgage-backed                                                        |  |           | 13,799  |                      |   | 118                   |  |   | (29  | )
|Corporate                                                              |  |           | 1,300   |                      |   |                      |  |   |     |  
|                                                                       |  |           |         |                      |   |                       |  |   |      |  
|                                                                       |  | $         | 152,069 |                      | $ | 389                   |  | $ | (63  | )
|                                                                       |  |           |         |                      |   |                       |  |   |      |  
|                                                                       |  | FairValue |         | GrossUnrealizedGains |   | GrossUnrealizedLosses | 
|2006                                                                   |  |           |         |                      |   |                       |  |   |      |  
|U.S. Government, federal agencies and Government sponsored enterprises |  | $         | 86,381  |                      | $ | 59                    |  | $ | (340 | )
|U.S. Treasury                                                          |  |           | 14,996  |                      |   | 1                     |  |   |     |  
|Mortgage-backed                                                        |  |           | 4,194   |                      |   | 9                     |  |   | (111 | )
|Corporate                                                              |  |           | 1,355   |                      |   |                      |  |   |     |  
|                                                                       |  |           |         |                      |   |                       |  |   |      |  
|                                                                       |  | $         | 106,926 |                      | $ | 69                    |  | $ | (451 | )
|                                                                       |  |           |         |                      |   |                       |  |   |      |  

(Continued)



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##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007, 2006 and 2005

(Dollar amounts in thousands, except per share amounts)



NOTE 2 - SECURITIES(Continued)



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



|                                |  |                |        |                        |   |                         |  |   |           |   |  |   |       
|------------------------------- |  | -------------- | ------ | ---------------------- | - | ----------------------- |  | - | --------- | - |  | - | ------
|Held-to-Maturity                |  | CarryingAmount |        | GrossUnrecognizedGains |   | GrossUnrecognizedLosses |  |   | FairValue
|2007                            |  |                |        |                        |   |                         |  |   |           |   |  |   |       
|Municipal and other obligations |  | $              | 16,230 |                        | $ | 21                      |  | $ | (81       | ) |  | $ | 16,170
|                                |  |                |        |                        |   |                         |  |   |           |   |  |   |       
|2006                            |  |                |        |                        |   |                         |  |   |           |   |  |   |       
|Municipal and other obligations |  | $              | 12,028 |                        | $ | 13                      |  | $ | (226      | ) |  | $ | 11,815
|                                |  |                |        |                        |   |                         |  |   |           |   |  |   |       

The fair value of debt securities and carrying amount, if different, at year-end 2007 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
|                                       |  | FairValue          |         | CarryingValue    |   | FairValue
|Due in one year or less                |  | $                  | 97,214  |                  | $ | 3,147     |  | $ | 3,146 
|Due after one year through five years  |  |                    | 35,754  |                  |   | 8,134     |  |   | 8,118 
|Due after five years through ten years |  |                    | 4,002   |                  |   | 4,949     |  |   | 4,906 
|Due after ten years                    |  |                    | 1,300   |                  |   |           |  |   |       
|Mortgage-backed                        |  |                    | 13,799  |                  |   |          |  |   |      
|                                       |  |                    |         |                  |   |           |  |   |       
|                                       |  | $                  | 152,069 |                  | $ | 16,230    |  | $ | 16,170
|                                       |  |                    |         |                  |   |           |  |   |       

There were no sales of available for sale securities in 2005, 2006 or 2007.

At December 31, 2007 and 2006, securities with a carrying value of $114,320 and $96,655 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, 2007, 2006 and 2005

(Dollar amounts in thousands, except per share amounts)



NOTE 2 - SECURITIES(Continued)



Securities with unrealized losses at year-end 2007, aggregated by investment category and length of time that
individual securities have been in a continuous unrealized loss position, were as follows:



|                                                                                             |  |                     |        |                |                   |     |           |       |                |        |  |           |      |                |  |   |        |  |   |      |  
|-------------------------------------------------------------------------------------------- |  | ------------------- | ------ | -------------- | ----------------- | --- | --------- | ----- | -------------- | ------ |  | --------- | ---- | -------------- |  | - | ------ |  | - | ---- | -
|                                                                                             |  | Less than 12 Months |        |                | 12 Months or More |     |           | Total |               
|Description of Securities                                                                    |  | FairValue           |        | UnrealizedLoss |                   |     | FairValue |       | UnrealizedLoss |        |  | FairValue |      | UnrealizedLoss | 
|2007                                                                                         |  |                     |        |                |                   |     |           |       |                |        |  |           |      |                |  |   |        |  |   |      |  
|U.S. Government, federal agencies and government sponsored enterprises                       |  | $                   | 4,002  |                | $                 | (3  | )         |       | $              | 9,498  |  | $         | (27  | )              |  | $ | 13,500 |  | $ | (30  | )
|U.S Treasury                                                                                 |  |                     | 39,995 |                |                   | (4  | )         |       |                |       |  |           |     |                |  |   | 39,995 |  |   | (4   | )
|Mortgage-backed                                                                              |  |                     | 284    |                |                   | (2  | )         |       |                | 2,282  |  |           | (27  | )              |  |   | 2,566  |  |   | (29  | )
|Municipal & other obligations                                                                |  |                     | 1,638  |                |                   | (11 | )         |       |                | 6,660  |  |           | (70  | )              |  |   | 8,298  |  |   | (81  | )
|                                                                                             |  |                     |        |                |                   |     |           |       |                |        |  |           |      |                |  |   |        |  |   |      |  
|Total temporarily impaired                                                                   |  | $                   | 45,919 |                | $                 | (20 | )         |       | $              | 18,440 |  | $         | (124 | )              |  | $ | 64,359 |  | $ | (144 | )
|                                                                                             |  |                     |        |                |                   |     |           |       |                |        |  |           |      |                |  |   |        |  |   |      |  
|                                                                                            
|Securities with unrealized losses at year end 2006 not recognized in income were as follows: | 
|                                                                                             |  |                     |        |                |                   |    
|2006                                                                                         |  |                     |        |                |                   |     |           |       |                |        |  |           |      |                |  |   |        |  |   |      |  
|U.S. Government, federal agencies and government sponsored enterprises                       |  | $                   | 6,707  |                | $                 | (36 | )         |       | $              | 33,774 |  | $         | (304 | )              |  | $ | 40,481 |  | $ | (340 | )
|Mortgage-backed                                                                              |  |                     | 715    |                |                   | (5  | )         |       |                | 2,918  |  |           | (106 | )              |  |   | 3,633  |  |   | (111 | )
|Municipal & other obligations                                                                |  |                     |       |                |                   |    |           |       |                | 10,154 |  |           | (226 | )              |  |   | 10,154 |  |   | (226 | )
|                                                                                             |  |                     |        |                |                   |     |           |       |                |        |  |           |      |                |  |   |        |  |   |      |  
|Total temporarily impaired                                                                   |  | $                   | 7,422  |                | $                 | (41 | )         |       | $              | 46,846 |  | $         | (636 | )              |  | $ | 54,268 |  | $ | (677 | )
|                                                                                             |  |                     |        |                |                   |     |           |       |                |        |  |           |      |                |  |   |        |  |   |      |  

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, 2007, 2006 and 2005

(Dollar amounts in thousands, except per share amounts)



NOTE 3 - LOANS

Year-end loans were as follows:

|                                     |  |      |         |   |      |   |         |  
|------------------------------------ |  | ---- | ------- | - | ---- | - | ------- | -
|                                     |  | 2007 |         |   | 2006 |  
|Commercial                           |  | $    | 182,431 |   |      | $ | 151,213 |  
|Residential real estate              |  |      | 215,915 |   |      |   | 181,534 |  
|Nonresidential real estate           |  |      | 387,234 |   |      |   | 359,943 |  
|Construction                         |  |      | 134,807 |   |      |   | 95,812  |  
|Consumer                             |  |      | 20,601  |   |      |   | 19,260  |  
|Municipal obligations                |  |      | 9,354   |   |      |   | 6,970   |  
|                                     |  |      |         |   |      |   |         |  
|Gross loans                          |  |      | 950,342 |   |      |   | 814,732 |  
|Less: Deferred loan origination fees |  |      | (628    | ) |      |   | (631    | )
|Allowance for loan losses            |  |      | (8,505  | ) |      |   | (6,918  | )
|                                     |  |      |         |   |      |   |         |  
|Net loans                            |  | $    | 941,209 |   |      | $ | 807,183 |  
|                                     |  |      |         |   |      |   |         |  

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



|                                                    |  |      |         |  
|--------------------------------------------------- |  | ---- | ------- | -
|                                                    |  | 2007 |        
|Beginning balance                                   |  | $    | 13,777  |  
|New loans and advances on lines of credit           |  |      | 18,366  |  
|Loan reductions                                     |  |      | (16,961 | )
|Effect of changes in composition of related parties |  |      | (3,212  | )
|                                                    |  |      |         |  
|Ending balance                                      |  | $    | 11,970  |  
|                                                    |  |      |         |  

(Continued)



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THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007, 2006 and 2005

(Dollar amounts in thousands, except per share amounts)



NOTE 4 - ALLOWANCE FOR LOAN LOSSES

Activity in the allowance for loan losses was as follows:



|                                                        |  |      |        |   |      |   |        |      |  |   |        |  
|------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                        |  | 2007 |        |   | 2006 |   |        | 2005 | 
|Beginning balance                                       |  | $    | 6,918  |   |      | $ | 7,581  |      |  | $ | 7,214  |  
|Allowance of acquired bank                              |  |      | 1,010  |   |      |   |       |      |  |   |       |  
|Provision charged to operations                         |  |      | 1,575  |   |      |   | 1,700  |      |  |   | 1,825  |  
|Loans charged off                                       |  |      | (1,497 | ) |      |   | (2,444 | )    |  |   | (1,536 | )
|Recoveries                                              |  |      | 499    |   |      |   | 81     |      |  |   | 78     |  
|                                                        |  |      |        |   |      |   |        |      |  |   |        |  
|Ending balance                                          |  | $    | 8,505  |   |      | $ | 6,918  |      |  | $ | 7,581  |  
|                                                        |  |      |        |   |      |   |        |      |  |   |        |  
|Nonperforming and impaired loans were as follows:       |  |      |        |   |      |   |        |      |  |   |        |  
|Nonaccrual loans at year-end                            |  | $    | 6,389  |   |      | $ | 2,905  |      |  | $ | 6,696  |  
|Loans past due over 90 days, still accruing at year-end |  |      | 2,658  |   |      |   | 2,068  |      |  |   | 2,349  |  
|Average impaired loans during the year                  |  |      | 8,785  |   |      |   | 7,741  |      |  |   | 10,318 |  
|Interest income recognized during impairment            |  |      | 444    |   |      |   | 391    |      |  |   | 669    |  
|Interest income received during impairment              |  |      | 336    |   |      |   | 342    |      |  |   | 675    |  
|Loans designated as impaired at year-end                |  |      | 7,899  |   |      |   | 6,142  |      |  |   | 8,925  |  
|Allowance allocated to impaired loans at year-end       |  |      | 2,833  |   |      |   | 1,783  |      |  |   | 3,136  |  

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

NOTE 5 - PREMISES AND EQUIPMENT

Year-end premises and equipment were as follows:



|                                  |  |      |         |   |      |   |        |  
|--------------------------------- |  | ---- | ------- | - | ---- | - | ------ | -
|                                  |  | 2007 |         |   | 2006 |  
|Land and improvements             |  | $    | 5,779   |   |      | $ | 5,087  |  
|Leasehold improvements            |  |      | 1,733   |   |      |   | 1,572  |  
|Buildings                         |  |      | 12,567  |   |      |   | 11,689 |  
|Furniture, fixtures and equipment |  |      | 8,678   |   |      |   | 8,132  |  
|                                  |  |      |         |   |      |   |        |  
|Total                             |  |      | 28,757  |   |      |   | 26,480 |  
|Accumulated depreciation          |  |      | (10,993 | ) |      |   | (9,411 | )
|                                  |  |      |         |   |      |   |        |  
|Net premises and equipment        |  | $    | 17,764  |   |      | $ | 17,069 |  
|                                  |  |      |         |   |      |   |        |  

(Continued)



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THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007, 2006 and 2005

(Dollar amounts in thousands, except per share amounts)



NOTES 5 - PREMISES AND EQUIPMENT(Continued)



Depreciation expense was $1,625, $1,486 and $1,436 for 2007, 2006, and 2005, respectively. Year-end premises included
$544,000 for the Walton banking center that was relocated on December 31, 2007. This property is currently held for sale. The propertys estimated fair value exceeds its carrying value.

NOTE 6 - ACQUISITION

On May 21, 2007, the Company announced it
had completed its acquisition of FNB Bancorporation, Inc. and its subsidiary, First Bank of Northern Kentucky, Inc. (First Bank). First Bank was merged into the Bank, and currently operates under The Bank of Kentucky name. As of the
closing date of the acquisition, First Bank had approximately $74,000, in total assets, which included $63,000 in loans, and $63,000 in deposits on the liability side of the balance sheet. The total purchase price for this acquisition was $20,400
which was funded in part by issuing $18,000 in Trust Preferred Securities, as further described in Note 10. The acquisition included a core deposit intangible asset of $1,505, a customer relationship intangible asset of $1,125 and goodwill of
$5,342. The acquisition also included a deferred tax asset of approximately $4,709, resulting from a net operating loss carry-forward. The results of operations for this acquisition have been included since the transaction date of May 18, 2007.

(Continued)



67



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##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007, 2006 and 2005

(Dollar amounts in thousands, except per share amounts)



NOTE 7 - GOODWILL AND ACQUISITION INTANGIBLES

Goodwill

The change in the carrying amount of goodwill for the year is solely attributable to the initial recording
of goodwill in connection with the acquisition of FNB Bancorporation, Inc. and its subsidiary, First Bank of Northern Kentucky, Inc., detailed in Note 6.

Acquisition Intangibles

Acquisition intangibles were as follows as of year-end:



|                                        |  |      |       |      |   |      
|--------------------------------------- |  | ---- | ----- | ---- | - | -----
|                                        |  | 2007 |       | 2006
|Core deposit intangibles                |  | $    | 4,368 |      | $ | 2,863
|Other customer relationship intangibles |  |      | 3,170 |      |   | 2,045
|                                        |  |      |       |      |   |      
|Total                                   |  |      | 7,538 |      |   | 4,908
|Accumulated amortization                |  |      | 3,708 |      |   | 2,618
|                                        |  |      |       |      |   |      
|Net                                     |  | $    | 3,830 |      | $ | 2,290
|                                        |  |      |       |      |   |      

Aggregate amortization expense was $1,090, $645 and $646 for 2007, 2006 and 2005, respectively.

Estimated amortization expense for each of the next five years:



|     |  |   |      
|---- |  | - | -----
|2008 |  | $ | 1,277
|2009 |  |   | 1,094
|2010 |  |   | 675  
|2011 |  |   | 232  
|2012 |  |   | 170  

(Continued)



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##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007, 2006 and 2005

(Dollar amounts in thousands, except per share amounts)



NOTE 8 - INTEREST BEARING DEPOSITS

Time deposits of $100 or more were $125,577 and $109,730 at year-end 2007 and 2006.

Scheduled maturities of time deposits
are as follows:



|     |  |   |        
|---- |  | - | -------
|2008 |  | $ | 311,225
|2009 |  |   | 56,415 
|2010 |  |   | 3,702  
|2011 |  |   | 831    
|2012 |  |   | 1,334  
|     |  |   |        
|     |  | $ | 373,507
|     |  |   |        

Deposits from directors and their affiliates at year-end 2007 and 2006 were $6,272 and $14,701, respectively,
comprising .59% and 1.61%, respectively, of total deposits at those dates.

NOTE 9 - SHORT-TERM BORROWINGS

Short-term borrowings consisted of the following:



|                             |  |      |        |      |   |       
|---------------------------- |  | ---- | ------ | ---- | - | ------
|                             |  | 2007 |        | 2006
|Revolving line of credit     |  | $    | 2,200  |      | $ | 500   
|Fed funds purchased          |  |      | 2,770  |      |   |      
|Retail repurchase agreements |  |      | 17,819 |      |   | 15,460
|                             |  |      |        |      |   |       
|                             |  | $    | 22,789 |      | $ | 15,960
|                             |  |      |        |      |   |       

Repurchase agreements outstanding at year-end 2007 had remaining maturities ranging from one day up to one year.

Information regarding repurchase agreements for the years ended December 31, 2007 and 2006 is presented below:



|                                          |  |      |        |   |      |   |        |  
|----------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                          |  | 2007 |        |   | 2006 |  
|Average balance during the year           |  | $    | 16,410 |   |      | $ | 8,684  |  
|Maximum month end balance during the year |  |      | 19,054 |   |      |   | 15,460 |  
|Average rate paid during the year         |  |      | 3.57   | % |      |   | 3.96   | %
|                                          |  |     
|Year-end weighted average rate            |  |      | 2.64   | % |      |   | 3.83   | %

(Continued)



69



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##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007, 2006 and 2005

(Dollar amounts in thousands, except per share amounts)



NOTE 9 - SHORT-TERM BORROWINGS(Continued)



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 $2,200 at December 31, 2007.

NOTE 10 - NOTES PAYABLE

Notes payable consisted of the following:



|                        |  |      |        |      |   |       
|----------------------- |  | ---- | ------ | ---- | - | ------
|                        |  | 2007 |        | 2006
|FHLB advances           |  | $    | 6,000  |      | $ | 6,110 
|Subordinated debentures |  |      | 36,083 |      |   | 17,526
|Other notes payable     |  |      | 257    |      |   | 271   
|                        |  |      |        |      |   |       
|                        |  | $    | 42,340 |      | $ | 23,907
|                        |  |      |        |      |   |       

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:



|                                                                                    |  |      |       |      |   |      
|----------------------------------------------------------------------------------- |  | ---- | ----- | ---- | - | -----
|                                                                                    |  | 2007 |       | 2006
|Convertible fixed rate advances with maturity in 2010 and an interest rate of 5.01% |  | $    | 6,000 |      | $ | 6,000
|                                                                                    |  |     
|Remaining premium reflecting market rate adjustment of assumed advances             |  |      |      |      |   | 110  
|                                                                                    |  |      |       |      |   |      
|                                                                                    |  | $    | 6,000 |      | $ | 6,110
|                                                                                    |  |      |       |      |   |      

Principal payments on FHLB advances for the next four years consist of $6,000 due in 2010.

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.

(Continued)



70



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##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007, 2006 and 2005

(Dollar amounts in thousands, except per share amounts)



NOTE 10 - NOTES PAYABLE(Continued)



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

Other notes payable included a capitalized lease obligation.

The Bank maintains a $125,000 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.

NOTE 11 - 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 $507, $534 and $432 for the years ended December 31, 2007, 2006 and 2005, respectively.

In 2003, the Company adopted a benefit
program for certain officers to encourage long-term retention. The program consists principally of a defined benefit component, providing each officer with payments equal to 30% of final average pay for 15 years after retirement, and a deferral
component, permitting each officer the ability to defer a portion of their current compensation and earn pre-tax returns on such deferred amounts. The accrued liability under the defined benefit component was $1,148 and $794 at December 31,
2007 and 2006, respectively. Expense related to the program was $354 and $283 for the years ended December 31, 2007 and 2006.



(Continued)



71



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##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007, 2006 and 2005

(Dollar amounts in thousands, except per share amounts)



NOTE 12 - STOCK-BASED COMPENSATION



Stock Option Plan

Options to buy stock are granted to directors, officers and employees under the Companys stock option and incentive plan which provide for the issuance of up to 1,200,000 shares. The Company believes that such awards better align the
interests of its employees with those of its shareholders. The specific terms of each option agreement are determined by the Compensation Committee at the date of the grant. For current options, outstanding, options granted to directors vest
immediately and options granted to employees generally vest evenly over a five-year period. The options lives are generally ten years for employees and five years for directors. Total compensation cost that has been charged against income for
those plans was $839, $775, and $0 for 2007, 2006 and 2005, respectively. The total income tax benefit was $77, $72, and $0.

The fair value of each option
award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model that uses the assumptions noted in the table below. Expected volatilities are based on historical volatilities of the Companys common stock. The
risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. Expected term is estimated based upon the contractual term and vesting period of the options including
consideration of historical trends segregated by employees and directors. A forfeiture rate of 13% for employees and 0% for directors is used in the model and is based on historical experience.

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



|                                |  |           |   |  |           |   |  |           |  
|------------------------------- |  | --------- | - |  | --------- | - |  | --------- | -
|                                |  | 2007      |   |  | 2006      |   |  | 2005      |  
|Risk-free interest rate         |  | 4.82      | % |  | 4.46      | % |  | 3.89      | %
|Expected term                   |  | 6.5 years |   |  | 6.7 years |   |  | 6.7 years |  
|Expected stock price volatility |  | 21.85     | % |  | 24.83     | % |  | 27.52     | %
|Dividend yield                  |  | 1.49      | % |  | 1.19      | % |  | .85       | %

A summary of the activity in the stock option plan for 2007 follows:



(Continued)



72



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##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007, 2006 and 2005

(Dollar amounts in thousands, except per share amounts)



NOTE 12 - STOCK-BASED COMPENSATION(Continued)



|                                 |  |         |   |  |                              |       |                                         |      |                         |   |    
|-------------------------------- |  | ------- | - |  | ---------------------------- | ----- | --------------------------------------- | ---- | ----------------------- | - | ---
|                                 |  | Shares  |   |  | WeightedAverageExercisePrice |       | WeightedAverageRemainingContractualTerm |      | AggregateIntrinsicValue
|Outstanding at beginning of year |  | 541,453 |   |  | $                            | 25.87 |                                         |     |                         |   |   
|Granted                          |  | 114,700 |   |  |                              | 26.19 |                                         |     |                         |   |   
|Exercised                        |  | (43,253 | ) |  |                              | 16.74 |                                         |     |                         |   |   
|Forfeited or expired             |  | (13,325 | ) |  |                              | 27.96 |                                         |     |                         |   |   
|                                 |  |         |   |  |                              |       |                                         |      |                         |   |    
|Outstanding at end of year       |  | 599,575 |   |  | $                            | 26.54 |                                         | 4.83 |                         | $ | 395
|                                 |  |         |   |  |                              |       |                                         |      |                         |   |    
|Exercisable at end of year       |  | 404,270 |   |  | $                            | 26.55 |                                         | 3.41 |                         | $ | 395

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



|                                               |  |      |      |      |   |      |  |   |     
|---------------------------------------------- |  | ---- | ---- | ---- | - | ---- |  | - | ----
|                                               |  | 2007 |      | 2006 |   | 2005
|Intrinsic value of options exercised           |  | $    | 398  |      | $ | 172  |  | $ | 34  
|Cash received from option exercises            |  |      | 724  |      |   | 564  |  |   | 117 
|Tax benefit realized from option exercises     |  |      | 53   |      |   | 57   |  |   | 9   
|Weighted average fair value of options granted |  |      | 7.38 |      |   | 7.77 |  |   | 8.81

As of December 31, 2007, there was $1,364,000 of total unrecognized compensation cost related to nonvested
stock options granted under the plan. The cost is expected to be recognized over a weighted-average period of 1.95 years.



(Continued)



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##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007, 2006 and 2005

(Dollar amounts in thousands, except per share amounts)



NOTE 13 - FEDERAL INCOME TAXES



Federal income taxes consisted of the following components:



|                     |  |      |       |   |      |   |       |  |   |       |  
|-------------------- |  | ---- | ----- | - | ---- | - | ----- |  | - | ----- | -
|                     |  | 2007 |       |   | 2006 |   | 2005  | 
|Income tax/(benefit) |  |      |       |   |      |   |       |  |   |       |  
|Currently payable    |  | $    | 4,948 |   |      | $ | 4,705 |  | $ | 4,863 |  
|Deferred             |  |      | (94   | ) |      |   | 82    |  |   | (268  | )
|                     |  |      |       |   |      |   |       |  |   |       |  
|                     |  | $    | 4,854 |   |      | $ | 4,787 |  | $ | 4,595 |  
|                     |  |      |       |   |      |   |       |  |   |       |  

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:



|                                                     |  |      |       |   |      |   |       |      |  |   |       |  
|---------------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                                     |  | 2007 |       |   | 2006 |   |       | 2005 | 
|Statutory rate applied to income before income taxes |  | $    | 5,595 |   |      | $ | 5,334 |      |  | $ | 5,153 |  
|Tax exempt income                                    |  |      | (200  | ) |      |   | (177  | )    |  |   | (188  | )
|Company owned life insurance income                  |  |      | (254  | ) |      |   | (238  | )    |  |   | (159  | )
|Low-income housing tax credit                        |  |      | (248  | ) |      |   | (248  | )    |  |   | (133  | )
|Historic tax credit                                  |  |      | (100  | ) |      |   |      |      |  |   |      |  
|Other                                                |  |      | 61    |   |      |   | 116   |      |  |   | (78   | )
|                                                     |  |      |       |   |      |   |       |      |  |   |       |  
|                                                     |  | $    | 4,854 |   |      | $ | 4,787 |      |  | $ | 4,595 |  
|                                                     |  |      |       |   |      |   |       |      |  |   |       |  



(Continued)



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##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007, 2006 and 2005

(Dollar amounts in thousands, except per share amounts)



NOTE 13 - FEDERAL INCOME TAXES(Continued)



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



|                                                     |  |      |        |   |      |   |        |  
|---------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                                     |  | 2007 |        |   | 2006 |  
|Deferred tax assets from:                            |  |      |        |   |      |   |        |  
|Allowance for loan losses                            |  | $    | 1,851  |   |      | $ | 2,369  |  
|State taxes                                          |  |      |       |   |      |   | 198    |  
|Benefit plans                                        |  |      | 616    |   |      |   | 441    |  
|Premises and equipment                               |  |      | 280    |   |      |   | 135    |  
|Net unrealized loss on available for sale securities |  |      |       |   |      |   | 135    |  
|Net operating loss carryforward                      |  |      | 4,527  |   |      |   |       |  
|Other                                                |  |      | 353    |   |      |   | 87     |  
|                                                     |  |      |        |   |      |   |        |  
|                                                     |  |      | 7,627  |   |      |   | 3,365  |  
|                                                     |  |     
|Deferred tax liabilities for:                        |  |      |        |   |      |   |        |  
|FHLB stock dividends                                 |  |      | (879   | ) |      |   | (860   | )
|Premises and equipment                               |  |      |       |   |      |   |       |  
|Acquisition intangibles                              |  |      | (1,843 | ) |      |   | (1,021 | )
|Net unrealized gain on available for sale securities |  |      | (124   | ) |      |   |       |  
|Other                                                |  |      |       |   |      |   |       |  
|                                                     |  |      |        |   |      |   |        |  
|                                                     |  |      | (2,846 | ) |      |   | (1,881 | )
|                                                     |  |      |        |   |      |   |        |  
|Net deferred tax asset                               |  | $    | 4,781  |   |      | $ | 1,484  |  
|                                                     |  |      |        |   |      |   |        |  

At year-end 2007, the Company had net operating loss carryforwards of approximately $13,217 which expire beginning
in 2022.

The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48),on January 1, 2007. The adoption of FIN 48 had no effect on the Companys financial statements. The Company had no unrecognized tax benefits as of January 1, 2007 and did not recognize any increase in unrecognized benefits during
2007 relative to any tax positions taken in 2007. Should the accrual of any interest or penalties relative to unrecognized tax benefits be necessary, it is the Companys policy to record such accruals in its income taxes accounts; no such
accruals exist as of December 31, 2007. The Company and its corporate subsidiary file a consolidated U.S. federal income tax return, which is subject to examination for all years after 2003.

Included in deferred tax assets at December 31, 2006 is $198 of federal tax benefit related to the SAB 108 adjustment.



(Continued)



75



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##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007, 2006 and 2005

(Dollar amounts in thousands, except per share amounts)



NOTE 14 - EARNINGS PER SHARE

Earnings per share is computed based upon the weighted average number of shares outstanding during the period which were 5,753,250 for 2007, 5,837,673 for 2006 and 5,909,087 for 2005. 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 2007, 2006 and 2005, this would result in an additional 24,452, 33,570 and 37,814 shares
outstanding, respectively. For 2007, 2006 and 2005, 415,290, 286,265 and 290,970 options were not considered, as they were not dilutive.

NOTE 15 -
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 $1,022, $967 and $914 for 2007, 2006 and 2005, respectively.
Minimum lease payments at December 31, 2007 for all non-cancelable leases were as follows:



|                             |  |   |      
|---------------------------- |  | - | -----
|2008                         |  | $ | 912  
|2009                         |  |   | 799  
|2010                         |  |   | 617  
|2011                         |  |   | 402  
|2012                         |  |   | 339  
|Thereafter                   |  |   | 533  
|                             |  |   |      
|Total minimum lease payments |  | $ | 3,602
|                             |  |   |      

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.

(Continued)



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##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007, 2006 and 2005

(Dollar amounts in thousands, except per share amounts)



NOTE 15 - COMMITMENTS AND OFF-BALANCE SHEET ACTIVITIES(Continued)



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



|                                            |  |           |       |              |         |           |   |              |  |   |        
|------------------------------------------- |  | --------- | ----- | ------------ | ------- | --------- | - | ------------ |  | - | -------
|                                            |  | 2 0 0 7   |       | 2 0 0 6     
|                                            |  | FixedRate |       | VariableRate |         | FixedRate |   | VariableRate
|Commitments to make loans (at market rates) |  | $         | 3,473 |              | 5,829   |           | $ | 9,491        |  | $ | 26,256 
|Unused lines of credit                      |  | $         |      |              | 248,961 |           | $ |             |  | $ | 217,673
|Unused letters of credit                    |  | $         |      |              | 65,304  |           | $ |             |  | $ | 69,415 

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 5.65% to 7.99% in 2007 and 6.25% to 9.25% in 2006.

At December 31, 2007 and 2006, the Bank was required to have $4,676 and $4,291, 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, with 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.

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

(Continued)



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THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007, 2006 and 2005

(Dollar amounts in thousands, except per share amounts)



NOTE 16 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally
for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to
qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. Management believes as of December 31, 2007, the Company and Bank meet all capital adequacy requirements to which they are subject.

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital
distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At year-end 2007 and 2006, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. There have been no subsequent conditions or events 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, 2007, 2006 and 2005

(Dollar amounts in thousands, except per share amounts)



NOTE 16 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS(Continued)



The consolidated and Banks capital amounts and ratios, at December 31, 2007 and 2006 are presented below:



|                                              |  |        |         |       |                              |   |        |                                                               |        |  |      |        |  |         |  |       |  
|--------------------------------------------- |  | ------ | ------- | ----- | ---------------------------- | - | ------ | ------------------------------------------------------------- | ------ |  | ---- | ------ |  | ------- |  | ----- | -
|                                              |  | Actual |         |       | For CapitalAdequacy Purposes |   |        | To Be WellCapitalized UnderPrompt CorrectiveAction Provisions |       
|                                              |  | Amount |         | Ratio |                              |   | Amount |                                                               | Ratio  |  |      | Amount |  | Ratio   | 
|2007                                          |  |        |         |       |                              |   |        |                                                               |        |  |      |        |  |         |  |       |  
|Total Capital to risk weighted assets         |  |        |         |       |                              |   |        |                                                               |        |  |      |        |  |         |  |       |  
|Consolidated                                  |  | $      | 113,390 |       | 10.12                        | % |        | $                                                             | 89,616 |  | 8.00 | %      |  | N/A     |  | N/A   |  
|Bank                                          |  |        | 114,931 |       | 10.28                        | % |        |                                                               | 89,463 |  | 8.00 | %      |  | 111,828 |  | 10.00 | %
|Tier 1 (Core) Capital to risk weighted assets |  |        |         |       |                              |   |        |                                                               |        |  |      |        |  |         |  |       |  
|Consolidated                                  |  | $      | 93,385  |       | 8.34                         | % |        | $                                                             | 44,808 |  | 4.00 | %      |  | N/A     |  | N/A   |  
|Bank                                          |  |        | 106,426 |       | 9.52                         | % |        |                                                               | 44,731 |  | 4.00 | %      |  | 67,097  |  | 6.00  | %
|Tier 1 (Core) Capital to average assets       |  |        |         |       |                              |   |        |                                                               |        |  |      |        |  |         |  |       |  
|Consolidated                                  |  | $      | 93,385  |       | 7.91                         | % |        | $                                                             | 47,215 |  | 4.00 | %      |  | N/A     |  | N/A   |  
|Bank                                          |  |        | 106,426 |       | 9.03                         | % |        |                                                               | 47,139 |  | 4.00 | %      |  | 58,923  |  | 5.00  | %
|                                              |  |        |        
|                                              |  | Actual |         |       | For CapitalAdequacy Purposes |   |        | To Be WellCapitalized UnderPrompt CorrectiveAction Provisions |       
|                                              |  | Amount |         | Ratio |                              |   | Amount |                                                               | Ratio  |  |      | Amount |  | Ratio   | 
|2006                                          |  |        |         |       |                              |   |        |                                                               |        |  |      |        |  |         |  |       |  
|Total Capital to risk weighted assets         |  |        |         |       |                              |   |        |                                                               |        |  |      |        |  |         |  |       |  
|Consolidated                                  |  | $      | 98,891  |       | 10.20                        | % |        | $                                                             | 77,581 |  | 8.00 | %      |  | N/A     |  | N/A   |  
|Bank                                          |  |        | 98,568  |       | 10.18                        | % |        |                                                               | 77,474 |  | 8.00 | %      |  | 96,842  |  | 10.00 | %
|Tier 1 (Core) Capital to risk weighted assets |  |        |         |       |                              |   |        |                                                               |        |  |      |        |  |         |  |       |  
|Consolidated                                  |  | $      | 91,973  |       | 9.48                         | % |        | $                                                             | 38,790 |  | 4.00 | %      |  | N/A     |  | N/A   |  
|Bank                                          |  |        | 91,650  |       | 9.46                         | % |        |                                                               | 38,737 |  | 4.00 | %      |  | 58,105  |  | 6.00  | %
|Tier 1 (Core) Capital to average assets       |  |        |         |       |                              |   |        |                                                               |        |  |      |        |  |         |  |       |  
|Consolidated                                  |  | $      | 91,973  |       | 9.13                         | % |        | $                                                             | 40,294 |  | 4.00 | %      |  | N/A     |  | N/A   |  
|Bank                                          |  |        | 91,650  |       | 9.11                         | % |        |                                                               | 40,240 |  | 4.00 | %      |  | 50,300  |  | 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)



79



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THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007, 2006 and 2005

(Dollar amounts in thousands, except per share amounts)



NOTE 16 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS(Continued)



During 2008, the Bank could, without prior approval, declare dividends of approximately $12,000 plus any 2008 net
profits retained to the date of the dividend declaration. At December 31, 2007, the Bank had capital in excess of the FDICs most restrictive minimum capital requirements (well capitalized) in an amount equal to $3.2 million from which
dividends could be paid.

On December 15, 2006, the Companys Board of Directors approved a share repurchase program. The repurchase program
began January 1, 2007 and expired on December 31, 2007. The repurchase program authorized 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. At
December 31, 2007 a total of 153,745 of the 200,000 shares had been repurchased.

On December 21, 2007, the Companys Board of Directors
approved a new share repurchase program. The repurchase program will begin January 1, 2008 and expire on December 31, 2008. The repurchase program authorized 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. Any repurchases will be funded, as needed, by dividends from the Bank, or from the Companys revolving line of credit.

NOTE 17 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

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



|                                     |  |               |            |   |           |   |            |               |  |   |           |   |  |   |          |  
|------------------------------------ |  | ------------- | ---------- | - | --------- | - | ---------- | ------------- |  | - | --------- | - |  | - | -------- | -
|                                     |  | 2 0 0 7       |            |   | 2 0 0 6   |  
|                                     |  | CarryingValue |            |   | FairValue |   |            | CarryingValue |  |   | FairValue |  
|Financial assets                     |  |               |            |   |           |   |            |               |  |   |           |   |  |   |          |  
|Cash and cash equivalents            |  | $             | 38,876     |   |           | $ | 38,876     |               |  | $ | 54,859    |   |  | $ | 54,859   |  
|Interest-bearing deposits with banks |  |               | 100        |   |           |   | 100        |               |  |   | 100       |   |  |   | 100      |  
|Available-for-sale securities        |  |               | 152,069    |   |           |   | 152,069    |               |  |   | 106,926   |   |  |   | 106,926  |  
|Held-to-maturity securities          |  |               | 16,230     |   |           |   | 16,170     |               |  |   | 12,028    |   |  |   | 11,815   |  
|Loans held for sale                  |  |               | 2,673      |   |           |   | 2,713      |               |  |   | 4,009     |   |  |   | 4,052    |  
|Loans (net)                          |  |               | 941,209    |   |           |   | 945,838    |               |  |   | 807,183   |   |  |   | 796,132  |  
|Federal Home Loan Bank stock         |  |               | 4,766      |   |           |   | 4,766      |               |  |   | 4,537     |   |  |   | 4,537    |  
|Accrued interest receivable          |  |               | 5,211      |   |           |   | 5,211      |               |  |   | 4,802     |   |  |   | 4,802    |  
|                                     |  |               |            |  
|Financial liabilities                |  |               |            |   |           |   |            |               |  |   |           |   |  |   |          |  
|Deposits                             |  |               | (1,062,079 | ) |           |   | (1,064,194 | )             |  |   | (914,427  | ) |  |   | (913,887 | )
|Short-term borrowings                |  |               | (22,789    | ) |           |   | (22,789    | )             |  |   | (15,960   | ) |  |   | (15,960  | )
|Notes payable                        |  |               | (42,340    | ) |           |   | (42,542    | )             |  |   | (23,907   | ) |  |   | (23,845  | )
|Accrued interest payable             |  |               | (6,908     | ) |           |   | (6,908     | )             |  |   | (5,575    | ) |  |   | (5,575   | )
|Standby letters of credit            |  |               | (313       | ) |           |   | (313       | )             |  |   | (330      | ) |  |   | (330     | )

(Continued)



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THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007, 2006 and 2005

(Dollar amounts in thousands, except per share amounts)



NOTE 17 - 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 commitments to make loans and unused lines of credit are considered nominal.

NOTE 18 - 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, 2007 and 2006



|                                     |  |      |         |      |   |        
|------------------------------------ |  | ---- | ------- | ---- | - | -------
|                                     |  | 2007 |         | 2006
|Assets                               |  |      |         |      |   |        
|Cash                                 |  | $    | 49      |      | $ | 204    
|Investment in bank subsidiary        |  |      | 130,027 |      |   | 103,560
|Investment in unconsolidated trust   |  |      | 1,083   |      |   | 526    
|Other assets                         |  |      | 835     |      |   | 808    
|                                     |  |      |         |      |   |        
|                                     |  | $    | 131,994 |      | $ | 105,098
|                                     |  |      |         |      |   |        
|Liabilities and shareholders equity |  |      |         |      |   |        
|Short-term borrowings                |  | $    | 2,200   |      | $ | 500    
|Subordinated debentures              |  |      | 36,083  |      |   | 17,526 
|Other liabilities                    |  |      | 226     |      |   | 189    
|                                     |  |      |         |      |   |        
|Total liabilities                    |  |      | 38,509  |      |   | 18,215 
|                                     |  |     
|Shareholders equity                 |  |      | 93,485  |      |   | 86,883 
|                                     |  |      |         |      |   |        
|                                     |  | $    | 131,994 |      | $ | 105,098
|                                     |  |      |         |      |   |        

(Continued)



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THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007, 2006 and 2005

(Dollar amounts in thousands, except per share amounts)



NOTE 18 - PARENT COMPANY FINANCIAL STATEMENTS(Continued)



CONDENSED STATEMENTS OF INCOME

Years ended December 31, 2007, 2006 and 2005



|                                                         |  |      |        |   |      |   |        |      |  |   |        |  
|-------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                         |  | 2007 |        |   | 2006 |   |        | 2005 | 
|Dividends from subsidiary                                |  | $    | 8,000  |   |      | $ | 5,900  |      |  | $ | 3,700  |  
|Interest expense                                         |  |      | (2,365 | ) |      |   | (1,447 | )    |  |   | (1,146 | )
|Operating expenses                                       |  |      | (1,037 | ) |      |   | (936   | )    |  |   | (137   | )
|Tax benefit                                              |  |      | 955    |   |      |   | 620    |      |  |   | 440    |  
|                                                         |  |      |        |   |      |   |        |      |  |   |        |  
|Income before equity in undistributed income of the Bank |  |      | 5,553  |   |      |   | 4,137  |      |  |   | 2,857  |  
|                                                         |  |      |       
|Equity in undistributed income of the Bank               |  |      | 5,578  |   |      |   | 6,315  |      |  |   | 7,270  |  
|                                                         |  |      |        |   |      |   |        |      |  |   |        |  
|Net income                                               |  | $    | 11,131 |   |      | $ | 10,452 |      |  | $ | 10,127 |  
|                                                         |  |      |        |   |      |   |        |      |  |   |        |  

(Continued)



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THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007, 2006 and 2005

(Dollar amounts in thousands, except per share amounts)



NOTE 18 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)



CONDENSED STATEMENTS OF CASH FLOWS

Years ended December 31, 2007, 2006 and 2005



|                                                                          |  |      |         |   |      |   |        |      |  |   |        |  
|------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                          |  | 2007 |         |   | 2006 |   |        | 2005 | 
|Cash flows from operating activities                                      |  |      |         |   |      |   |        |      |  |   |        |  
|Net income                                                                |  | $    | 11,131  |   |      | $ | 10,452 |      |  | $ | 10,127 |  
|                                                                          |  |      |        
|Adjustments to reconcile net income to net cash from operating activities |  |      |         |   |      |   |        |      |  |   |        |  
|Equity in undistributed income of the Bank                                |  |      | (5,578  | ) |      |   | (6,315 | )    |  |   | (7,270 | )
|Other changes                                                             |  |      | 849     |   |      |   | 780    |      |  |   | 80     |  
|                                                                          |  |      |         |   |      |   |        |      |  |   |        |  
|Net cash from operating activities                                        |  |      | 6,402   |   |      |   | 4,917  |      |  |   | 2,937  |  
|                                                                          |  |      |        
|Cash flows from investing activities                                      |  |      |         |   |      |   |        |      |  |   |        |  
|Cash paid for acquisition                                                 |  |      | (20,440 | ) |      |   |       |      |  |   |       |  
|Contribution to Bank                                                      |  |      |        |   |      |   | (1,000 | )    |  |   |       |  
|Investment in unconsolidated subsidiary                                   |  |      | (557    | ) |      |   |       |      |  |   |       |  
|                                                                          |  |      |         |   |      |   |        |      |  |   |        |  
|Net cash from investing activities                                        |  |      | (20,997 | ) |      |   | (1,000 | )    |  |   |       |  
|                                                                          |  |      |        
|Cash flows from financing activities                                      |  |      |         |   |      |   |        |      |  |   |        |  
|Net change in short-term borrowings                                       |  |      | 1,700   |   |      |   | 500    |      |  |   |       |  
|Proceeds from issuance of subordinated debentures                         |  |      | 18,557  |   |      |   |       |      |  |   |       |  
|Dividends paid                                                            |  |      | (2,651  | ) |      |   | (2,217 | )    |  |   | (1,772 | )
|Exercise of stock options                                                 |  |      | 777     |   |      |   | 621    |      |  |   | 117    |  
|Stock repurchase and retirement                                           |  |      | (3,943  | ) |      |   | (3,077 | )    |  |   | (1,288 | )
|                                                                          |  |      |         |   |      |   |        |      |  |   |        |  
|Net cash from financing activities                                        |  |      | 14,440  |   |      |   | (4,173 | )    |  |   | (2,943 | )
|                                                                          |  |      |         |   |      |   |        |      |  |   |        |  
|Net change in cash                                                        |  |      | (155    | ) |      |   | (256   | )    |  |   | (6     | )
|                                                                          |  |      |        
|Cash at beginning of year                                                 |  |      | 204     |   |      |   | 460    |      |  |   | 466    |  
|                                                                          |  |      |         |   |      |   |        |      |  |   |        |  
|Cash at end of year                                                       |  | $    | 49      |   |      | $ | 204    |      |  | $ | 460    |  
|                                                                          |  |      |         |   |      |   |        |      |  |   |        |  

(Continued)



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THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007, 2006 and 2005

(Dollar amounts in thousands, except per share amounts)



NOTE 19 - OTHER COMPREHENSIVE INCOME (LOSS)

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



|                                                                   |  |      |      |   |      |   |      |      |  |   |      |  
|------------------------------------------------------------------ |  | ---- | ---- | - | ---- | - | ---- | ---- |  | - | ---- | -
|                                                                   |  | 2007 |      |   | 2006 |   |      | 2005 | 
|Unrealized holding gains (losses) on available-for-sale securities |  | $    | 708  |   |      | $ | 402  |      |  | $ | (630 | )
|Reclassification adjustment for losses (gains) realized in income  |  |      |     |   |      |   |     |      |  |   |     |  
|                                                                   |  |      |      |   |      |   |      |      |  |   |      |  
|Net unrealized gains (losses)                                      |  |      | 708  |   |      |   | 402  |      |  |   | (630 | )
|Tax effect                                                         |  |      | (259 | ) |      |   | (141 | )    |  |   | 220  |  
|                                                                   |  |      |      |   |      |   |      |      |  |   |      |  
|                                                                   |  | $    | 449  |   |      | $ | 261  |      |  | $ | (410 | )
|                                                                   |  |      |      |   |      |   |      |      |  |   |      |  

(Continued)



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THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007, 2006 and 2005

(Dollar amounts in thousands, except per share amounts)



NOTE 20 - SELECTED QUARTERLY DATA (Unaudited)

Presented below is a summary of the consolidated quarterly financial data for the years ended December 31, 2007 and 2006.



|              |        |          |         |          |        |              |             |               |        |     |       |                    |         |   |       |  |   |     |  |   |    
|------------- | ------ | -------- | ------- | -------- | ------ | ------------ | ----------- | ------------- | ------ | --- | ----- | ------------------ | ------- | - | ----- |  | - | --- |  | - | ---
|              |        | 2 0 0 7 
|              |        | Interest |         | Interest |        | Net Interest |             | Provision for |        | Net |       | Earnings Per Share
|              | Income |          | Expense |          | Income |              | Loan Losses |               | Income |     | Basic |                    | Diluted
|Quarter ended |        |          |         |          |        |              |             |               |        |     |       |                    |         |   |       |  |   |     |  |   |    
|March 31      |        | $        | 17,525  |          | $      | 8,758        |             | $             | 8,767  |     | $     | 650                |         | $ | 2,157 |  | $ | .37 |  | $ | .37
|June 30       |        |          | 18,414  |          |        | 9,320        |             |               | 9,094  |     |       | 300                |         |   | 2,848 |  |   | .49 |  |   | .49
|September 30  |        |          | 19,811  |          |        | 10,130       |             |               | 9,681  |     |       | 100                |         |   | 3,041 |  |   | .53 |  |   | .53
|December 31   |        |          | 19,963  |          |        | 10,269       |             |               | 9,694  |     |       | 525                |         |   | 3,085 |  |   | .54 |  |   | .54



|              |        |          |         |          |        |              |             |               |        |     |       |                    |         |   |       |  |   |     |  |   |    
|------------- | ------ | -------- | ------- | -------- | ------ | ------------ | ----------- | ------------- | ------ | --- | ----- | ------------------ | ------- | - | ----- |  | - | --- |  | - | ---
|              |        | 2006    
|              |        | Interest |         | Interest |        | Net Interest |             | Provision for |        | Net |       | Earnings Per Share
|              | Income |          | Expense |          | Income |              | Loan Losses |               | Income |     | Basic |                    | Diluted
|Quarter ended |        |          |         |          |        |              |             |               |        |     |       |                    |         |   |       |  |   |     |  |   |    
|March 31      |        | $        | 14,469  |          | $      | 6,310        |             | $             | 8,159  |     | $     | 400                |         | $ | 2,266 |  | $ | .39 |  | $ | .38
|June 30       |        |          | 15,397  |          |        | 6,854        |             |               | 8,543  |     |       | 400                |         |   | 2,380 |  |   | .41 |  |   | .41
|September 30  |        |          | 16,256  |          |        | 7,629        |             |               | 8,627  |     |       | 500                |         |   | 2,742 |  |   | .47 |  |   | .47
|December 31   |        |          | 17,495  |          |        | 8,531        |             |               | 8,964  |     |       | 400                |         |   | 3,064 |  |   | .53 |  |   | .52



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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, 2007. 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 2007, 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.

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, 2007. Managements internal control over financial reporting as of
December 31, 2007 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

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

Item 9B. Other Information

None.



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##### Table of Contents

PART III



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

Information in response to this item is incorporated by reference from BKFCs definitive Proxy Statement for the 2008 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 2008 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 2008 Annual Meeting of Shareholders.



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

Information in response to this item is incorporated by reference from BKFCs definitive Proxy Statement for the 2008 Annual Meeting of Shareholders.



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

Information
in response to this item is incorporated by reference from BKFCs definitive Proxy Statement for the 2008 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 14th day of March 2008.



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                                                         |  |  |  | /s/ Charles M. Berger                        
|Martin J. Gerrety Treasurer March 14, 2008                                    |  |  |  | Charles M. Berger Director March 14, 2008    
|                                                                              |  | 
|/s/ Robert W. Zapp                                                            |  |  |  | /s/ Rodney S. Cain                           
|Robert W. Zapp President, Chief Executive Officer and
Director March 14, 2008 |  |  |  | Rodney S. Cain Director March 14, 2008       
|                                                                              |  | 
|                                                                              |  |  |  | /s/ John F. Miracle, M.D.                    
|Mary Sue Rudicill Director                                                    |  |  |  | John F. Miracle, M.D. Director March 14, 2008
|                                                                              |  | 
|/s/ Harry J. Humpert                                                          |  |  |  | /s/ Herbert H. Works                         
|Harry J. Humpert Director March 14, 2008                                      |  |  |  | Herbert H. Works Director March 14, 2008     
|                                                                              |  | 
|/s/ Barry G. Kienzle                                                          |  |  |  |                                              
|Barry G. Kienzle Director March 14, 2008                                      |  |  |  | Ruth Seligman Doering Director               
|                                                                              |  | 
|                                                                              |  |  |  | /s/ John P. Williams, Jr.                    
|                                                                              |  |  |  | John P. Williams, Jr. Director March 14, 2008



88



---

##### Table of Contents

INDEX TO EXHIBITS



|              |  |                                                                                                                                                                                                                                                                                     
|------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                         
|2.1           |  | Purchase and Assumption Agreement, by and between The Bank of Kentucky, Inc., as buyer, and Peoples Bank of Northern Kentucky, Inc., as seller, and Peoples Bancorporation of Northern Kentucky,
Inc., dated as of September 24, 2002(1)                                            
|              | 
|3.1           |  | Articles of Incorporation of the Bank of Kentucky Financial Corporation(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 Financial Corporation 2007 Stock Option and Incentive Plan(6)                                                                                                                                                                                                  
|              | 
|10.3          |  | The Bank of Kentucky, Inc. Executive Deferred Contribution Plan(7)                                                                                                                                                                                                                  
|              | 
|10.4          |  | The Bank of Kentucky, Inc. Executive Private Pension Plan(7)                                                                                                                                                                                                                        
|              | 
|10.5          |  | The Bank of Kentucky, Inc. Group Insurance Endorsement Plan(7)                                                                                                                                                                                                                      
|              | 
|10.6          |  | 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            |  | Subsidiaries of BKFC                                                                                                                                                                                                                                                                
|              | 
|23            |  | Consent of Crowe Chizek and Company LLC                                                                                                                                                                                                                                             
|              | 
|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 the Form 10-Q for the period ended September 30, 2002, filed with the SEC on
November 14, 2002.
|--- | ----------------------------------------------------------------------------------------------------------------------------

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

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

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

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

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

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



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