##### Table of Contents

---



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 EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------



For the Fiscal Year December 31, 2004



OR



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



For the transition period
fromto.



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)



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



Indicate
by checkmark 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 issuer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 an accelerated filer (as defined in Rule 12b-2 of the Act) Yes x No ̈



The aggregate market value of the voting Common Stock held by non-affiliates of the registrant as of December 31, 2004 was $85,400,000.



At February 18, 2005 there were 5,922,839 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.



---



---

##### Table of Contents



PART I



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



General



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



Formed in 1990, the Bank provides a variety of community-oriented consumer and commercial financial services to customers throughout Northern Kentucky.
The principal business activity of the Bank consists of accepting consumer and commercial deposits and using such deposits to fund residential and non-residential real estate loans and commercial, consumer, construction and land development loans.
The Banks primary market area for both loans and deposits includes Boone, Kenton and Campbell counties and parts of Grant and Gallatin counties in Northern Kentucky.



On June 14, 2000, BKFC consummated the acquisition of the Fort Thomas Financial Corporation (FTFC) and its
wholly owned subsidiary, the Fort Thomas Savings Bank (FTSB). FTFC was merged with and into BKFC and FTSB was merged with and into the Bank. Upon consummation of this acquisition, 865,592 shares of BKFC were issued for substantially all
of the outstanding shares of FTFC. The combination was accounted for as a pooling of interests and the historical financial position and results of operations of the two companies have been combined for financial reporting purposes.



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



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



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



2



---

##### Table of Contents

Lending Activities



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



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



|                                                   |  |                        |         |   |       |   |        |      |         |  |       |        |  |      |         |  |        |   |   |   |         |        |       |   |  |   |         |  |       |  
|-------------------------------------------------- |  | ---------------------- | ------- | - | ----- | - | ------ | ---- | ------- |  | ----- | ------ |  | ---- | ------- |  | ------ | - | - | - | ------- | ------ | ----- | - |  | - | ------- |  | ----- | -
|                                                   |  | As of December 31,     |        
|                                                   |  | 2004                   |         |   | 2003  |   |        | 2002 |         |  | 2001  |        |  | 2000 |        
|                                                   |  | Amount                 |         | % |       |   | Amount |      | %       |  |       | Amount |  | %    |         |  | Amount |   | % |   |         | Amount |       | % | 
|                                                   |  | (Dollars in thousands) |        
|Type of Loan:                                      |  |                        |         |   |       |   |        |      |         |  |       |        |  |      |         |  |        |   |   |   |         |        |       |   |  |   |         |  |       |  
|Nonresidential real estate loans                   |  | $                      | 290,684 |   | 40.3  | % |        | $    | 249,683 |  | 37.8  | %      |  | $    | 216,579 |  | 35.6   | % |   | $ | 126,161 |        | 30.6  | % |  | $ | 116,974 |  | 30.4  | %
|One - to four-family residential real estate loans |  |                        | 188,140 |   | 26.1  |   |        |      | 175,492 |  | 26.5  |        |  |      | 176,546 |  | 29.1   |   |   |   | 136,194 |        | 33.1  |   |  |   | 150,222 |  | 39.1  |  
|Commercial loans                                   |  |                        | 130,760 |   | 18.2  |   |        |      | 130,022 |  | 19.7  |        |  |      | 119,446 |  | 19.7   |   |   |   | 81,051  |        | 19.7  |   |  |   | 73,538  |  | 19.1  |  
|Consumer loans                                     |  |                        | 20,606  |   | 2.9   |   |        |      | 19,367  |  | 2.9   |        |  |      | 19,258  |  | 3.2    |   |   |   | 14,959  |        | 3.6   |   |  |   | 12,661  |  | 3.3   |  
|Construction and land development loans            |  |                        | 84,690  |   | 11.8  |   |        |      | 82,356  |  | 12.5  |        |  |      | 72,522  |  | 11.9   |   |   |   | 52,184  |        | 12.7  |   |  |   | 23,586  |  | 6.1   |  
|Municipal obligations                              |  |                        | 5,074   |   | 0.7   |   |        |      | 4,183   |  | 0.6   |        |  |      | 3,013   |  | 0.5    |   |   |   | 1,443   |        | 0.3   |   |  |   | 7,849   |  | 2.0   |  
|                                                   |  |                        |         |   |       |   |        |      |         |  |       |        |  |      |         |  |        |   |   |   |         |        |       |   |  |   |         |  |       |  
|Total loans                                        |  | $                      | 719,954 |   | 100.0 | % |        | $    | 661,103 |  | 100.0 | %      |  | $    | 607,364 |  | 100.0  | % |   | $ | 411,992 |        | 100.0 | % |  | $ | 384,830 |  | 100.0 | %
|                                                   |  |                        |         |   |       |   |        |      |         |  |       |        |  |      |         |  |        |   |   |   |         |        |       |   |  |   |         |  |       |  
|Less:                                              |  |                        |         |   |       |   |        |      |         |  |       |        |  |      |         |  |        |   |   |   |         |        |       |   |  |   |         |  |       |  
|Deferred loan fees                                 |  |                        | 797     |   |       |   |        |      | 661     |  |       |        |  |      | 549     |  |        |   |   |   | 520     |        |       |   |  |   | 749     |  |       |  
|Allowance for loan losses                          |  |                        | 7,214   |   |       |   |        |      | 6,855   |  |       |        |  |      | 6,408   |  |        |   |   |   | 4,244   |        |       |   |  |   | 3,806   |  |       |  
|                                                   |  |                        |         |   |       |   |        |      |         |  |       |        |  |      |         |  |        |   |   |   |         |        |       |   |  |   |         |  |       |  
|Net loans                                          |  | $                      | 711,943 |   |       |   |        | $    | 653,587 |  |       |        |  | $    | 600,407 |  |        |   |   | $ | 407,228 |        |       |   |  | $ | 380,275 |  |       |  
|                                                   |  |                        |         |   |       |   |        |      |         |  |       |        |  |      |         |  |        |   |   |   |         |        |       |   |  |   |         |  |       |  



3



---

##### Table of Contents

Loan Maturity Schedule. The following table sets forth certain information, as of December 31,
2004, 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 2004:



|                                        |  |                        |         |                           |   |                  |  |       |       |  |   |        
|--------------------------------------- |  | ---------------------- | ------- | ------------------------- | - | ---------------- |  | ----- | ----- |  | - | -------
|                                        |  | Due within one year    |         | Due after 1year to 5years |   | Due after 5years |  | Total
|                                        |  | (Dollars in thousands)
|Commercial loans                        |  | $                      | 86,752  |                           | $ | 40,854           |  | $     | 3,154 |  | $ | 130,760
|Construction and land development loans |  |                        | 84,690  |                           |   |                 |  |       |      |  |   | 84,690 
|                                        |  |                        |         |                           |   |                  |  |       |       |  |   |        
|Total                                   |  | $                      | 171,442 |                           | $ | 40,854           |  | $     | 3,154 |  | $ | 215,450
|                                        |  |                        |         |                           |   |                  |  |       |       |  |   |        
|Interest sensitivity:                   |  |                        |         |                           |   |                  |  |       |       |  |   |        
|With fixed rates                        |  |                        |         |                           | $ | 17,051           |  | $     | 61    |  |   |        
|With variable rates                     |  |                        |         |                           |   | 23,803           |  |       | 3,093 |  |   |        
|                                        |  |                        |         |                           |   |                  |  |       |       |  |   |        
|Total                                   |  |                        |         |                           | $ | 40,854           |  | $     | 3,154 |  |   |        
|                                        |  |                        |         |                           |   |                  |  |       |       |  |   |        



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 have terms to maturity of
between 10 and 20 years and are made with adjustable interest rates (ARMs). Interest rates on the ARMs adjust every one, three or five years based upon the interest rates of the applicable one- three or five year U.S. Treasury security
then offered. Such loans typically have adjustment period caps of 2% and lifetime caps of 6%.



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



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



At December 31,
2004, the Bank had a total of $291 million invested in nonresidential real estate loans, the vast majority of which were secured by property located in the Northern Kentucky metropolitan area. Such loans comprised approximately 40% of the
Banks total loans at such date, $1,680,000 of which were nonperforming.



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



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



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



4



---

##### Table of Contents

The aggregate amount of the Banks residential real estate loans equaled approximately $188 million
at December 31, 2004, and represented 26% of total loans at such date. At December 31, 2004, the Bank had $2,056,000 of non-performing loans of this type.



Loans held for sale. The Bank originates residential real estate loans to be sold, service released, subject to commitment to purchase in the
secondary market. These loans are fixed rate with terms ranging from fifteen to thirty years. At December 31, 2004 these loans totaled $1,391,000.



Commercial Loans. The Bank offers commercial loans to individuals and businesses located throughout Northern Kentucky and the metropolitan area.
The typical commercial borrower is a small to mid-sized company with annual sales under $10 million. The majority of commercial loans are made with adjustable rates of interest tied to the Banks prime interest rate. Commercial loans typically
have terms of 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, 2004, the Bank had $131 million, or 18% of total loans, invested in commercial loans, $1,123,000 of which was non-performing.



Consumer Loans. The Bank makes a variety of consumer loans, including automobile loans, recreational vehicle loans and personal loans. Such loans
generally have fixed rates with terms from three to five years. Consumer loans involve a higher risk of default than residential real estate loans, particularly in the case of consumer loans that are unsecured or secured by rapidly depreciating
assets, such as automobiles. Repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation, and the
remaining deficiency may not warrant further substantial collection efforts against the borrower. In addition, consumer loan collections depend on the borrowers continuing financial stability, and thus are more likely to be adversely affected
by job loss, illness or personal bankruptcy. Various federal and state laws, including federal and state bankruptcy and insolvency laws, may also limit the amount that can be recovered on such loans. At December 31, 2004, the Bank had $21 million,
or 3% of total loans, invested in consumer loans, $69,000 of which was non-performing.



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



Construction and land development loans involve greater underwriting and
default risks than do loans secured by mortgages on improved and developing properties, due to the effects of general economic conditions on real estate developments, developers, managers and builders. In addition, such loans are more difficult to
evaluate and monitor. Loan funds are advanced upon the security of the project under construction, which is more difficult to value before the completion of construction. Moreover, because of the uncertainties inherent in estimating construction
costs, it is relatively difficult to evaluate accurately the LTVs and the total loan funds required to complete a project. In the event a default on a construction or land development loan occurs and foreclosure follows, the Bank must take control
of the project and attempt either to arrange for completion of construction or to dispose of the unfinished project. At December 31, 2004, a total of $85 million, or approximately 12% of the Banks total loans, consisted of construction and
land development loans, $217,000 of which were non-performing.



Municipal Obligations. The Bank makes loans to various Kentucky municipalities for various purposes, including the construction of municipal buildings and equipment purchases. Loans made to municipalities are usually secured by
mortgages on the properties financed or by a lien on equipment purchased or by the general taxing authority of the municipality and provide certain tax benefits for the Bank. At December 31, 2004, the Bank had $5 million, or 0.7% 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



5



---

##### Table of Contents

of the nonresidential real estate and the receipt of information on the borrower, the loan application is submitted to the Banks Loan Committee for
approval or rejection. If, however, the loan relationship is in excess of $1.25 million, the loan will be submitted to the Banks Executive Committee for approval or rejection.



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



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



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



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



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



When a borrower fails to make a timely payment, the borrower will receive a delinquency notice within 10 days of the due
date. When the payment is 15 days past due, an employee of the Bank will call the customer. When the payment reaches 30 days past due, a second notice will be sent and a second call will be made. In most cases, delinquencies are paid promptly.
Generally, if a real estate loan becomes 45 days delinquent, the borrower and collateral will be assessed to determine whether foreclosure action is required. When deemed appropriate by management, a foreclosure action will be instituted or a deed
in lieu of foreclosure will be pursued.



Loans that are 90 days
past due and are not well secured and in the process of collection will be placed on non-accrual status. Under-collateralized loans that are 90 days past due will be fully or partially charged-off. The amount charged-off will be charged against the
loan loss allowance.



The Bank has developed a risk-rating
system to quantify commercial loan quality. The system assigns a risk rating from 1 to 9 for each loan. Classified commercial loans are those with risk ratings of 5 or higher. Each loan rating is determined by analyzing the borrowers
management, financial ability, sales trends, operating results, financial conditions, asset protection, contingencies, payment history, financial flexibility, credit enhancements and other relevant factors. Loans that fall into the classified
categories are monitored on a regular basis and proper action is taken to minimize the Banks exposure. Losses or partial losses will be taken when they are recognized.



The Banks risk rating system is similar to that used by regulatory agencies. Problem assets are classified as
substandard (risk rating 7), doubtful (risk rating 8) or loss (risk rating 9). Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the insured
institution will sustain some loss if the deficiencies are not corrected. Doubtful assets have the same weaknesses as substandard assets, with the additional characteristics that (i) the weaknesses make collection or
liquidation in full on the basis of currently existing facts, conditions and values questionable and (ii) there is a high possibility of loss. An asset classified loss is considered uncollectable and of such little value that its
continuance as an asset of the institution is not warranted. The regulations also contain a special



6



---

##### Table of Contents

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.



The aggregate amounts of the Banks classified assets at December 31,
2004, were as follows:



|                            |  |                |      
|--------------------------- |  | -------------- | -----
|                            |  | (In thousands)
|Substandard (risk rating 7) |  | $              | 6,220
|Doubtful (risk rating 8)    |  |                | 1,773
|Loss (risk rating 9)        |  |                | 0    
|                            |  |                |      
|Total classified assets     |  | $              | 7,993
|                            |  |                |      



The following table
reflects the amount of loans in delinquent status as of December 31, 2004:



|                                               |  |                |        |  
|---------------------------------------------- |  | -------------- | ------ | -
|                                               |  | (In thousands) |       
|Loans delinquent                               |  |                |        |  
|30 to 59 days                                  |  | $              | 8,951  |  
|60 to 89 days                                  |  |                | 1,095  |  
|90 or more days                                |  |                | 1,658  |  
|                                               |  |                |        |  
|Total delinquent loans                         |  | $              | 11,704 |  
|                                               |  |                |        |  
|Ratio of total delinquent loans to total loans |  |                | 1.63   | %
|                                               |  |                |        |  



The following table
sets forth information with respect to the Banks nonperforming assets for the periods indicated. During the periods shown, the Bank had no restructured loans within the meaning of FAS No. 15. In addition, the Bank evaluates loans to identify
those that are impaired. Impaired loans are those for which management has determined that it is probable that the customer will be unable to comply with the contractual terms of the loan. Loans so identified are reduced to the present
value of expected future cash flows, or to the fair value of the collateral securing the loan, by the allocation of a portion of the allowance for loan losses to the loan. As of December 31, 2004, the Bank had designated $6,024,000 as impaired
loans. Management evaluates for impairment all loans selected for specific review during the quarterly allowance analysis. Generally, that analysis will not address smaller balance consumer credits.



7



---

##### Table of Contents

|                                                                 |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|---------------------------------------------------------------- |  | ---------------------- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | - |  | ---- | ----- | - |  | - | ----- | -
|                                                                 |  | At December 31,        |      
|                                                                 |  | 2004                   |       |   | 2003 |   |       | 2002 |  |   | 2001  |   |  | 2000 |      
|                                                                 |  | (Dollars in thousands) |      
|Loans accounted for on a non-accrual basis:(1)                   |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Real estate:                                                     |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Nonresidential                                                   |  | $                      | 1,319 |   |      | $ | 489   |      |  | $ | 0     |   |  | $    | 427   |   |  | $ | 344   |  
|Residential                                                      |  |                        | 941   |   |      |   | 181   |      |  |   | 318   |   |  |      | 329   |   |  |   | 226   |  
|Construction                                                     |  |                        | 217   |   |      |   | 174   |      |  |   | 248   |   |  |      | 0     |   |  |   | 0     |  
|Commercial                                                       |  |                        | 1,010 |   |      |   | 622   |      |  |   | 365   |   |  |      | 198   |   |  |   | 192   |  
|Consumer and other                                               |  |                        | 0     |   |      |   | 0     |      |  |   | 0     |   |  |      | 0     |   |  |   | 122   |  
|                                                                 |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Total                                                            |  |                        | 3,487 |   |      |   | 1,466 |      |  |   | 931   |   |  |      | 954   |   |  |   | 884   |  
|                                                                 |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Accruing loans which are contractually past due 90 days or more: |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Real estate:                                                     |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Nonresidential                                                   |  | $                      | 361   |   |      | $ | 800   |      |  | $ | 358   |   |  |      | 0     |   |  |   | 0     |  
|Residential                                                      |  |                        | 1,115 |   |      |   | 843   |      |  |   | 2,292 |   |  |      | 2,114 |   |  |   | 3,215 |  
|Construction                                                     |  |                        | 0     |   |      |   | 0     |      |  |   | 324   |   |  |      | 0     |   |  |   | 0     |  
|Commercial                                                       |  |                        | 113   |   |      |   | 310   |      |  |   | 158   |   |  |      | 44    |   |  |   | 628   |  
|Consumer and other loans                                         |  |                        | 69    |   |      |   | 54    |      |  |   | 109   |   |  |      | 41    |   |  |   | 262   |  
|                                                                 |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Total                                                            |  |                        | 1,658 |   |      |   | 2,007 |      |  |   | 3,241 |   |  |      | 2,199 |   |  |   | 4,105 |  
|                                                                 |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Total of non-accrual and 90 days past due loans                  |  | $                      | 5,145 |   |      | $ | 3,473 |      |  | $ | 4,172 |   |  | $    | 3,153 |   |  | $ | 4,989 |  
|                                                                 |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Percentage of total loans                                        |  |                        | .72   | % |      |   | .53   | %    |  |   | .69   | % |  |      | .77   | % |  |   | 1.30  | %
|                                                                 |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Other nonperforming assets(2)                                    |  | $                      | 1,434 |   |      | $ | 1,239 |      |  | $ | 1,754 |   |  | $    | 292   |   |  | $ | 94    |  
|                                                                 |  |                        |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  

---

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



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



Allowance for Loan Losses. While
management believes that it uses the best information available to determine the allowance for loan losses, unforeseen market conditions could result in adjustments, and net earnings could be significantly affected if circumstances differ
substantially from the assumptions used in making the final determination. At December 31, 2004, the Banks allowance for loan losses totaled $7.2 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.



8



---

##### Table of Contents

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



|                                                        |  |                            |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |       |  
|------------------------------------------------------- |  | -------------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | - |  | ---- | ------ | - |  | - | ----- | -
|                                                        |  | Year ended at December 31, |       
|                                                        |  | 2004                       |        |   | 2003 |   |        | 2002 |  |   | 2001   |   |  | 2000 |       
|                                                        |  | (Dollars in thousands)     |       
|Balance of allowance at beginning of period             |  | $                          | 6,855  |   |      | $ | 6,408  |      |  | $ | 4,244  |   |  | $    | 3,806  |   |  | $ | 3,257 |  
|Recoveries of loans previously charged off:             |  |                            |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |       |  
|Commercial loans                                        |  |                            | 8      |   |      |   | 5      |      |  |   | 10     |   |  |      | 49     |   |  |   | 64    |  
|Consumer loans                                          |  |                            | 2      |   |      |   | 26     |      |  |   | 9      |   |  |      | 10     |   |  |   | 10    |  
|Mortgage loans                                          |  |                            | 0      |   |      |   | 1      |      |  |   | 6      |   |  |      | 2      |   |  |   | 0     |  
|                                                        |  |                            |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |       |  
|Total recoveries                                        |  |                            | 10     |   |      |   | 32     |      |  |   | 25     |   |  |      | 61     |   |  |   | 74    |  
|                                                        |  |                            |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |       |  
|Loans charged off:                                      |  |                            |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |       |  
|Commercial loans                                        |  |                            | 936    |   |      |   | 335    |      |  |   | 152    |   |  |      | 242    |   |  |   | 383   |  
|Consumer loans                                          |  |                            | 360    |   |      |   | 226    |      |  |   | 211    |   |  |      | 69     |   |  |   | 78    |  
|Mortgage loans                                          |  |                            | 30     |   |      |   | 114    |      |  |   | 115    |   |  |      | 93     |   |  |   | 137   |  
|                                                        |  |                            |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |       |  
|Total charge-offs                                       |  |                            | 1,326  |   |      |   | 675    |      |  |   | 478    |   |  |      | 404    |   |  |   | 598   |  
|                                                        |  |                            |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |       |  
|Net charge-offs                                         |  |                            | (1,316 | ) |      |   | (643   | )    |  |   | (453   | ) |  |      | (343   | ) |  |   | (524  | )
|Provision for loan losses                               |  |                            | 1,675  |   |      |   | 1,090  |      |  |   | 1,235  |   |  |      | 781    |   |  |   | 1,143 |  
|Merger adjustment                                       |  |                            | 0      |   |      |   | 0      |      |  |   | 1,382  |   |  |      | 0      |   |  |   | (70   | )
|                                                        |  |                            |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |       |  
|Balance of allowance at end of period                   |  | $                          | 7,214  |   |      | $ | 6,855  |      |  | $ | 6,408  |   |  | $    | 4,244  |   |  | $ | 3,806 |  
|                                                        |  |                            |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |       |  
|Net charge-offs to average loans outstanding for period |  |                            | .19    | % |      |   | .10    | %    |  |   | .10    | % |  |      | .09    | % |  |   | .15   | %
|                                                        |  |                            |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |       |  
|Allowance at end of period to loans at end of period    |  |                            | 1.00   | % |      |   | 1.04   | %    |  |   | 1.06   | % |  |      | 1.02   | % |  |   | .99   | %
|                                                        |  |                            |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |       |  
|Allowance to nonperforming loans at end of period       |  |                            | 140.21 | % |      |   | 197.38 | %    |  |   | 153.60 | % |  |      | 134.60 | % |  |   | 76.29 | %
|                                                        |  |                            |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |       |  



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



|                                |  |                        |       |      |   |       |  |      |       |      |   |       |  |   |      
|------------------------------- |  | ---------------------- | ----- | ---- | - | ----- |  | ---- | ----- | ---- | - | ----- |  | - | -----
|                                |  | At December 31,       
|                                |  | 2004                   |       | 2003 |   | 2002  |  | 2001 |       | 2000
|                                |  | (Dollars in thousands)
|Loan type                       |  |                        |       |      |   |       |  |      |       |      |   |       |  |   |      
|Commercial                      |  | $                      | 3,537 |      | $ | 3,369 |  | $    | 3,139 |      | $ | 2,099 |  | $ | 1,757
|Real estate                     |  |                        | 2,528 |      |   | 2,499 |  |      | 2,433 |      |   | 1,556 |  |   | 1,497
|Consumer and credit cards       |  |                        | 1,149 |      |   | 987   |  |      | 836   |      |   | 589   |  |   | 552  
|                                |  |                        |       |      |   |       |  |      |       |      |   |       |  |   |      
|Total allowance for loan losses |  | $                      | 7,214 |      | $ | 6,855 |  | $    | 6,408 |      | $ | 4,244 |  | $ | 3,806
|                                |  |                        |       |      |   |       |  |      |       |      |   |       |  |   |      



The Bank increased its
allowance for loan losses from $6.9 million at December 31, 2003, to $7.2 million at December 31, 2004, due primarily to the growth in the loan portfolio. Because the loan loss allowance is based on estimates, it is monitored on an ongoing basis and
adjusted as necessary to provide an adequate allowance.



Investment
Activities



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



9



---

##### Table of Contents

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



|                                    |  |                        |        |            |   |                |  |            |        |                |   |            |  |   |        |  |   |       
|----------------------------------- |  | ---------------------- | ------ | ---------- | - | -------------- |  | ---------- | ------ | -------------- | - | ---------- |  | - | ------ |  | - | ------
|                                    |  | At December 31,       
|                                    |  | 2004                   |        | 2003       |   | 2002          
|                                    |  | Amortized Cost         |        | Fair Value |   | Amortized Cost |  | Fair Value |        | Amortized Cost |   | Fair Value
|                                    |  | (Dollars in thousands)
|Held-to-maturity securities:        |  |                        |        |            |   |                |  |            |        |                |   |            |  |   |        |  |   |       
|U.S. Government agency obligations  |  |                        | 0      |            |   | 0              |  |            | 1,500  |                |   | 1,523      |  |   | 3,000  |  |   | 3,086 
|Municipal and other obligations     |  |                        | 12,062 |            |   | 12,129         |  |            | 13,611 |                |   | 13,793     |  |   | 12,694 |  |   | 12,984
|                                    |  |                        |        |            |   |                |  |            |        |                |   |            |  |   |        |  |   |       
|Total held-to-maturity securities   |  | $                      | 12,062 |            | $ | 12,129         |  | $          | 15,111 |                | $ | 15,316     |  | $ | 15,694 |  | $ | 16,070
|                                    |  |                        |        |            |   |                |  |            |        |                |   |            |  |   |        |  |   |       
|Available-for-sale securities:      |  |                        |        |            |   |                |  |            |        |                |   |            |  |   |        |  |   |       
|U.S. Government agency obligations  |  |                        | 50,903 |            |   | 50,749         |  |            | 42,717 |                |   | 42,924     |  |   | 33,218 |  |   | 33,770
|Corporate obligations               |  |                        | 1,455  |            |   | 1,455          |  |            | 1,500  |                |   | 1,500      |  |   | 0      |  |   | 0     
|                                    |  |                        |        |            |   |                |  |            |        |                |   |            |  |   |        |  |   |       
|Total available-for-sale securities |  | $                      | 52,358 |            | $ | 52,204         |  | $          | 44,217 |                | $ | 44,424     |  | $ | 33,218 |  | $ | 33,770
|                                    |  |                        |        |            |   |                |  |            |        |                |   |            |  |   |        |  |   |       



The following table
sets forth the carrying value of the Banks securities portfolio at December 31, 2004 by contractual or expected maturity. Securities with call features are presented at call date if management expects that option to be exercised.



|                                   |  |                          |  |               |                                         |  |               |                                          |               |   |                          |               |  |               |   |  |               |  |               |   |  |               |  |               |  
|---------------------------------- |  | ------------------------ |  | ------------- | --------------------------------------- |  | ------------- | ---------------------------------------- | ------------- | - | ------------------------ | ------------- |  | ------------- | - |  | ------------- |  | ------------- | - |  | ------------- |  | ------------- | -
|                                   |  | Maturing within one year |  |               | Maturing after one And within fiveyears |  |               | Maturing after five and within ten years |               |   | Maturing after ten years |               |  | Total         |  
|                                   |  | CarryingValue            |  | Average Yield |                                         |  | CarryingValue |                                          | Average Yield |   |                          | CarryingValue |  | Average Yield |   |  | CarryingValue |  | Average Yield |   |  | CarryingValue |  | Average Yield |  
|                                   |  | (Dollars in thousands)   | 
|Held-to-maturity:                  |  |                          |  |               |                                         |  |               |                                          |               |   |                          |               |  |               |   |  |               |  |               |   |  |               |  |               |  
|Municipal and other obligations(1) |  | 1,580                    |  | 4.62          | %                                       |  | 7,488         |                                          | 3.94          | % |                          | 2,994         |  | 3.95          | % |  | 0             |  | 0.00          | % |  | 12,062        |  | 4.03          | %
|Available for sale:                |  |                          |  |               |                                         |  |               |                                          |               |   |                          |               |  |               |   |  |               |  |               |   |  |               |  |               |  
|Corporate obligations              |  | 1,455                    |  | 2.14          | %                                       |  | 0             |                                          | 0.00          | % |                          | 0             |  | 0.00          | % |  | 0             |  | 0.00          | % |  | 1,455         |  | 2.14          | %
|U.S. Government agency obligations |  | 7,981                    |  | 2.23          | %                                       |  | 36,339        |                                          | 3.22          | % |                          | 5,677         |  | 3.71          | % |  | 752           |  | 6.03          | % |  | 50,749        |  | 3.16          | %

---

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



Deposits and Borrowings



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



The Bank also uses retail repurchase agreements as a source of funds.
These agreements essentially represent borrowings by the Bank from customers with maturities of three months or less. Certain securities are pledged as collateral for these agreements. At December 31, 2004 the Bank had $5.2 million in retail
repurchase agreements.



The Bank has a mortgage payable that is
secured by a parcel of real estate owned by the Bank (the Mortgage Loan). The Mortgage Loan has an interest rate of 9.00%, monthly payments of $2,762 and a balance of $51,000 at December 31, 2004, and $78,000 at December 31, 2003. 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.



10



---

##### Table of Contents

Deposits. Deposits are attracted principally from within the Banks designated lending area
through the offering of numerous deposit instruments, including regular passbook savings accounts, negotiable order of withdrawal (NOW) accounts, money market deposit accounts, term certificate accounts and individual retirement accounts
(IRAs). Interest rates paid, maturity terms, service fees and withdrawal penalties for the various types of accounts are established periodically by the Banks Board of Directors based on the Banks liquidity requirements,
growth goals and market trends. The Bank may on occasion use brokers to attract deposits. The Bank had $12 million in deposits from outside its market area as of December 31, 2004.



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, 2004:



|                           |  |                      |       
|-------------------------- |  | -------------------- | ------
|Maturity                   |  | At December 31, 2004
|                           |  | (In thousands)      
|Three months or less       |  | $                    | 16,433
|Over 3 months to 6 months  |  |                      | 15,755
|Over 6 months to 12 months |  |                      | 17,966
|Over 12 months             |  |                      | 30,323
|                           |  |                      |       
|Total                      |  | $                    | 80,477
|                           |  |                      |       



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, 2004, 2003 and 2002, along with the average aggregate balances of the Banks outstanding short-term borrowings for such periods:



|                                                   |  |                                |        |   |      |   |       |      |  |   |       |  
|-------------------------------------------------- |  | ------------------------------ | ------ | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                                   |  | During year ended December 31, |       
|                                                   |  | 2004                           |        |   | 2003 |   |       | 2002 | 
|                                                   |  | (Dollars in thousands)         |       
|Maximum balance at any month-end during the period |  | $                              | 31,013 |   |      | $ | 8,347 |      |  | $ | 9,214 |  
|Average balance                                    |  |                                | 15,985 |   |      |   | 5,510 |      |  |   | 6,090 |  
|Weighted average interest rate                     |  |                                | 1.78   | % |      |   | 1.41  | %    |  |   | 2.24  | %



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



|                                  |  |              |       |   |      |   |       |      |  |   |       |  
|--------------------------------- |  | ------------ | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                  |  | December 31, |      
|                                  |  | 2004         |       |   | 2003 |   |       | 2002 | 
|Short-term borrowings outstanding |  | $            | 9,161 |   |      | $ | 8,347 |      |  | $ | 5,880 |  
|Weighted average interest rate    |  |              | 1.78  | % |      |   | 1.32  | %    |  |   | 1.56  | %



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.



11



---

##### Table of Contents

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. While management and the Board of Directors believe the foregoing steps have mitigated interest-rate risk to the maximum extent practicable, the contractual terms to
maturity or repricing of the Banks liabilities still exceed the contractual terms to maturity or repricing of the Banks earning assets in twelve month period. Although the Bank currently is liability sensitive, lower rates would have a
disproportionately negative impact on earnings, as rates on interest bearing transaction accounts can not drop appreciably lower than their current levels, while yields on earning assets still have downward potential if rates fall. 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.



The following table sets forth the amounts of the Banks interest-earning assets and interest-bearing liabilities
outstanding at December 31, 2004, 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. This table does not necessarily indicate the impact of general interest rate movements on the Banks net interest income because the re-pricing of certain categories of assets and liabilities is subject to the
interest rate environment, competition and other factors beyond the Banks control. As a result, certain assets and liabilities may in fact mature or re-price at different times and in different volumes than indicated.



12



---

##### 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                                                            |  | $                      | 0       |    |              | $ | 0       |                   |  | $ | 0            |   |  | $     | 0       |   |  | $ | 0      
|Interest bearing deposits with banks                                          |  |                        | 0       |    |              |   | 0       |                   |  |   | 0            |   |  |       | 0       |   |  |   | 0      
|Securities                                                                    |  |                        | 11,526  |    |              |   | 3,571   |                   |  |   | 43,763       |   |  |       | 9,481   |   |  |   | 68,341 
|Loans receivable(1)                                                           |  |                        | 366,270 |    |              |   | 94,877  |                   |  |   | 256,199      |   |  |       | 4,414   |   |  |   | 721,760
|                                                                              |  |                        |         |    |              |   |         |                   |  |   |              |   |  |       |         |   |  |   |        
|Total interest-earning assets                                                 |  |                        | 377,796 |    |              |   | 98,448  |                   |  |   | 299,962      |   |  |       | 13,895  |   |  |   | 790,101
|                                                                              |  |                        |         |    |              |   |         |                   |  |   |              |   |  |       |         |   |  |   |        
|Interest-bearing liabilities:                                                 |  |                        |         |    |              |   |         |                   |  |   |              |   |  |       |         |   |  |   |        
|Savings deposits                                                              |  |                        | 39,971  |    |              |   | 0       |                   |  |   | 0            |   |  |       | 0       |   |  |   | 39,971 
|Money market deposit accounts                                                 |  |                        | 86,878  |    |              |   | 0       |                   |  |   | 0            |   |  |       | 0       |   |  |   | 86,878 
|NOW accounts                                                                  |  |                        | 242,166 |    |              |   | 0       |                   |  |   | 0            |   |  |       | 0       |   |  |   | 242,166
|Certificates of deposit                                                       |  |                        | 35,465  |    |              |   | 97,695  |                   |  |   | 89,090       |   |  |       | 48      |   |  |   | 222,298
|IRAs                                                                         |  |                        | 4,713   |    |              |   | 14,849  |                   |  |   | 20,471       |   |  |       | 0       |   |  |   | 40,033 
|Federal funds purchased                                                       |  |                        | 3,922   |    |              |   | 0       |                   |  |   | 0            |   |  |       | 0       |   |  |   | 3,922  
|Repurchase agreements                                                         |  |                        | 5,239   |    |              |   | 0       |                   |  |   | 0            |   |  |       | 0       |   |  |   | 5,239  
|Notes payable                                                                 |  |                        | 17,007  |    |              |   | 20      |                   |  |   | 4,110        |   |  |       | 16,436  |   |  |   | 37,573 
|                                                                              |  |                        |         |    |              |   |         |                   |  |   |              |   |  |       |         |   |  |   |        
|Total interest-bearing liabilities                                            |  |                        | 435,361 |    |              |   | 112,564 |                   |  |   | 113,671      |   |  |       | 16,484  |   |  |   | 678,080
|                                                                              |  |                        |         |    |              |   |         |                   |  |   |              |   |  |       |         |   |  |   |        
|Interest-earning assets less Interest-bearing liabilities                     |  | $                      | (57,565 | )  |              | $ | (14,116 | )                 |  | $ | 186,291      |   |  | $     | (2,589  | ) |  | $ | 112,021
|                                                                              |  |                        |         |    |              |   |         |                   |  |   |              |   |  |       |         |   |  |   |        
|Cumulative interest-rate sensitivity gap                                      |  | $                      | (57,565 | )  |              | $ | (71,681 | )                 |  | $ | 114,610      |   |  | $     | 112,021 |   |  |   |        
|                                                                              |  |                        |         |    |              |   |         |                   |  |   |              |   |  |       |         |   |  |   |        
|Cumulative interest-rate gap as a Percentage of total interest earning assets |  |                        | (7.29   | )% |              |   | (9.07   | )%                |  |   | 14.51        | % |  |       | 14.18   | % |  |   |        
|                                                                              |  |                        |         |    |              |   |         |                   |  |   |              |   |  |       |         |   |  |   |        

---

|(1) | Virtually all of the Banks loans are monthly amortizing adjustable-rate installment obligations and, therefore, are not subject to rollover and renewal
provisions. Excludes overdrawn accounts reflected as loans.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



13



---

##### Table of Contents

Competition



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



Due to the Banks size relative to the many other financial institutions
in its market area, management believes that the Bank does not have a substantial share of the deposit and loan markets. The size of financial institutions competing with the Bank is likely to increase as a result of changes in statutes and
regulations eliminating various restrictions on interstate and inter-industry branching and acquisitions. Such increased competition may have an adverse effect upon the Bank.



Employees



As of December 31, 2004, the Bank had 189 full-time employees and 64 part-time employees. The Bank believes that relations with its employees are good.
None of the employees of the Bank are represented by a labor union or subject to a collective bargaining agreement.



Regulation of BKFC



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



In general, BKFC is only
permitted to engage in activities deemed by the FRB to be closely related to banking. FRB regulations contain a list of activities that are deemed closely related to banking. Generally, many securities and insurance activities, most real estate
development activities and most industrial operations, are not deemed to be closely related to banking. In addition, the FRB could require that BKFC terminate any activity, if the FRB deems the activity to constitute a serious risk to the financial
soundness of the Bank.



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



Regulation of the Bank



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



The Bank is subject to regulation, supervision and examination by the
Department and the FDIC. Both the Department and the FDIC have the authority to issue cease-and-desist orders if either determines that the activities of the



14



---

##### Table of Contents

Bank represent unsafe and unsound banking practices. If the grounds provided by law exist, the Department or the FDIC may appoint a conservator or receiver
for a bank.



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



Kentucky law limits loans or other extensions of credit to any borrower to 20% of the Banks paid-in capital and actual
surplus. Such limit is increased to 30% if the borrower provides collateral with a cash value exceeding the amount of the loan. Loans or extensions of credit to certain borrowers are aggregated, and loans secured by certain government obligations
are exempt from these limits. At December 31, 2004, the maximum the Bank could lend to any one borrower generally equaled $8.7 million and equaled $13.1 million if the borrower provided collateral with a cash value in excess of the amount of the
loan.



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



Regulatory Capital Requirements



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



The
FRB also has established minimum leverage ratio guidelines for bank holding companies. The guidelines provide for a minimum ratio of Tier 1 Capital to average total assets (excluding the loan and lease loss allowance, goodwill and certain other
intangibles, and, effective April 1, 2002, portions of certain nonfinancial equity investments) (the Leverage Ratio) of 3% for bank holding companies that meet specified criteria, including having the highest regulatory rating. All other
bank holding companies must maintain a Leverage Ratio of 4% to 5%. The guidelines further provide that bank holding companies making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory
levels.



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



15



---

##### Table of Contents

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, 2004:



|                  |  |                        |        |         |          |   |        |   |         |  |       |  
|----------------- |  | ---------------------- | ------ | ------- | -------- | - | ------ | - | ------- |  | ----- | -
|                  |  | At December 31, 2004   |       
|                  |  | BKFC                   |        |         | The Bank |  
|                  |  | Amount                 |        | Percent |          |   | Amount |   | Percent | 
|                  |  | (Dollars in thousands) |       
|Tier 1 risk-based |  | $                      | 77,784 |         | 9.50     | % |        | $ | 76,624  |  | 9.37  | %
|Requirement       |  |                        | 32,760 |         | 4.00     |   |        |   | 32,709  |  | 4.00  |  
|                  |  |                        |        |         |          |   |        |   |         |  |       |  
|Excess            |  | $                      | 45,024 |         | 5.50     | % |        | $ | 43,915  |  | 5.37  | %
|                  |  |                        |        |         |          |   |        |   |         |  |       |  
|Total risk-based  |  | $                      | 84,998 |         | 10.38    | % |        | $ | 83,838  |  | 10.25 | %
|Requirement       |  |                        | 65,520 |         | 8.00     |   |        |   | 65,418  |  | 8.00  |  
|                  |  |                        |        |         |          |   |        |   |         |  |       |  
|Excess            |  | $                      | 19,478 |         | 2.38     | % |        | $ | 18,420  |  | 2.25  | %
|                  |  |                        |        |         |          |   |        |   |         |  |       |  
|Leverage ratio    |  | $                      | 77,784 |         | 9.08     | % |        | $ | 76,624  |  | 8.96  | %
|Requirement       |  |                        | 34,278 |         | 4.00     |   |        |   | 34,225  |  | 4.00  |  
|                  |  |                        |        |         |          |   |        |   |         |  |       |  
|Excess            |  | $                      | 43,506 |         | 5.08     | % |        | $ | 42,399  |  | 4.96  | %
|                  |  |                        |        |         |          |   |        |   |         |  |       |  



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.



The FDIC has adopted regulations governing prompt corrective action to
resolve the problems of capital deficient and otherwise troubled banks under its regulation. At each successively lower defined capital category, an institution is subject to more restrictive and numerous mandatory or discretionary regulatory
actions or limits, and the FDIC has less flexibility in determining how to resolve the problems of the institution. The FDIC generally can downgrade an institutions capital category, notwithstanding its capital level, if, after notice and
opportunity for hearing, the institution is deemed to be engaging in an unsafe or unsound practice because it has not corrected deficiencies that resulted in it receiving a less than satisfactory examination rating on matters other than capital or
it is deemed to be in an unsafe or unsound condition. An undercapitalized institution must submit a capital restoration plan to the FDIC within 45 days after it becomes undercapitalized. Such institution will be subject to increased monitoring and
asset growth restrictions and will be required to obtain prior approval for acquisitions, branching and engaging in new lines of business. Furthermore, critically undercapitalized institutions must be placed in conservatorship or receivership within
90 days of reaching that capitalization level, except under limited circumstances. The Banks capital levels at December 31, 2004, meet the standards for the highest level, a well-capitalized institution.



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



Dividend Restrictions



The ability of BKFC to pay cash dividends to its stockholders depends on the amount of dividends that may be declared and paid by the Bank. There are a
number of statutory and regulatory requirements applicable to the payment of dividends by banks and bank holding companies.



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



16



---

##### Table of Contents

At December 31, 2004, the Bank had capital in excess of the FDICs most restrictive minimum capital
requirements in an amount equal to $2.1 million from which dividends could be paid, subject to the FDICs general safety and soundness review. In 2004, BKFC paid a cash dividend of $0.23 per share totaling $1,370,000.



FDIC Deposit Insurance and Assessments



The FDIC is an independent federal agency that insures the deposits, up to
prescribed statutory limits, of federally insured banks and thrifts and safeguards the safety and soundness of the banking and thrift industries. The FDIC administers two separate insurance funds, the BIF for commercial banks and state savings banks
and the SAIF for savings associations and SAIF deposits acquired by banks. The FDIC is required to maintain designated levels of reserves in each fund.



The deposits of Burnett and FTSB obtained by the Bank in the mergers, which at September 30, 2004 was $131 million, including the attributed growth
factor, remain insured by the SAIF. The Bank is a member of the BIF, and, at September 30, 2004, it had $580 million in deposits insured in the BIF.



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



FRB Reserve
Requirements



FRB regulations currently require banks to
maintain reserves of 3% of net transaction accounts (primarily demand and NOW accounts) up to $47.6 million of such accounts (subject to an exemption of up to $7.0 million), and of 10% of net transaction accounts in excess of $47.6 million. At
December 31, 2004, the Bank was in compliance with this reserve requirement.



Acquisitions of Control



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



Federal Home Loan
Banks



The Federal Home Loan Banks provide credit to their
members in the form of advances. The Bank is a member of the FHLB and must maintain an investment in the capital stock of the FHLB that consist of two components, the first is the membership component which is equal to .15% of the Banks total
assets, the second is an activity component that is equal to 2%-4% of the Banks outstanding advances. The Bank is in compliance with this requirement with an investment in stock of the FHLB of $4,075,000 at December 31, 2004. Generally, the
FHLB is 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.



17



---

##### Table of Contents

Kentucky Taxation



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



In 1996 the Kentucky legislature passed legislation to replace the Bank Shares Tax with the Local Deposits
Franchise Tax and the Kentucky Bank Franchise Tax. The Kentucky Bank Franchise Tax is an annual tax equal to 1.1% of net capital after apportionment if applicable. The value of net capital is calculated annually by
deducting from total capital an amount equal to the same percentage of the total as the book value of United States obligations bears to the book value of the total assets of the financial institution. The Local Deposits Franchise Tax is
an annual tax of up to .025% imposed by each city and county on bank deposits within their jurisdictions.



The Kentucky property tax extends to bank deposits (Deposits Tax). The tax is levied at a rate of 0.001% of the amount of the deposits. It is
the responsibility of the bank, not the depositor, to report and pay the Deposits Tax.



State banks are subject to state and local ad valorem taxes on tangible personal property and real property that is not otherwise exempt from taxation. The rates of taxation for tangible personal property vary
depending on the character of the property. The state rate of taxation on real property equals $0.315 per $100 of value as of January 1 each year.



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 $25,000 of taxable net income allocated or apportioned to Kentucky; 5% of the next $25,000; 6% of the next $50,000; 7% of the next $150,000; and 8.25% of taxable net income over
$250,000. All dividend income received by a corporation is excluded for purposes of arriving at taxable net income.



The license (franchise) tax is equal to $2.10 per $1,000 of total capital employed in the business. A corporation with gross income of not more than
$500,000 is entitled to a credit equal to $1.40 per $1,000 of the initial $350,000 of capital employed in the business and apportioned to Kentucky. Capital means capital stock, surplus, advances by affiliated companies, intercompany
accounts, borrowed moneys or any other accounts representing additional capital used and employed in the business. Total capital used in the business is apportioned to Kentucky according to a uniform apportionment formula.



A corporations taxable capital generally includes its stock
holdings in other corporations. However, a Kentucky-domiciled corporation holding directly or indirectly stock or securities in other corporations equal to or greater than 50% of its total assets may, at the corporations option, be considered
as one taxpayer for purposes of determining and apportioning total capital, or it may compute its capital by: (a) computing the total capital used in the business; and (b) deducting the book value of its investment in the stock and securities of any
corporation in which it owns more than 50% of the outstanding stock. The term book value means the value as shown on financial statements prepared for book purposes as of the last day of the corporations calendar or fiscal year.
Thus, in calculating its taxable capital for Kentucky license (franchise) tax purposes, BKFC will be able to deduct the book value of its investments in the stock of its wholly owned subsidiaries, i.e., the Bank.



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.



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



|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 26 branch
locations operated by the Bank, 15 are owned and 11 are leased. Certain of these leases are with affiliates and affiliated entities.



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.



18



---

##### Table of Contents

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



From time to time, BKFC and the Bank are involved in litigation incidental to the conduct of the 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.



PART II



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



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



|                 |  |      |       |     |   |      
|---------------- |  | ---- | ----- | --- | - | -----
|Fiscal Year 2004 |  | High |       | Low
|First Quarter    |  | $    | 30.50 |     | $ | 30.00
|Second Quarter   |  |      | 30.30 |     |   | 28.75
|Third Quarter    |  |      | 29.25 |     |   | 26.00
|Fourth Quarter   |  |      | 26.85 |     |   | 25.75
|                 |  |     
|Fiscal Year 2003 |  | High |       | Low
|First Quarter    |  | $    | 30.00 |     | $ | 26.50
|Second Quarter   |  |      | 32.25 |     |   | 29.00
|Third Quarter    |  |      | 31.25 |     |   | 30.30
|Fourth Quarter   |  |      | 32.00 |     |   | 30.35



There were 5,927,979
shares of common stock of BKFC outstanding on December 31, 2004, which were held of record by 1,064 shareholders. The Board of Directors declared cash dividends of $.08 per share in March 2003, and $.09 per share in September 2003, and $.11 per
share in March 2004, and $.12 per share in September 2004.



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



SELECTED FINANCIAL DATA



The following is a summary of selected consolidated financial data for The Bank of Kentucky Financial Corporation for the five years ended December 31, 2004. The summary should be read in conjunction with the Financial Statements and Notes
to Consolidated Financial Statements.



|                                                    |  |                              |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|--------------------------------------------------- |  | ---------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|(Dollars In Thousands Except Per Share Amounts) (a) |  | For Year Ended December 31st |        
|                                                    |  | 2004                         |         |   | 2003 |   |         | 2002 |  |   | 2001    |   |  | 2000 |        
|Earnings:                                           |  |                              |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total Interest Income                               |  | $                            | 41,591  |   |      | $ | 39,369  |      |  | $ | 33,959  |   |  | $    | 36,083  |   |  | $ | 36,247  |  
|Total Interest Expense                              |  |                              | 11,598  |   |      |   | 12,690  |      |  |   | 12,120  |   |  |      | 17,415  |   |  |   | 19,015  |  
|                                                    |  |                              |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net Interest Income                                 |  |                              | 29,993  |   |      |   | 26,679  |      |  |   | 21,839  |   |  |      | 18,668  |   |  |   | 17,232  |  
|Provision for Loan Losses                           |  |                              | 1,675   |   |      |   | 1,090   |      |  |   | 1,235   |   |  |      | 781     |   |  |   | 1,143   |  
|Noninterest Income                                  |  |                              | 8,271   |   |      |   | 8,940   |      |  |   | 5,515   |   |  |      | 4,346   |   |  |   | 2,850   |  
|Noninterest Expense                                 |  |                              | 21,602  |   |      |   | 20,484  |      |  |   | 13,583  |   |  |      | 11,854  |   |  |   | 12,747  |  
|                                                    |  |                              |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Income Before Income Taxes                          |  |                              | 14,987  |   |      |   | 14,045  |      |  |   | 12,536  |   |  |      | 10,379  |   |  |   | 6,192   |  
|Federal Income Taxes                                |  |                              | 4,929   |   |      |   | 4,686   |      |  |   | 4,085   |   |  |      | 3,310   |   |  |   | 1,979   |  
|                                                    |  |                              |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net Income                                          |  | $                            | 10,058  |   |      | $ | 9,359   |      |  | $ | 8,451   |   |  | $    | 7,069   |   |  | $ | 4,213   |  
|                                                    |  |                              |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Per Common Share Data:                              |  |                              |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Basic Earnings                                      |  | $                            | 1.69    |   |      | $ | 1.57    |      |  | $ | 1.42    |   |  | $    | 1.16    |   |  | $ | 0.69    |  
|Diluted Earnings                                    |  |                              | 1.68    |   |      |   | 1.55    |      |  |   | 1.41    |   |  |      | 1.15    |   |  |   | 0.68    |  
|Dividends Paid                                      |  |                              | 0.23    |   |      |   | 0.17    |      |  |   | 0.13    |   |  |      | 0.10    |   |  |   | 0.08    |  
|Balances at December 31:                            |  |                              |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total Investment Securities                         |  | $                            | 64,266  |   |      | $ | 59,535  |      |  | $ | 59,464  |   |  | $    | 52,298  |   |  | $ | 52,373  |  
|Total Loans                                         |  |                              | 719,157 |   |      |   | 660,442 |      |  |   | 606,815 |   |  |      | 411,472 |   |  |   | 384,081 |  
|Allowance for Loan Losses                           |  |                              | 7,214   |   |      |   | 6,855   |      |  |   | 6,408   |   |  |      | 4,244   |   |  |   | 3,806   |  
|Total Assets                                        |  |                              | 878,129 |   |      |   | 815,976 |      |  |   | 779,606 |   |  |      | 507,262 |   |  |   | 470,129 |  
|Noninterest Bearing Deposits                        |  |                              | 121,454 |   |      |   | 106,451 |      |  |   | 91,787  |   |  |      | 55,763  |   |  |   | 52,253  |  
|Interest Bearing Deposits                           |  |                              | 631,346 |   |      |   | 592,276 |      |  |   | 575,559 |   |  |      | 360,420 |   |  |   | 341,468 |  
|Total Deposits                                      |  |                              | 752,800 |   |      |   | 698,727 |      |  |   | 667,346 |   |  |      | 416,183 |   |  |   | 393,721 |  
|Notes payable                                       |  |                              | 37,573  |   |      |   | 37,850  |      |  |   | 43,125  |   |  |      | 9,449   |   |  |   | 12,174  |  
|Total Shareholders Equity                          |  |                              | 73,664  |   |      |   | 66,689  |      |  |   | 58,423  |   |  |      | 51,521  |   |  |   | 47,777  |  
|Other Statistical Information:                      |  |                              |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Return on Average Assets                            |  |                              | 1.21    | % |      |   | 1.19    | %    |  |   | 1.52    | % |  |      | 1.48    | % |  |   | 0.95    | %
|Return on Average Equity                            |  |                              | 14.39   | % |      |   | 14.84   | %    |  |   | 15.35   | % |  |      | 14.05   | % |  |   | 9.63    | %
|Dividend Payout Ratio                               |  |                              | 13.61   | % |      |   | 10.83   | %    |  |   | 9.15    | % |  |      | 8.62    | % |  |   | 11.59   | %
|Capital Ratios at December 31:                      |  |                              |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total Equity to Total Assets                        |  |                              | 8.39    | % |      |   | 8.17    | %    |  |   | 7.50    | % |  |      | 10.16   | % |  |   | 10.16   | %
|Average Equity to Average Assets                    |  |                              | 8.38    | % |      |   | 8.04    | %    |  |   | 9.93    | % |  |      | 10.50   | % |  |   | 9.84    | %
|Tier 1 Leverage Ratio                               |  |                              | 9.08    | % |      |   | 8.87    | %    |  |   | 9.57    | % |  |      | 10.46   | % |  |   | 10.12   | %
|Tier 1 Capital to Risk-Weighted Assets              |  |                              | 9.50    | % |      |   | 9.60    | %    |  |   | 9.40    | % |  |      | 10.46   | % |  |   | 11.39   | %
|Total Risk-Based Capital to Risk-Weighted Assets    |  |                              | 10.38   | % |      |   | 10.54   | %    |  |   | 10.39   | % |  |      | 12.12   | % |  |   | 12.32   | %
|Loan Quality Ratios at December 31:                 |  |                              |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Allowance for Loan Losses                           |  |                              |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|To Total Loans                                      |  |                              | 1.00    | % |      |   | 1.04    | %    |  |   | 1.06    | % |  |      | 1.02    | % |  |   | 0.99    | %
|Allowance for Loan Losses                           |  |                              |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|To Nonperforming Loans                              |  |                              | 140.21  | % |      |   | 197.38  | %    |  |   | 153.60  | % |  |      | 134.60  | % |  |   | 76.29   | %
|Net Charge-Offs to Average Net Loans                |  |                              | 0.19    | % |      |   | 0.10    | %    |  |   | 0.10    | % |  |      | 0.09    | % |  |   | 0.15    | %



|(a) | Financial Data reflects a combination accounted for as a pooling of interest in 2000.
|--- | -------------------------------------------------------------------------------------



19



---

##### Table of Contents



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



Managements Discussion and Analysis of Financial Condition

And the Results of Operations

December 31, 2004



FORWARD LOOKING STATEMENTS



This report includes forward-looking statements by the Company 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 Companys management and are subject to risks and uncertainties. While the Company 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 Company in its forward-looking statements. Factors that could cause actual
results or experience to differ from results discussed in the forward-looking statements include, but are not limited to: economic conditions; volatility and direction of market interest rates; governmental legislation and regulation, including
changes in accounting regulation or standards; material unforeseen changes in the financial condition or results of operations of the Companys clients; and other risks identified from time-to-time in The Companys other public documents
on file with the Securities and Exchange Commission. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements, and the purpose of this paragraph is to secure the use of the safe harbor provisions.



MANAGEMENT OVERVIEW



The business of The Bank of Kentucky Financial Corporation (BKFC or the
Corporation) consists of holding and administering its interest in The Bank of Kentucky, Inc. (the Bank). The Bank conducts basic banking operations from locations in Boone, Kenton, Campbell, and Grant Counties in Northern
Kentucky. The majority of the Corporations revenue is derived from the Banks loan portfolio. The loan portfolio is diversified and the ability of debtors to repay their loans is not dependent upon any single industry. Commercial or
residential real estate or other business and consumer assets secure the majority of the Banks loans.



The driving force for the growth in earnings in 2004 was loan growth and an improved mix of earning assets. On average, loans grew by $70,202,000 or 11% in 2004, while short term investments decreased by $33,125,000
or 93%. The high amount of short term investments in 2003 was the result of the PBNK acquisition in 2002. The net effect to the balance sheet from the acquisition, and the related issuance of $17,000,000 in trust preferred securities, was an
increase in liquidity that led to a higher percentage of short-term investments to earning assets in 2003 compared to 2002. This growth in loans and the accompanying improvement in the earning asset mix of the bank in 2004 drove the increase in net
interest income of $3,314,000 or 12% for the year.



Offsetting the increase in
net interest income was the decrease in gains on the sale of mortgage loans. Gains on the sale of mortgage loans decreased $1,643,000 or 56% from 2003. The gains



20



---

##### Table of Contents

in 2003 were driven by refinancing activity as a result of the historically low interest rate environment of 2003, and with rising mortgage rates and a
saturated refinancing market 2004 saw a slowdown in this refinancing activity. The gains in 2004 represented a more normalized year in gains on the sale of mortgage loans.



Higher credit losses in 2004 drove the provision for loan losses to $1,675,000, an increase of $585,000 or 54% from 2003. Net charge offs
for 2004 were $1,316,000 or .19% of average loans compared to the $643,000 or .10% in 2003. While the charge off percentage increased from .10% in 2003 to .19% in 2004, the Banks net charge off experience is still well below industry averages.



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



CRITICAL ACCOUNTING POLICIES



BKFC has prepared all of the consolidated financial information in this report in accordance
with accounting principles generally accepted in the United States of America (U.S. GAAP). In preparing the consolidated financial statements in accordance with U.S. GAAP, BKFC makes estimates and assumptions that affect the reported amount of
assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurances that actual results will not
differ from those estimates.



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



The
Bank maintains an allowance to absorb probable, incurred loan losses inherent in the loan portfolio. The allowance for loan losses is maintained at a level the Bank considers to be adequate and is based on ongoing quarterly assessments and
evaluations of the collectibility and historical loss experience of loans. Loan losses are charged and recoveries are credited to the allowance for loan losses. Provisions for loan losses are based on the Banks review of the historical loan
loss experience and such factors that, in managements judgment, deserve consideration under existing economic conditions in estimating probable loan losses. The Banks strategy for credit risk management includes a combination of
conservative underwriting, documentation and collections standards and quarterly management reviews of large loan exposures and loans experiencing deterioration of loan quality.



Larger commercial loans that exhibit probable or observed loan weaknesses are subject to individual review. Where appropriate, specific
portions of the allowance are allocated to individual loans based on managements estimate of the borrowers ability to repay the loan given the availability of collateral, other sources of cash flow and legal options available to the
Bank. The review of individual loans includes those loans that are impaired as provided in SFAS No. 114, Accounting by Creditors for Impairment of a Loan. The Bank evaluates the collectibility of both principal and interest when
assessing the need for loans being placed on non-accrual status. Historical loss rates are applied to other commercial loans not subject to



21



---

##### Table of Contents

specific reserve allocations. The loss rates applied to commercial loans are derived from analyzing a range of the loss experience sustained on loans
according to their internal risk grade. These loss rates may be adjusted to account for environmental factors if warranted.



Homogenous loans, such as consumer installment, residential mortgage loans and home equity loans are not individually risk graded. Rather, a range of historic loss
experience of the portfolio is used to determine the appropriate allowance for the portfolios. Allocations of 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 the internal credit review department.



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



During 2004, the Bank migrated from using peer data in determining historic loss ratios to the Banks own loss experience. Prior to 2004, the peer data on loss
experience was used as a result of the relatively young age of the Bank and low levels of loss experience. The implementation of this change did not have a material effect on the financial statements.



FINANCIAL CONDITION



Total assets at December 31, 2004 were $878,129,000 compared to $815,976,000 at December 31,
2003, an increase of $62,153,000 (8%). Driving the asset growth in the bank was an increase of $58,356,000 (9%) in the loan portfolio. Contributing to the growth in the loan portfolio were increases in the commercial and commercial real estate loan
portfolios (up $41,739,000 or 11%) and the residential real estate portfolio (up $12,648,000 or 7%). The growth in the residential portfolio was primarily the result of home equity loans, which increased $12,363,000 or 27% from December of 2003.
While the growth in the commercial and commercial real estate portfolio in 2004 was typical for the Bank, the growth in home equity loans benefited from the Banks marketing efforts. The majority of the asset growth was funded by increases in
deposits and shareholders equity. Total deposits increased $54,073,000 (8%) to $752,800,000 at December 31, 2004, compared to $698,727,000 at December 31, 2003, while shareholders equity increased $6,975,000 (10%) to $73,664,000 at
December 31, 2004, compared to $66,689,000 at December 31, 2003. While total other borrowings increased $537,000 to $46,734,000 at December 31,2004 compared to $46,197,000 at December 31, 2003. Contributing to the growth in deposits were increases
in demand deposit accounts (up $15,003,000 or 14%), money market accounts (up $25,342,000 or 41%) and certificates of



22



---

##### Table of Contents

deposits and individual retirement accounts (up $13,088,000 or 5%). The growth in demand deposits benefited from the continued growth of commercial loan
relationships in the Bank, while the growth in money market accounts benefited from the introduction of the Banks Money Market Plus account.



As discussed in the management overview, the following table illustrates the effect loan growth had on the mix of average earning assets of the bank in 2004. The table
shows that loans as a percentage of average earning assets grew $70,202,000 to 82.2% of the average earning assets in 2004, compared to 78.5% in 2003 while short-term investments decreased $33,125,000 to .3% of average earning assets in 2004
compared to 4.5% in 2003. These changes to the mix of earning assets had a positive effect on net interest income with higher yielding loans replacing lower yielding short term investments.



Table 1- Average Assets 2004, 2003 and 2002



|                                         |  |      |         |                      |       |   |      |   |                      |  |       |      |  |                      |         |  |       |  
|---------------------------------------- |  | ---- | ------- | -------------------- | ----- | - | ---- | - | -------------------- |  | ----- | ---- |  | -------------------- | ------- |  | ----- | -
|                                         |  | 2004 |         | As a %of totalassets |       |   | 2003 |   | As a %of totalassets |  |       | 2002 |  | As a %of totalassets |        
|Average Assets:                          |  |      |         |                      |       |   |      |   |                      |  |       |      |  |                      |         |  |       |  
|Cash and Due from banks                  |  | $    | 42,364  |                      | 5.1   | % |      | $ | 37,098               |  | 4.7   | %    |  | $                    | 24,885  |  | 4.5   | %
|Short term Investments                   |  |      | 2,355   |                      | .3    | % |      |   | 35,480               |  | 4.5   | %    |  |                      | 8,521   |  | 1.5   | %
|Other interest-earning assets            |  |      | 4,157   |                      | .5    | % |      |   | 5,757                |  | .8    | %    |  |                      | 4,168   |  | .8    | %
|Securities                               |  |      | 51,724  |                      | 6.2   | % |      |   | 48,103               |  | 6.1   | %    |  |                      | 49,699  |  | 9.0   | %
|Loans (net of allowance for loan losses) |  |      | 686,016 |                      | 82.2  | % |      |   | 615,814              |  | 78.5  | %    |  |                      | 452,276 |  | 81.6  | %
|Premises and Equipment                   |  |      | 16,589  |                      | 2.0   | % |      |   | 16,394               |  | 2.1   | %    |  |                      | 6,896   |  | 1.2   | %
|Goodwill and Acquisition intangibles     |  |      | 13,296  |                      | 1.6   | % |      |   | 13,926               |  | 1.8   | %    |  |                      | 1,599   |  | .3    | %
|Cash Surrender Value of life insurance   |  |      | 11,869  |                      | 1.4   | % |      |   | 5,497                |  | .7    | %    |  |                      | 1,366   |  | .2    | %
|Other Assets                             |  |      | 6,283   |                      | .7    | % |      |   | 6,176                |  | .8    | %    |  |                      | 4,712   |  | .9    | %
|                                         |  |      |         |                      |       |   |      |   |                      |  |       |      |  |                      |         |  |       |  
|Total Average Assets                     |  | $    | 834,653 |                      | 100.0 | % |      | $ | 784,245              |  | 100.0 | %    |  |                      | 554,122 |  | 100.0 | %
|                                         |  |      |         |                      |       |   |      |   |                      |  |       |      |  |                      |         |  |       |  



RESULTS OF
OPERATIONS



SUMMARY



Net income was $10,058,000 for the year ended December 31, 2004 compared to $9,359,000 in
2003, an increase of $699,000 (7%). Net income for the year ended December 31, 2003 increased $908,000 (11%) from the $8,451,000 recorded in 2002. Driven by the growth in loans and the improved mix of earning assets, net interest income increased
$3,314,000 or 12% in 2004 which helped offset the $1,643,000 (56%) reduction in gains on loans sold from 2003. The reduction in gains on loans sold was caused by the slowdown in the mortgage loan refinancing market, which slowed dramatically from
2003 as a result of rising rates. The 2003 results reflected the full year effect of the purchase of certain assets and the assumption of certain liabilities of the Peoples Bank of Northern Kentucky (PBNK) on November 22, 2003.



23



---

##### Table of Contents

NET INTEREST INCOME



Net interest income grew to $29,993,000 in 2004, an increase of $3,314,000 (12%) over the $26,679,000 earned in 2003. The increase was driven by the growth in loans and
an improved mix of earning assets. These balance sheet changes help produce the increase in the net interest margin from 3.79% in 2003 to 4.03% in 2004. As can be seen in table 3, net interest income was positively impacted by the volume additions
and mix improvements to the balance sheet by $3,139,000 in 2004, and was helped to a smaller degree by the rate variance which had a $138,000 positive impact on net interest income.



The rates that are currently being paid on interest bearing transaction deposits are at such a level that although the Bank currently has
more of these interest bearing transaction accounts that can be repriced immediately than assets that are immediately repriceable, lower interest rates would not have a positive impact on earnings. The rates on these deposits cannot drop appreciably
lower than their current levels. The low rates also have a negative effect on the value of net free funds (earning assets funded by non interest bearing liabilities), which drop as rates fall.



The Banks ratio of interest-earning assets to interest-bearing liabilities was 113.90%
for 2004 which was an increase, or improvement, from the 112.60% in 2003. The Bank expects this ratio to increase with balance sheet growth, which will continue to leverage the acquired fixed assets and goodwill and purchase intangibles associated
with the PBNK acquisition in 2002.



Net interest income grew to $26,679,000 in
2003, an increase of $4,840,000 (22%) over the $21,839,000 earned in 2002. The large increase in the net interest income was the result of the growth in earning assets and interest bearing liabilities associated with both the PBNK transaction and
the growth experienced in 2003, and was offset with a decline in the net interest margin to 3.79% in 2003 from 4.28% in 2002. The decline in the net interest margin was the result of the historically low interest rate environment and the balance
sheet changes associated with the PBNK transaction. As can be seen in table 3, net interest income was positively impacted by the volume additions to the balance sheet by $6,220,000 in 2003, however these gains were offset by the rate variance,
which had a $1,365,000 negative impact on net interest income. The level of net free funds has also dropped as a result of the balance sheet changes in 2003 associated with the PBNK acquisition. As table 2 shows, the average interest-earning assets
to interest-bearing liabilities ratio decreased from 117.59% on average balances in 2002 to 112.60% in 2003. The effect of the low rates and the balance sheet changes can also be seen in table 2 which shows the positive effect of net free funds on
the net interest margin had fallen from .42% in 2002 to .23% in 2003.



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



Table 3
describes 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



24



---

##### Table of Contents

(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 2- Average Balance Sheet Rates 2004, 2003 and 2002
(presented on a tax equivalent basis in thousands)



|                                                                                          |  |                            |         |   |                     |   |            |      |      |                            |  |   |                     |   |            |   |        |                           |      |   |                     |   |            |   |  |   |        |  |      |  
|----------------------------------------------------------------------------------------- |  | -------------------------- | ------- | - | ------------------- | - | ---------- | ---- | ---- | -------------------------- |  | - | ------------------- | - | ---------- | - | ------ | ------------------------- | ---- | - | ------------------- | - | ---------- | - |  | - | ------ |  | ---- | -
|                                                                                          |  | Year ended December 31,    |        
|                                                                                          |  | 2004                       |         |   | 2003                |   |            | 2002 |     
|                                                                                          |  | Average outstandingbalance |         |   | Interestearned/paid |   | Yield/rate |      |      | Average outstandingbalance |  |   | Interestearned/paid |   | Yield/rate |   |        | Averageoutstandingbalance |      |   | Interestearned/paid |   | Yield/rate |  
|                                                                                          |  | (Dollars in thousands)     |        
|Interest-earning assets:                                                                  |  |                            |         |   |                     |   |            |      |      |                            |  |   |                     |   |            |   |        |                           |      |   |                     |   |            |   |  |   |        |  |      |  
|Loans receivable(1)(2)                                                                    |  | $                          | 693,195 |   |                     | $ | 39,969     |      | 5.77 | %                          |  | $ | 622,346             |   |            | $ | 37,288 |                           | 5.99 | % |                     | $ | 454,887    |   |  | $ | 31,329 |  | 6.89 | %
|Securities(2)                                                                             |  |                            | 51,724  |   |                     |   | 1,686      |      | 3.26 |                            |  |   | 48,103              |   |            |   | 1,826  |                           | 3.80 |   |                     |   | 49,699     |   |  |   | 2,631  |  | 5.29 |  
|Other interest-earning assets                                                             |  |                            | 6,512   |   |                     |   | 204        |      | 3.15 |                            |  |   | 41,237              |   |            |   | 560    |                           | 1.36 |   |                     |   | 12,689     |   |  |   | 289    |  | 2.28 |  
|                                                                                          |  |                            |         |   |                     |   |            |      |      |                            |  |   |                     |   |            |   |        |                           |      |   |                     |   |            |   |  |   |        |  |      |  
|Total interest-earning assets                                                             |  |                            | 751,431 |   |                     |   | 41,859     |      | 5.57 |                            |  |   | 711,686             |   |            |   | 39,674 |                           | 5.57 |   |                     |   | 517,275    |   |  |   | 34,249 |  | 6.62 |  
|                                                                                          |  |                            |         |   |                     |   |            |      |      |                            |  |   |                     |   |            |   |        |                           |      |   |                     |   |            |   |  |   |        |  |      |  
|Non-interest-earning assets                                                               |  |                            | 83,222  |   |                     |   |            |      |      |                            |  |   | 72,559              |   |            |   |        |                           |      |   |                     |   | 36,989     |   |  |   |        |  |      |  
|                                                                                          |  |                            |         |   |                     |   |            |      |      |                            |  |   |                     |   |            |   |        |                           |      |   |                     |   |            |   |  |   |        |  |      |  
|Total assets                                                                              |  | $                          | 834,653 |   |                     |   |            |      |      |                            |  | $ | 784,245             |   |            |   |        |                           |      |   |                     | $ | 554,264    |   |  |   |        |  |      |  
|                                                                                          |  |                            |         |   |                     |   |            |      |      |                            |  |   |                     |   |            |   |        |                           |      |   |                     |   |            |   |  |   |        |  |      |  
|Interest-bearing liabilities:                                                             |  |                            |         |   |                     |   |            |      |      |                            |  |   |                     |   |            |   |        |                           |      |   |                     |   |            |   |  |   |        |  |      |  
|Transaction accounts                                                                      |  |                            | 346,940 |   |                     |   | 3,153      |      | .91  |                            |  |   | 323,837             |   |            |   | 3,276  |                           | 1.01 |   |                     |   | 227,587    |   |  |   | 3,919  |  | 1.72 |  
|Time deposits                                                                             |  |                            | 259,072 |   |                     |   | 6,660      |      | 2.57 |                            |  |   | 264,056             |   |            |   | 7,831  |                           | 2.97 |   |                     |   | 187,448    |   |  |   | 7,409  |  | 3.95 |  
|Borrowings                                                                                |  |                            | 53,694  |   |                     |   | 1,785      |      | 3.32 |                            |  |   | 44,148              |   |            |   | 1,583  |                           | 3.59 |   |                     |   | 24,846     |   |  |   | 792    |  | 3.19 |  
|                                                                                          |  |                            |         |   |                     |   |            |      |      |                            |  |   |                     |   |            |   |        |                           |      |   |                     |   |            |   |  |   |        |  |      |  
|Total interest-bearing liabilities                                                        |  |                            | 659,706 |   |                     |   | 11,598     |      | 1.76 |                            |  |   | 632,041             |   |            |   | 12,690 |                           | 2.01 |   |                     |   | 439,881    |   |  |   | 12,120 |  | 2.76 |  
|                                                                                          |  |                            |         |   |                     |   |            |      |      |                            |  |   |                     |   |            |   |        |                           |      |   |                     |   |            |   |  |   |        |  |      |  
|Non-interest-bearing liabilities                                                          |  |                            | 105,030 |   |                     |   |            |      |      |                            |  |   | 89,117              |   |            |   |        |                           |      |   |                     |   | 59,327     |   |  |   |        |  |      |  
|                                                                                          |  |                            |         |   |                     |   |            |      |      |                            |  |   |                     |   |            |   |        |                           |      |   |                     |   |            |   |  |   |        |  |      |  
|Total liabilities                                                                         |  |                            | 764,736 |   |                     |   |            |      |      |                            |  |   | 721,158             |   |            |   |        |                           |      |   |                     |   | 499,208    |   |  |   |        |  |      |  
|Shareholders equity                                                                      |  |                            | 69,917  |   |                     |   |            |      |      |                            |  |   | 63,087              |   |            |   |        |                           |      |   |                     |   | 55,056     |   |  |   |        |  |      |  
|                                                                                          |  |                            |         |   |                     |   |            |      |      |                            |  |   |                     |   |            |   |        |                           |      |   |                     |   |            |   |  |   |        |  |      |  
|Total liabilities and shareholders equity                                                |  | $                          | 834,653 |   |                     |   |            |      |      |                            |  | $ | 784,245             |   |            |   |        |                           |      |   |                     | $ | 554,264    |   |  |   |        |  |      |  
|                                                                                          |  |                            |         |   |                     |   |            |      |      |                            |  |   |                     |   |            |   |        |                           |      |   |                     |   |            |   |  |   |        |  |      |  
|Net interest income                                                                       |  |                            |         |   |                     | $ | 30,261     |      |      |                            |  |   |                     |   |            | $ | 26,984 |                           |      |   |                     |   |            |   |  | $ | 22,129 |  |      |  
|                                                                                          |  |                            |         |   |                     |   |            |      |      |                            |  |   |                     |   |            |   |        |                           |      |   |                     |   |            |   |  |   |        |  |      |  
|interest rate spread                                                                      |  |                            |         |   |                     |   |            |      | 3.81 | %                          |  |   |                     |   |            |   |        |                           | 3.56 | % |                     |   |            |   |  |   |        |  | 3.86 | %
|                                                                                          |  |                            |         |   |                     |   |            |      |      |                            |  |   |                     |   |            |   |        |                           |      |   |                     |   |            |   |  |   |        |  |      |  
|Net interest margin (net interest income as a percent of average interest-earning assets) |  |                            |         |   |                     |   |            |      | 4.03 | %                          |  |   |                     |   |            |   |        |                           | 3.79 | % |                     |   |            |   |  |   |        |  | 4.28 | %
|                                                                                          |  |                            |         |   |                     |   |            |      |      |                            |  |   |                     |   |            |   |        |                           |      |   |                     |   |            |   |  |   |        |  |      |  
|Effect of Net Free Funds (earning assets funded by non interest bearing liabilities)      |  |                            |         |   |                     |   |            |      | .22  | %                          |  |   |                     |   |            |   |        |                           | .23  | % |                     |   |            |   |  |   |        |  | .42  | %
|                                                                                          |  |                            |         |   |                     |   |            |      |      |                            |  |   |                     |   |            |   |        |                           |      |   |                     |   |            |   |  |   |        |  |      |  
|Average interest-earning assets to interest-bearing liabilities                           |  |                            | 113.90  | % |                     |   |            |      |      |                            |  |   | 112.60              | % |            |   |        |                           |      |   |                     |   | 117.59     | % |  |   |        |  |      |  
|                                                                                          |  |                            |         |   |                     |   |            |      |      |                            |  |   |                     |   |            |   |        |                           |      |   |                     |   |            |   |  |   |        |  |      |  

---

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



|(2) | Income presented on a tax equivalent basis using a 35% tax rate. The tax equivalent adjustment was $268,000, $305,000, and $290,000, in 2004, 2003, and 2002
respectively.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



25



---

##### Table of Contents

Table 3-Volume/Rate Analysis (in thousands)



|                                           |  |                            |       |   |                            |   |        |       |  |   |        |   |  |      |        |   |       |   |        |   |  |   |       |  
|------------------------------------------ |  | -------------------------- | ----- | - | -------------------------- | - | ------ | ----- |  | - | ------ | - |  | ---- | ------ | - | ----- | - | ------ | - |  | - | ----- | -
|                                           |  | Year ended December 31,    |      
|                                           |  | 2004 vs. 2003              |       |   | 2003 vs. 2002              |  
|                                           |  | Increase (Decrease) Due to |       |   | Increase (Decrease) Due to |  
|                                           |  | Volume                     |       |   | Rate                       |   |        | Total |  |   | Volume |   |  | Rate |        |   | Total |  
|                                           |  | (Dollars in thousands)     |      
|Interest income attributable to:           |  |                            |       |   |                            |   |        |       |  |   |        |   |  |      |        |   |       |   |        |   |  |   |       |  
|Loans receivable                           |  | $                          | 4,125 |   |                            | $ | (1,444 | )     |  | $ | 2,681  |   |  | $    | 10,425 |   |       | $ | (4,466 | ) |  | $ | 5,959 |  
|Securities                                 |  |                            | 131   |   |                            |   | (271   | )     |  |   | (140   | ) |  |      | (82    | ) |       |   | (723   | ) |  |   | (805  | )
|Other interest-earning assets(1)           |  |                            | (713  | ) |                            |   | 357    |       |  |   | (356   | ) |  |      | 428    |   |       |   | (157   | ) |  |   | 271   |  
|                                           |  |                            |       |   |                            |   |        |       |  |   |        |   |  |      |        |   |       |   |        |   |  |   |       |  
|Total interest-earning assets              |  |                            | 3,543 |   |                            |   | (1,358 | )     |  |   | 2,185  |   |  |      | 10,771 |   |       |   | (5,346 | ) |  |   | 5,425 |  
|                                           |  |                            |       |   |                            |   |        |       |  |   |        |   |  |      |        |   |       |   |        |   |  |   |       |  
|Interest expense attributable to:          |  |                            |       |   |                            |   |        |       |  |   |        |   |  |      |        |   |       |   |        |   |  |   |       |  
|Transaction accounts                       |  |                            | 224   |   |                            |   | (347   | )     |  |   | (123   | ) |  |      | 1,311  |   |       |   | (1,954 | ) |  |   | (643  | )
|Time deposits                              |  |                            | (145  | ) |                            |   | (1,026 | )     |  |   | (1,171 | ) |  |      | 2,559  |   |       |   | (2,137 | ) |  |   | 422   |  
|Borrowings                                 |  |                            | 324   |   |                            |   | (122   | )     |  |   | 202    |   |  |      | 681    |   |       |   | 110    |   |  |   | 791   |  
|                                           |  |                            |       |   |                            |   |        |       |  |   |        |   |  |      |        |   |       |   |        |   |  |   |       |  
|Total interest-bearing liabilities         |  |                            | 403   |   |                            |   | (1,495 | )     |  |   | (1,092 | ) |  |      | 4,551  |   |       |   | (3,981 | ) |  |   | 570   |  
|                                           |  |                            |       |   |                            |   |        |       |  |   |        |   |  |      |        |   |       |   |        |   |  |   |       |  
|Increase (decrease) in net interest income |  | $                          | 3,140 |   |                            | $ | 137    |       |  | $ | 3,277  |   |  | $    | 6,220  |   |       | $ | (1,365 | ) |  | $ | 4,855 |  
|                                           |  |                            |       |   |                            |   |        |       |  |   |        |   |  |      |        |   |       |   |        |   |  |   |       |  

---

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



PROVISION FOR LOAN LOSSES



The provision for loan losses was $1,675,000 for the year ended December 31, 2004, compared
to $1,090,000 for 2003. The increase of $585,000 (54%) reflected a higher level of losses in the loan portfolio in 2004. For the year 2004, net charge offs were $1,316,000 or .19% of average loan balances compared to 2003 figures of $643,000 or .10%
of average loan balances. Total non-accrual loans and loans past due 90 days or more were $5,145,000 (.72% of loans outstanding) at December 31, 2004 compared to $3,473,000 (.53% of loans outstanding) at December 31, 2003. As the non-performing loan
balances increased, the ratio of the allowance to nonperforming loans (coverage ratio) decreased from 197% at the end of 2003 to 140% at the end of 2004. The provision for loan losses was $1,090,000 for the year ended December 31, 2003, compared to
$1,235,000 for 2002. The decrease of $145,000 (12%) reflected the stable credit quality of the loan portfolio. For the year 2003, net charge offs were $643,000 or .10% of average loan balances compared to 2002 figures of $453,000 or .10% of average
loan balances. Total non-accrual loans and loans past due 90 days or more were $3,473,000 (.53% of loans outstanding) at December 31, 2003 compared to $4,172,000 (.69% of loans outstanding) at December 31, 2002. As the non-performing loan balances
decreased the ratio of the allowance to nonperforming loans (coverage ratio) increased from 154% at the end of 2002 to 197% at the end of 2003.



The allowance for loan losses as a percentage of total assets stood at 1.00% on December 31, 2004, which was down from the 1.04% at December 31, 2003. The allowance
percentage has remained relatively stable from previous years. Management believes the current level of the



26



---

##### Table of Contents

allowance for loan losses is sufficient to absorb probable incurred losses in the loan portfolio. Management continues to monitor the loan portfolio closely
and believes the increase in the provision for loan losses is directionally consistent with the increase in losses in the loan portfolio and the higher level of non-performing loans.



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



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



Table 4 analysis of the allowance for losses for the periods indicated:



|                                                        |  |                            |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |       |  
|------------------------------------------------------- |  | -------------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | - |  | ---- | ------ | - |  | - | ----- | -
|                                                        |  | Year ended at December 31, |       
|                                                        |  | 2004                       |        |   | 2003 |   |        | 2002 |  |   | 2001   |   |  | 2000 |       
|                                                        |  | (Dollars in thousands)     |       
|Balance of allowance at beginning of period             |  | $                          | 6,855  |   |      | $ | 6,408  |      |  | $ | 4,244  |   |  | $    | 3,806  |   |  | $ | 3,257 |  
|Recoveries of loans previously charged off:             |  |                            |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |       |  
|Commercial loans                                        |  |                            | 8      |   |      |   | 5      |      |  |   | 10     |   |  |      | 49     |   |  |   | 64    |  
|Consumer loans                                          |  |                            | 2      |   |      |   | 26     |      |  |   | 9      |   |  |      | 10     |   |  |   | 10    |  
|Mortgage loans                                          |  |                            | 0      |   |      |   | 1      |      |  |   | 6      |   |  |      | 2      |   |  |   | 0     |  
|                                                        |  |                            |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |       |  
|Total recoveries                                        |  |                            | 10     |   |      |   | 32     |      |  |   | 25     |   |  |      | 61     |   |  |   | 74    |  
|                                                        |  |                            |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |       |  
|Loans charged off:                                      |  |                            |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |       |  
|Commercial loans                                        |  |                            | 936    |   |      |   | 335    |      |  |   | 152    |   |  |      | 242    |   |  |   | 383   |  
|Consumer loans                                          |  |                            | 360    |   |      |   | 226    |      |  |   | 211    |   |  |      | 69     |   |  |   | 78    |  
|Mortgage loans                                          |  |                            | 30     |   |      |   | 114    |      |  |   | 115    |   |  |      | 93     |   |  |   | 137   |  
|                                                        |  |                            |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |       |  
|Total charge-offs                                       |  |                            | 1,326  |   |      |   | 675    |      |  |   | 478    |   |  |      | 404    |   |  |   | 598   |  
|                                                        |  |                            |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |       |  
|Net charge-offs                                         |  |                            | (1,316 | ) |      |   | (643   | )    |  |   | (453   | ) |  |      | (343   | ) |  |   | (524  | )
|Provision for loan losses                               |  |                            | 1,675  |   |      |   | 1,090  |      |  |   | 1,235  |   |  |      | 781    |   |  |   | 1,143 |  
|Merger adjustment                                       |  |                            | 0      |   |      |   | 0      |      |  |   | 1,382  |   |  |      | 0      |   |  |   | (70   | )
|                                                        |  |                            |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |       |  
|Balance of allowance at end of period                   |  | $                          | 7,214  |   |      | $ | 6,855  |      |  | $ | 6,408  |   |  | $    | 4,244  |   |  | $ | 3,806 |  
|                                                        |  |                            |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |       |  
|Net charge-offs to average loans outstanding for period |  |                            | .19    | % |      |   | .10    | %    |  |   | .10    | % |  |      | .09    | % |  |   | .15   | %
|                                                        |  |                            |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |       |  
|Allowance at end of period to loans at end of period    |  |                            | 1.00   | % |      |   | 1.04   | %    |  |   | 1.06   | % |  |      | 1.02   | % |  |   | .99   | %
|                                                        |  |                            |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |       |  
|Allowance to nonperforming loans at end of period       |  |                            | 140.21 | % |      |   | 197.38 | %    |  |   | 153.60 | % |  |      | 134.60 | % |  |   | 76.29 | %
|                                                        |  |                            |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |       |  



27



---

##### Table of Contents

NONINTEREST INCOME



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



|                                      |  |                         |       |                                |   |       |  |           |       |  |           |    |  |      |  
|------------------------------------- |  | ----------------------- | ----- | ------------------------------ | - | ----- |  | --------- | ----- |  | --------- | -- |  | ---- | -
|                                      |  | Year ended December 31, |       | Percentage Increase/(Decrease) |  
|                                      |  | 2004                    |       | 2003                           |   | 2002  |  | 2004/2003 |       |  | 2003/2002 |   
|Non-interest income:                  |  |                         |       |                                |   |       |  |           |       |  |           |    |  |      |  
|Service charges and fees              |  | $                       | 3,680 |                                | $ | 3,502 |  | $         | 2,666 |  | 5         | %  |  | 31   | %
|Gain on sale of securities            |  |                         | 10    |                                |   | 0     |  |           | 113   |  | 100       |    |  | (100 | )
|Gains on sale of real estate loans    |  |                         | 1,281 |                                |   | 2,924 |  |           | 1,316 |  | (56       | )  |  | 122  |  
|Trust fee income                      |  |                         | 779   |                                |   | 622   |  |           | 213   |  | 25        |    |  | 192  |  
|Bankcard transaction revenue          |  |                         | 812   |                                |   | 669   |  |           | 478   |  | 21        |    |  | 40   |  
|Company owned life insurance earnings |  |                         | 485   |                                |   | 224   |  |           | 17    |  | 116       |    |  | 1218 |  
|Other                                 |  |                         | 1,224 |                                |   | 999   |  |           | 712   |  | 23        |    |  | 40   |  
|                                      |  |                         |       |                                |   |       |  |           |       |  |           |    |  |      |  
|Total non-interest income             |  | $                       | 8,271 |                                | $ | 8,940 |  | $         | 5,515 |  | (7        | )% |  | 62   | %
|                                      |  |                         |       |                                |   |       |  |           |       |  |           |    |  |      |  



Total non-interest income decreased
$669,000 (7%) in 2004 from $8,940,000 in 2003 to $8,271,000 in 2004. The largest decrease in non-interest income for 2004, was in gains on the sale of mortgage loans, which decreased $1,643,000 (56%) in 2004 from $2,924,000 in 2003 to $1,281,000 in
2004. The decrease was due to the slowdown in refinancing activity as a result of the rising mortgage rates and a saturated refinancing market, as a high percentage of consumers have already taken advantage of the historically low rates that have
now been in place for an extended period of time. The Bank originates fixed rate first mortgage loans and sells them, servicing released, into the secondary market. For the twelve months ended December 31, 2004, $94 million of loans were sold
compared to $263 million sold during the same period in 2003. Loans held for sale at December 31, 2004 increased to $1,391,000 from $1,017,000 at December 31, 2003. These loans have been approved by the secondary market buyer and closed by the Bank.
The Bank is awaiting settlement, but is not exposed to significant interest rate or pricing risk during the period between closing the loan and settlement. The level of the refinancing business is dependent upon rates, and with rates rising on fixed
rate mortgage loans in 2004, the refinancing activity slowed appreciably. Likewise, if rates remain stable or continue to rise in 2005, the result will likely be a relatively low level of refinancing in 2005.



Service charges and fees on deposit accounts increased by $178,000 (5%) from $3,502,000 in
2003, to $3,680,000 in 2004, fee increases associated with higher volume of accounts was partially offset with higher earnings credit rates for customers to offset service charges with. Earnings credit rates are tied to short term rates and rose
steadily in 2004. The Bank had $10,000 in gains from the sale of investment securities in 2004 versus $0 in 2003. Trust fee income increased $157,000 (25%) in 2004 compared 2003 as a result of business development efforts and market value increases.
At year-end 2004, total trust assets stood at $244 million compared to $197 million at the end of 2003. Bankcard transactions, which are the fees received from vendors when the Banks debit cards and credit cards are used, increased by $143,000
(21%) from $669,000 in 2003 to $812,000 in 2004, reflecting the added cards and increased volume. The growth in the bankcard transactions fees from 2003 levels were slowed somewhat as a result of an industry wide legal settlement which effectively
reduced the fee percentage that banks may receive from customers using the banks debit and credit cards in mid-year of 2003.



28



---

##### Table of Contents

Total non-interest income increased $3,425,000 (62%) in 2003 from $5,515,000 in 2002 to $8,940,000 in 2003. The 2003
figures reflect the effects of the PBNK transaction, which added eight banking offices, sixty-two employees, $140 million in loans and $162 million in deposits. The largest increase in non-interest income, for 2003, was in gains on the sale of
mortgage loans, which increased $1,608,000 (122%) in 2003 from $1,316,000 in 2002 to $2,924,000 in 2003. The increase was due to strong refinancing activity as a result of the low interest rate environment experienced in 2003. For the twelve months
ended December 31, 2003, $263 million of loans were sold compared to $114 million sold during the same period in 2002. Loans held for sale at December 31, 2003 decreased to $1,017,000 from $10,799,000 at December 31, 2002. The level of the
refinancing business is dependent upon rates, and with rates rising on fixed rate mortgage loans in the second half of 2003, the refinancing activity slowed appreciably. Service charges and fees on deposit accounts increased by $836,000 (31%) from
$2,666,000 in 2002, to $3,502,000 in 2003, reflecting the significant increase in volume associated with the added deposits. The Bank had no gains or losses from the sale of investment securities in 2003 versus a realized gain of $113,000 on the
sale of securities in 2002. Trust fee income increased $409,000 (192%) in 2003 compared 2002. The main reason for the increase in trust revenue was the acquisition of the PBNK trust assets and customers. At year-end 2003, total trust assets stood at
$197 million compared to $150 million at the end of 2002. The addition of the PBNK trust department added approximately $86 million in trust assets in November of 2002. Bankcard transactions, which are the fees received from vendors when the
Banks debit cards and credit cards are used, increased by $191,000 (40%) from $478,000 in 2002 to $669,000 in 2003, reflecting the added cards associated with the PBNK transaction. The growth in the bankcard transactions fees were slowed in
2003 as a result of an industry wide legal settlement which effectively reduced the fee percentage that banks may receive from customers using the banks debit and credit cards.



NONINTEREST EXPENSE



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



|                                  |  |                         |        |                                |   |        |  |           |        |  |           |   |  |    |  
|--------------------------------- |  | ----------------------- | ------ | ------------------------------ | - | ------ |  | --------- | ------ |  | --------- | - |  | -- | -
|                                  |  | Year ended December 31, |        | Percentage Increase/(Decrease) |  
|                                  |  | 2004                    |        | 2003                           |   | 2002   |  | 2004/2003 |        |  | 2003/2002 |  
|Non-interest expense:             |  |                         |        |                                |   |        |  |           |        |  |           |   |  |    |  
|Salaries and employee benefits    |  | $                       | 10,386 |                                | $ | 9,445  |  | $         | 6,482  |  | 10        | % |  | 46 | %
|Occupancy and equipment           |  |                         | 3,357  |                                |   | 3,387  |  |           | 2,145  |  | (1        | ) |  | 58 |  
|Data processing                   |  |                         | 1,278  |                                |   | 1,278  |  |           | 907    |  | 0         |   |  | 41 |  
|Advertising                       |  |                         | 630    |                                |   | 525    |  |           | 411    |  | 20        |   |  | 28 |  
|ATM processing fees               |  |                         | 572    |                                |   | 845    |  |           | 708    |  | (32       | ) |  | 19 |  
|Outside service fees              |  |                         | 734    |                                |   | 644    |  |           | 390    |  | 14        |   |  | 65 |  
|State bank taxes                  |  |                         | 870    |                                |   | 763    |  |           | 584    |  | 14        |   |  | 31 |  
|Amortization of intangible assets |  |                         | 645    |                                |   | 645    |  |           | 37     |  | 0         |   |  | NM |  
|Other                             |  |                         | 3,130  |                                |   | 2,952  |  |           | 1,919  |  | 6         |   |  | 54 |  
|                                  |  |                         |        |                                |   |        |  |           |        |  |           |   |  |    |  
|Total non-interest expense        |  | $                       | 21,602 |                                | $ | 20,484 |  | $         | 13,583 |  | 5         | % |  | 51 | %
|                                  |  |                         |        |                                |   |        |  |           |        |  |           |   |  |    |  



Noninterest expense increased
$1,118,000 (5%) to $21,602,000 for 2004, compared to $20,484,000 in 2003. The largest increase in non-interest expense was in salaries and benefits, which increased $941,000 (10%) in 2004 compared to the same period in 2003. The increase in salaries
and benefits was the result of annual merit increases, staff additions and added employee



29



---

##### Table of Contents

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



Noninterest
expense increased $6,901,000 (51%) to $20,484,000 for 2003, compared to $13,583,000 in 2002. The 2003 figures reflect the full year effect of the PBNK transaction, which added eight banking offices and sixty-two employees. The added staff was the
largest added expense and drove the salaries and benefits increase of $2,963,000 (46%) in 2003 to $9,445,000 compared to $6,482,000 in 2002. Occupancy and equipment expense increased $1,242,000 (58%) from $2,145,000 in 2002 to $3,387,000 in 2003 as
a result of the added banking offices. Contributing to the increase in outside service fees in 2003, $254,000 or 65%, was the asset management fees associated with the addition of the PBNK trust assets. Non-interest expense includes $645,000 in the
amortization of intangible assets associated with the PBNK transaction in 2003 versus $37,000 in 2002.



TAX EXPENSE



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



Federal income tax expense increased $601,000 (15%) to $4,686,000 for 2003 compared to $4,085,000 for 2002, due to the increase in earnings and an increase in the corporate tax bracket from 34% to 35% due to higher
earnings. The effective tax rate was 33.4% for 2003, which was an increase of .8% from 32.6% in 2002.



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, 2004, 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.



30



---

##### Table of Contents

Table 7- Contractual obligations (in thousands)



|                        |  |                    |        |                 |   |          |  |          |       |                  |   |       |  |   |       
|----------------------- |  | ------------------ | ------ | --------------- | - | -------- |  | -------- | ----- | ---------------- | - | ----- |  | - | ------
|                        |  | Maturity by period
|                        |  | Total              |        | Less than1 year |   | 1-3Years |  | 3-5Years |       | More than5 Years
|FHLB advances           |  | $                  | 19,700 |                 |   |         |  |          |      |                  | $ | 4,000 |  | $ | 15,700
|Subordinated debentures |  |                    | 17,526 |                 |   |         |  |          |      |                  |   |      |  |   | 17,526
|Other notes payable     |  |                    | 347    |                 |   | 41       |  |          | 48    |                  |   | 33    |  |   | 225   
|Lease commitments       |  |                    | 4,070  |                 |   | 835      |  |          | 1,134 |                  |   | 820   |  |   | 1,281 
|                        |  |                    |        |                 |   |          |  |          |       |                  |   |       |  |   |       
|Total                   |  | $                  | 41,643 |                 | $ | 876      |  | $        | 1,182 |                  | $ | 4,853 |  | $ | 34,732
|                        |  |                    |        |                 |   |          |  |          |       |                  |   |       |  |   |       



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, 2004, the Banks significant off-balance sheet
commitments.



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



In November 2004, the bank made a commitment to
purchase land for a future branch development with a purchase price of $675.



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 |  | $                  | 181,316 |                 | $ | 115,244  |  | $        | 16,104 |                  | $ | 6,621  |  | $ | 43,347
|Standby letters of credit                   |  |                    | 60,668  |                 |   | 18,824   |  |          | 25,186 |                  |   | 14,120 |  |   | 2,538 
|FHLB letters of credit                      |  |                    | 89,300  |                 |   | 89,300   |  |          |       |                  |   |       |  |   |      



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



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



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



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



31



---

##### Table of Contents

LIQUIDITY AND CAPITAL RESOURCES



Liquidity refers to the availability of funds to meet deposit withdrawals, fund loan commitments and pay expenses. BKFC will need to have
funds available to meet its quarterly payment obligations under the subordinated debentures. The source of the funds for BKFCs debt obligations is dependent on the Bank. During 2004, the Bank funded its loan growth with growth in deposits and
equity. At December 31, 2004, the Banks customers have available $232,323,000 in unused lines and letters of credit, and the Bank has further extended loan commitments totaling $9,661,000. Historically, many such commitments have expired
without being drawn and, accordingly, do not represent future cash commitments.



If needed, the Bank has the ability to borrow term and overnight funds from the Federal Home Loan Bank or other financial intermediaries. Further, the Bank has $52,204,000 of securities designated as available-for-sale and an additional
$1,580,000 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, 2004 to meet known and potential obligations.



As illustrated in the Companys statement of cash flows, the net change in cash and cash
equivalents was an increase of $85,000. Net income provided $10,058,00 of the $13,281,000 in the Banks cash flows from operating activities, while the largest cash outflow from investing activities was in the form of an increase in net loans
of $60,450,000. The largest source of cash from financing activities came from the increase of $54,200,000 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 2004, BKFC paid cash dividends of $.23 per share totaling $1,370,000.



The FDIC has issued regulations that relate a banks deposit insurance assessment and certain aspects of its operations to specified
capital levels. A well-capitalized bank, one with a



32



---

##### Table of Contents

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, 2004, BKFCs leverage and total risk-based capital ratios were 9.08% and
10.38%, respectively, which exceed all required ratios established for bank holding companies.



EFFECT OF NEWLY ISSUED BUT NOT YET EFFECTIVE ACCOUNTING STANDARDS



Statement of Financial Accounting Standards 123, Revised, requires all public companies to record compensation cost for stock options provided to employees in return for employee service. The cost is measured at the
fair value of the options when granted, and this cost is expensed over the employee service period, which is normally the vesting period of the options. This will apply to awards granted or modified after the first quarter beginning after June 15,
2005. Compensation cost will also be recorded for prior option grants that vest after the date of adoption. The effect on results of operations will depend on the level of future option grants and the calculation of the fair value of the options
granted at such future date, as well as the vesting periods provided, and so cannot currently be predicted. Existing options that will vest after adoption date are expected to result in additional compensation expense of approximately $185, $335,
$279 and $179 during 2005, 2006, 2007 and 2008. There will be no significant effect on financial position as total equity will not change.



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



33



---

##### Table of Contents

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



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



The Bank utilizes an earnings
simulation model to measure and define the amount of interest rate risk it assumes. Interest rate risk is the potential for economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest
income and /or a decline in fair market values. Interest rate risk results from the fact that the interest sensitive assets and liabilities can adjust their rates at different times and by different amounts. The goal of asset/liability management is
to maintain a high, yet stable, net interest margin and to manage the effect that changes in market interest rates will have on net interest income. A common measure of interest rate risk is interest rate gap measurement. The gap is the
difference, in dollars, between the amount of interest-earning assets and interest-bearing liabilities that will reprice within a certain time frame. Repricing can occur when an asset or liability matures or, if an adjustable rate instrument, when
it can be adjusted. Typically, the measurement will focus on the interest rate gap position over the next twelve months. An institution is said to have a negative gap position when more interest-bearing liabilities reprice within a certain period
than do interest-earning assets, and a positive gap position when more interest-earning assets reprice than interest-bearing liabilities. Interest rate gap is considered an indicator of the effect that changing rates may have on net interest income.
Generally, an institution with a negative gap will benefit from declining market interest rates and be negatively impacted by rising interest rates. The Bank currently is in a positive gap position, $59,763,000 (6.81%), and as a result would benefit
from higher rates and would be negatively impacted by lower interest rates.



At
December 31, 2004, BKFCs twelve-month interest rate gap position was positive. Over the succeeding twelve months, interest rate sensitive assets exceed interest rate sensitive liabilities by $59,763,000 (6.81% of total assets). At December 31,
2003, the one-year interest rate gap was negative $4,720,000 (.58% of total assets). An assumption contributing to this result is that the balances in NOW and savings accounts react within a two year time frame to market rate changes. These
instruments are not tied to specific indices and are only influenced by market conditions and other factors. Accordingly, a general movement in interest rates may not have any immediate effect on the rates paid on those deposit accounts.



The Banks asset/liability management policy establishes guidelines governing the
amount of interest income at risk, market value at risk and parameters for the gap position. Management continually monitors these risks through the use of gap analysis and the earnings simulation model. The simulation model is used to estimate and
evaluate the impact of changing interest



34



---

##### Table of Contents

rates on earnings and market value. The model projects the effect of instantaneous movements in interest rates of both 100 and 200 basis points. As shown
below, the December 31, 2004 simulation analysis indicates that an increase in interest rates would have a positive effect on net interest income, and a decrease in rates would have a negative effect on net interest income. The estimate of the
effect of a 100 basis point increase in interest rates on the Banks net interest income was a 2.83% increase in 2004 versus .33% increase in 2003. This change is a result of the Bank being more asset sensitive, a larger positive rate gap
position, at December 31, 2004 than December 31, 2003. The changes in market values for these rate assumptions are within the Banks acceptable ranges. The assumptions used in the simulation are inherently uncertain and, as a result, the model
cannot precisely measure future net interest income. Actual results will differ from the models simulated results due to timing, frequency of interest rate changes as well as changes in changes in various management strategies.



Net interest income estimates are summarized below.



|                |  |                           |   |  |       |  
|--------------- |  | ------------------------- | - |  | ----- | -
|                |  | Net InterestIncome Change |  
|                |  | 2004                      |   |  | 2003  |  
|Increase 200 bp |  | 4.94                      | % |  | .43   | %
|Increase 100 bp |  | 2.83                      |   |  | .33   |  
|Decrease 100 bp |  | (3.51                     | ) |  | (2.03 | )
|Decrease 200 bp |  | (10.00                    | ) |  | (9.02 | )



The table below provides information
about the quantitative market risk of interest sensitive instruments at December 31, 2004 (dollars in thousands) and shows the contractually repricing intervals, and related average interest rates, for each of the next five years and thereafter:



Table 9-Balance sheet repricing data (in thousands)



|                      |  |         |   |  |         |   |  |         |   |  |        |   |  |       |   |  |            |   |  |         |  |           
|--------------------- |  | ------- | - |  | ------- | - |  | ------- | - |  | ------ | - |  | ----- | - |  | ---------- | - |  | ------- |  | ----------
|                      |  | 2005    |   |  | 2006    |   |  | 2007    |   |  | 2008   |   |  | 2009  |   |  | Thereafter |   |  | Total   |  | Fair Value
|Repricing in:         |  |         |   |  |         |   |  |         |   |  |        |   |  |       |   |  |            |   |  |         |  |           
|Securities            |  | 11,022  |   |  | 11,440  |   |  | 27,193  |   |  | 3,503  |   |  | 1,627 |   |  | 9,481      |   |  | 64,266  |  | 64,333    
|Average Interest Rate |  | 2.33    | % |  | 3.03    | % |  | 3.07    | % |  | 2.56   | % |  | 4.49  | % |  | 3.78       | % |  |         |  |           
|FHLB Stock            |  | 4,075   |   |  |        |   |  |        |   |  |       |   |  |      |   |  |           |   |  | 4,075   |  | 4,075     
|Average Interest Rate |  | 4.25    | % |  |        |   |  |        |   |  |       |   |  |      |   |  |           |   |  |        |  |          
|Loans                 |  | 461,147 |   |  | 115,019 |   |  | 106,701 |   |  | 25,907 |   |  | 8,572 |   |  | 4,414      |   |  | 721,760 |  | 717,125   
|Average Interest Rate |  | 5.68    | % |  | 5.83    | % |  | 5.83    | % |  | 5.91   | % |  | 6.35  | % |  | 7.07       | % |  |        |  |          
|Liabilities           |  |         |   |  |         |   |  |         |   |  |        |   |  |       |   |  |            |   |  |         |  |           
|Savings, NOW, MMA     |  | 369,015 |   |  |        |   |  |        |   |  |       |   |  |      |   |  |           |   |  | 369,015 |  | 369,015   
|Average Interest Rate |  | 1.27    | % |  |        |   |  |        |   |  |       |   |  |      |   |  |           |   |  |        |  |          
|CDs and IRAs        |  | 152,722 |   |  | 67,056  |   |  | 24,975  |   |  | 12,953 |   |  | 4,577 |   |  | 48         |   |  | 262,331 |  | 262,307   
|Average Interest Rate |  | 2.27    | % |  | 2.93    | % |  | 3.56    | % |  | 3.15   | % |  | 3.63  | % |  | 1.00       | % |  |        |  |          
|Borrowings            |  | 9,161   |   |  |        |   |  |        |   |  |       |   |  |      |   |  |           |   |  | 9,161   |  | 9,161     
|Average Interest Rate |  | 1.59    | % |  |        |   |  |        |   |  |       |   |  |      |   |  |           |   |  |        |  |          
|Notes Payable         |  | 17,000  |   |  |        |   |  |        |   |  |       |   |  | 4,000 |   |  | 16,573     |   |  | 37,573  |  | 37,729    
|Average Interest Rate |  | 5.64    | % |  |        |   |  |        |   |  |       |   |  | 4.82  | % |  | 2.87       | % |  |        |  |          



35



---

##### Table of Contents

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



THE BANK OF KENTUCKY

FINANCIAL
CORPORATION



FINANCIAL STATEMENTS

December 31, 2004, 2003 and 2002



36



---

##### Table of Contents



THE BANK OF KENTUCKY
FINANCIAL CORPORATION

Florence, Kentucky



FINANCIAL STATEMENTS

December 31, 2004, 2003
and 2002



CONTENTS



|                                                                                |  |   
|------------------------------------------------------------------------------- |  | --
|REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON FINANCIAL STATEMENTS |  | 38
|                                                                                | 
|CONSOLIDATED FINANCIAL STATEMENTS                                               |  |   
|                                                                                | 
|CONSOLIDATED BALANCE SHEETS                                                     |  | 39
|                                                                                | 
|CONSOLIDATED STATEMENTS OF INCOME                                               |  | 40
|                                                                                | 
|CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY                      |  | 41
|                                                                                | 
|CONSOLIDATED STATEMENTS OF CASH FLOWS                                           |  | 42
|                                                                                | 
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                      |  | 43



37



---

##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON FINANCIAL STATEMENTS



Board of Directors and Shareholders

The Bank of Kentucky Financial Corporation

Crestview Hills, Kentucky



We have audited the accompanying consolidated balance sheets of The Bank of Kentucky
Financial Corporation as of December 31, 2004 and 2003 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, 2004. These financial
statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.



We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.



In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the financial position of The Bank of Kentucky Financial Corporation as of December 31, 2004 and 2003, and the results of its operations and its cash flows for each of the three years in
the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.



We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of The Bank of Kentucky Financial Corporations internal control over
financial reporting as of December 31, 2004 based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 18, 2005 expressed an
unqualified opinion thereon.



Crowe Chizek and
Company LLC



Columbus, Ohio

February 18, 2005



38



---

##### Table of Contents



THE BANK OF KENTUCKY FINANCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS

December 31, 2004 and 2003

(Dollar amounts in
thousands, except per share amounts)



|                                                                                                              |  |      |         |   |      |   |        
|------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | -------
|                                                                                                              |  | 2004 |         |   | 2003
|ASSETS                                                                                                        |  |      |         |   |      |   |        
|Cash and due from banks                                                                                       |  | $    | 47,406  |   |      | $ | 47,321 
|Federal funds sold and other short-term investments                                                           |  |      |        |   |      |   |       
|                                                                                                              |  |      |         |   |      |   |        
|Total cash and cash equivalents                                                                               |  |      | 47,406  |   |      |   | 47,321 
|Interest bearing deposits with banks                                                                          |  |      |        |   |      |   | 1,935  
|Available-for-sale securities                                                                                 |  |      | 52,204  |   |      |   | 44,424 
|Held-to-maturity securities (Fair value of $12,129 and $15,316)                                               |  |      | 12,062  |   |      |   | 15,111 
|Loans held for sale                                                                                           |  |      | 1,391   |   |      |   | 1,017  
|Loans, net of allowance ($7,214 and $6,855)                                                                   |  |      | 711,943 |   |      |   | 653,587
|Premises and equipment - net                                                                                  |  |      | 16,465  |   |      |   | 16,246 
|Federal Home Loan Bank stock, at cost                                                                         |  |      | 4,075   |   |      |   | 3,912  
|Goodwill                                                                                                      |  |      | 9,867   |   |      |   | 9,867  
|Acquisition intangibles                                                                                       |  |      | 3,581   |   |      |   | 4,226  
|Cash surrender value of life insurance                                                                        |  |      | 12,106  |   |      |   | 11,621 
|Accrued interest receivable and other assets                                                                  |  |      | 7,029   |   |      |   | 6,709  
|                                                                                                              |  |      |         |   |      |   |        
|                                                                                                              |  | $    | 878,129 |   |      | $ | 815,976
|                                                                                                              |  |      |         |   |      |   |        
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                          |  |      |         |   |      |   |        
|Liabilities                                                                                                   |  |      |         |   |      |   |        
|Deposits                                                                                                      |  |      |         |   |      |   |        
|Non interest bearing deposits                                                                                 |  | $    | 121,454 |   |      | $ | 106,451
|Interest bearing deposits                                                                                     |  |      | 631,346 |   |      |   | 592,276
|                                                                                                              |  |      |         |   |      |   |        
|Total deposits                                                                                                |  |      | 752,800 |   |      |   | 698,727
|Short-term borrowings                                                                                         |  |      | 9,161   |   |      |   | 8,347  
|Notes payable                                                                                                 |  |      | 37,573  |   |      |   | 37,850 
|Accrued expenses and other liabilities                                                                        |  |      | 4,931   |   |      |   | 4,363  
|                                                                                                              |  |      |         |   |      |   |        
|                                                                                                              |  |      | 804,465 |   |      |   | 749,287
|Commitments and contingent liabilities                                                                        |  |      |        |   |      |   |       
|Shareholders equity                                                                                          |  |      |         |   |      |   |        
|Common stock, no par value, 15,000,000 shares authorized, 5,927,979 (2004) and 5,972,049 (2003) shares issued |  |      | 3,098   |   |      |   | 3,098  
|Additional paid-in capital                                                                                    |  |      | 9,050   |   |      |   | 10,528 
|Retained earnings                                                                                             |  |      | 61,614  |   |      |   | 52,926 
|Accumulated other comprehensive income (loss)                                                                 |  |      | (98     | ) |      |   | 137    
|                                                                                                              |  |      |         |   |      |   |        
|                                                                                                              |  |      | 73,664  |   |      |   | 66,689 
|                                                                                                              |  |      |         |   |      |   |        
|                                                                                                              |  | $    | 878,129 |   |      | $ | 815,976
|                                                                                                              |  |      |         |   |      |   |        



See accompanying notes.



39



---

##### Table of Contents



THE BANK OF KENTUCKY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

Years ended December 31, 2004, 2003 and 2002

(Dollar amounts in thousands, except per share amounts)



|                                                    |  |      |        |      |   |        |  |   |       
|--------------------------------------------------- |  | ---- | ------ | ---- | - | ------ |  | - | ------
|                                                    |  | 2004 |        | 2003 |   | 2002  
|Interest income                                     |  |      |        |      |   |        |  |   |       
|Loans, including related fees                       |  | $    | 39,896 |      | $ | 37,218 |  | $ | 31,290
|Securities                                          |  |      |        |      |   |        |  |   |       
|Taxable                                             |  |      | 1,129  |      |   | 1,155  |  |   | 1,893 
|Tax exempt                                          |  |      | 362    |      |   | 436    |  |   | 487   
|Other                                               |  |      | 204    |      |   | 560    |  |   | 289   
|                                                    |  |      |        |      |   |        |  |   |       
|                                                    |  |      | 41,591 |      |   | 39,369 |  |   | 33,959
|Interest expense                                    |  |      |        |      |   |        |  |   |       
|Deposits                                            |  |      | 9,813  |      |   | 11,107 |  |   | 11,328
|Borrowings                                          |  |      | 1,785  |      |   | 1,583  |  |   | 792   
|                                                    |  |      |        |      |   |        |  |   |       
|                                                    |  |      | 11,598 |      |   | 12,690 |  |   | 12,120
|                                                    |  |      |        |      |   |        |  |   |       
|Net interest income                                 |  |      | 29,993 |      |   | 26,679 |  |   | 21,839
|Provision for loan losses                           |  |      | 1,675  |      |   | 1,090  |  |   | 1,235 
|                                                    |  |      |        |      |   |        |  |   |       
|Net interest income after provision for loan losses |  |      | 28,318 |      |   | 25,589 |  |   | 20,604
|Non-interest income                                 |  |      |        |      |   |        |  |   |       
|Service charges and fees                            |  |      | 3,680  |      |   | 3,502  |  |   | 2,666 
|Gain on sale of real estate loans                   |  |      | 1,281  |      |   | 2,924  |  |   | 1,316 
|Gain on sale of securities                          |  |      | 10     |      |   |       |  |   | 113   
|Trust fee income                                    |  |      | 779    |      |   | 622    |  |   | 213   
|Bankcard transaction revenue                        |  |      | 812    |      |   | 669    |  |   | 478   
|Other                                               |  |      | 1,709  |      |   | 1,223  |  |   | 729   
|                                                    |  |      |        |      |   |        |  |   |       
|                                                    |  |      | 8,271  |      |   | 8,940  |  |   | 5,515 
|Non-interest expense                                |  |      |        |      |   |        |  |   |       
|Salaries and employee benefits                      |  |      | 10,386 |      |   | 9,445  |  |   | 6,482 
|Occupancy and equipment                             |  |      | 3,357  |      |   | 3,387  |  |   | 2,145 
|Data processing                                     |  |      | 1,278  |      |   | 1,278  |  |   | 907   
|Advertising                                         |  |      | 630    |      |   | 525    |  |   | 411   
|ATM processing fees                                 |  |      | 572    |      |   | 845    |  |   | 708   
|Outside service fees                                |  |      | 734    |      |   | 644    |  |   | 390   
|State bank taxes                                    |  |      | 870    |      |   | 763    |  |   | 584   
|Amortization of intangible assets                   |  |      | 645    |      |   | 645    |  |   | 37    
|Other                                               |  |      | 3,130  |      |   | 2,952  |  |   | 1,919 
|                                                    |  |      |        |      |   |        |  |   |       
|                                                    |  |      | 21,602 |      |   | 20,484 |  |   | 13,583
|                                                    |  |      |        |      |   |        |  |   |       
|Income before income taxes                          |  |      | 14,987 |      |   | 14,045 |  |   | 12,536
|Federal income taxes                                |  |      | 4,929  |      |   | 4,686  |  |   | 4,085 
|                                                    |  |      |        |      |   |        |  |   |       
|Net income                                          |  | $    | 10,058 |      | $ | 9,359  |  | $ | 8,451 
|                                                    |  |      |        |      |   |        |  |   |       
|Per share data                                      |  |      |        |      |   |        |  |   |       
|Earnings per share                                  |  | $    | 1.69   |      | $ | 1.57   |  | $ | 1.42  
|                                                    |  |      |        |      |   |        |  |   |       
|Earnings per share, assuming dilution               |  | $    | 1.68   |      | $ | 1.55   |  | $ | 1.41  
|                                                    |  |      |        |      |   |        |  |   |       



See accompanying notes.



40



---

##### Table of Contents



THE BANK OF KENTUCKY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS

OF CHANGES IN SHAREHOLDERS EQUITY

Years
ended December 31, 2004, 2003 and 2002

(Dollar amounts in thousands, except per share amounts)



|                                                  |  |           |   |  |             |       |                          |   |        |                  |  |   |                                            |   |  |       |      |   |  |   |        |  
|------------------------------------------------- |  | --------- | - |  | ----------- | ----- | ------------------------ | - | ------ | ---------------- |  | - | ------------------------------------------ | - |  | ----- | ---- | - |  | - | ------ | -
|                                                  |  | Shares    |   |  | CommonStock |       | AdditionalPaid-inCapital |   |        | RetainedEarnings |  |   | AccumulatedOtherComprehensiveIncome (Loss) |   |  | Total |     
|Balance January 1, 2002                           |  | 5,994,595 |   |  | $           | 3,098 |                          | $ | 11,313 |                  |  | $ | 36,906                                     |   |  | $     | 204  |   |  | $ | 51,521 |  
|Comprehensive income                              |  |           |   |  |             |       |                          |   |        |                  |  |   |                                            |   |  |       |      |   |  |   |        |  
|Net income                                        |  |          |   |  |             |      |                          |   |       |                  |  |   | 8,451                                      |   |  |       |     |   |  |   | 8,451  |  
|Change in net unrealized gain (loss), net of tax  |  |          |   |  |             |      |                          |   |       |                  |  |   |                                           |   |  |       | 160  |   |  |   | 160    |  
|                                                  |  |           |   |  |             |       |                          |   |        |                  |  |   |                                            |   |  |       |      |   |  |   |        |  
|Total comprehensive income                        |  |           |   |  |             |       |                          |   |        |                  |  |   |                                            |   |  |       |      |   |  |   | 8,611  |  
|Cash dividends - $.13 per share                   |  |          |   |  |             |      |                          |   |       |                  |  |   | (775                                       | ) |  |       |     |   |  |   | (775   | )
|Exercise of stock options, including tax benefits |  | 15,884    |   |  |             |      |                          |   | 234    |                  |  |   |                                           |   |  |       |     |   |  |   | 234    |  
|Repurchase and retirement of common shares        |  | (56,630   | ) |  |             |      |                          |   | (1,168 | )                |  |   |                                           |   |  |       |     |   |  |   | (1,168 | )
|                                                  |  |           |   |  |             |       |                          |   |        |                  |  |   |                                            |   |  |       |      |   |  |   |        |  
|Balance December 31, 2002                         |  | 5,953,849 |   |  |             | 3,098 |                          |   | 10,379 |                  |  |   | 44,582                                     |   |  |       | 364  |   |  |   | 58,423 |  
|Comprehensive income                              |  |           |   |  |             |       |                          |   |        |                  |  |   |                                            |   |  |       |      |   |  |   |        |  
|Net income                                        |  |          |   |  |             |      |                          |   |       |                  |  |   | 9,359                                      |   |  |       |     |   |  |   | 9,359  |  
|Change in net unrealized gain (loss), net of tax  |  |          |   |  |             |      |                          |   |       |                  |  |   |                                           |   |  |       | (227 | ) |  |   | (227   | )
|                                                  |  |           |   |  |             |       |                          |   |        |                  |  |   |                                            |   |  |       |      |   |  |   |        |  
|Total comprehensive income                        |  |           |   |  |             |       |                          |   |        |                  |  |   |                                            |   |  |       |      |   |  |   | 9,132  |  
|Cash dividends - $.17 per share                   |  |          |   |  |             |      |                          |   |       |                  |  |   | (1,015                                     | ) |  |       |     |   |  |   | (1,015 | )
|Exercise of stock options, including tax benefits |  | 31,200    |   |  |             |      |                          |   | 559    |                  |  |   |                                           |   |  |       |     |   |  |   | 559    |  
|Repurchase and retirement of common shares        |  | (13,000   | ) |  |             |      |                          |   | (410   | )                |  |   |                                           |   |  |       |     |   |  |   | (410   | )
|                                                  |  |           |   |  |             |       |                          |   |        |                  |  |   |                                            |   |  |       |      |   |  |   |        |  
|Balance December 31, 2003                         |  | 5,972,049 |   |  |             | 3,098 |                          |   | 10,528 |                  |  |   | 52,926                                     |   |  |       | 137  |   |  |   | 66,689 |  
|Comprehensive income                              |  |           |   |  |             |       |                          |   |        |                  |  |   |                                            |   |  |       |      |   |  |   |        |  
|Net income                                        |  |          |   |  |             |      |                          |   |       |                  |  |   | 10,058                                     |   |  |       |     |   |  |   | 10,058 |  
|Change in net unrealized gain (loss), net of tax  |  |          |   |  |             |      |                          |   |       |                  |  |   |                                           |   |  |       | (235 | ) |  |   | (235   | )
|                                                  |  |           |   |  |             |       |                          |   |        |                  |  |   |                                            |   |  |       |      |   |  |   |        |  
|Total comprehensive income                        |  |           |   |  |             |       |                          |   |        |                  |  |   |                                            |   |  |       |      |   |  |   | 9,823  |  
|Cash dividends - $.23 per share                   |  |          |   |  |             |      |                          |   |       |                  |  |   | (1,370                                     | ) |  |       |     |   |  |   | (1,370 | )
|Exercise of stock options, including tax benefits |  | 30,930    |   |  |             |      |                          |   | 701    |                  |  |   |                                           |   |  |       |     |   |  |   | 701    |  
|Repurchase and retirement of common shares        |  | (75,000   | ) |  |             |      |                          |   | (2,179 | )                |  |   |                                           |   |  |       |     |   |  |   | (2,179 | )
|                                                  |  |           |   |  |             |       |                          |   |        |                  |  |   |                                            |   |  |       |      |   |  |   |        |  
|Balance December 31, 2004                         |  | 5,927,979 |   |  | $           | 3,098 |                          | $ | 9,050  |                  |  | $ | 61,614                                     |   |  | $     | (98  | ) |  | $ | 73,664 |  
|                                                  |  |           |   |  |             |       |                          |   |        |                  |  |   |                                            |   |  |       |      |   |  |   |        |  



See accompanying notes.



41



---

##### Table of Contents



THE BANK OF KENTUCKY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended December 31, 2004, 2003 and 2002

(Dollar amounts in thousands)



|                                                                                 |  |      |         |   |      |   |          |      |  |   |          |  
|-------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                                                 |  | 2004 |         |   | 2003 |   |          | 2002 | 
|Cash flows from operating activities                                             |  |      |         |   |      |   |          |      |  |   |          |  
|Net income                                                                       |  | $    | 10,058  |   |      | $ | 9,359    |      |  | $ | 8,451    |  
|Adjustments to reconcile net income to net cash from operating activities        |  |      |         |   |      |   |          |      |  |   |          |  
|Depreciation and amortization                                                    |  |      | 1,304   |   |      |   | 1,243    |      |  |   | 675      |  
|Net amortization on securities                                                   |  |      | 173     |   |      |   | 150      |      |  |   | 32       |  
|Provision for loan losses                                                        |  |      | 1,675   |   |      |   | 1,090    |      |  |   | 1,235    |  
|Federal Home Loan Bank stock dividend                                            |  |      | (163    | ) |      |   | (153     | )    |  |   | (169     | )
|Securities gains                                                                 |  |      | (10     | ) |      |   |         |      |  |   | (113     | )
|Amortization of acquisition intangibles                                          |  |      | 645     |   |      |   | 645      |      |  |   | 37       |  
|Earnings on life insurance                                                       |  |      | (485    | ) |      |   | (223     | )    |  |   | (17      | )
|Gains on sales of loans                                                          |  |      | (1,281  | ) |      |   | (2,924   | )    |  |   | (1,316   | )
|Proceeds from loans sold                                                         |  |      | 93,934  |   |      |   | 262,742  |      |  |   | 113,800  |  
|Origination of loans held for sale                                               |  |      | (93,027 | ) |      |   | (250,036 | )    |  |   | (117,774 | )
|Net change in:                                                                   |  |      |         |   |      |   |          |      |  |   |          |  
|Accrued interest receivable and other assets                                     |  |      | (110    | ) |      |   | 1,042    |      |  |   | (1,909   | )
|Accrued expenses and other liabilities                                           |  |      | 568     |   |      |   | (469     | )    |  |   | (603     | )
|                                                                                 |  |      |         |   |      |   |          |      |  |   |          |  
|Net cash from operating activities                                               |  |      | 13,281  |   |      |   | 22,466   |      |  |   | 2,329    |  
|Cash flows from investing activities                                             |  |      |         |   |      |   |          |      |  |   |          |  
|Net change in interest-bearing deposits with banks                               |  |      | 1,935   |   |      |   | 80       |      |  |   | (2,015   | )
|Proceeds from maturities and principal reductions of held-to-maturity securities |  |      | 3,900   |   |      |   | 6,499    |      |  |   | 7,215    |  
|Purchase of held-to-maturity securities                                          |  |      | (865    | ) |      |   | (5,926   | )    |  |   | (5,778   | )
|Proceeds from maturities and sales of available-for-sale securities              |  |      | 48,371  |   |      |   | 42,570   |      |  |   | 20,001   |  
|Purchase of available-for-sale securities                                        |  |      | (56,661 | ) |      |   | (53,709  | )    |  |   | (15,282  | )
|Loans made to customers, net of principal collections                            |  |      | (60,450 | ) |      |   | (54,905  | )    |  |   | (54,159  | )
|Property and equipment expenditures, net                                         |  |      | (1,471  | ) |      |   | (1,290   | )    |  |   | (515     | )
|Purchase of Company owned life insurance                                         |  |      |        |   |      |   | (10,024  | )    |  |   |         |  
|Investment in unconsolidated subsidiary                                          |  |      |        |   |      |   |         |      |  |   | (526     | )
|Net payments in acquisition                                                      |  |      |        |   |      |   | (68      | )    |  |   | 10,601   |  
|                                                                                 |  |      |         |   |      |   |          |      |  |   |          |  
|Net cash from investing activities                                               |  |      | (65,241 | ) |      |   | (76,773  | )    |  |   | (40,458  | )
|Cash flows from financing activities                                             |  |      |         |   |      |   |          |      |  |   |          |  
|Net change in deposits                                                           |  |      | 54,200  |   |      |   | 31,819   |      |  |   | 89,468   |  
|Net change in short-term borrowings                                              |  |      | 814     |   |      |   | 2,467    |      |  |   | (20,463  | )
|Advances on notes payable                                                        |  |      |        |   |      |   |         |      |  |   | 17,526   |  
|Payments on notes payable                                                        |  |      | (37     | ) |      |   | (5,035   | )    |  |   | (31      | )
|Dividends paid on common stock                                                   |  |      | (1,370  | ) |      |   | (1,015   | )    |  |   | (775     | )
|Stock repurchase and retirement                                                  |  |      | (2,179  | ) |      |   | (410     | )    |  |   | (1,168   | )
|Proceeds from exercise of stock options                                          |  |      | 617     |   |      |   | 484      |      |  |   | 184      |  
|                                                                                 |  |      |         |   |      |   |          |      |  |   |          |  
|Net cash from financing activities                                               |  |      | 52,045  |   |      |   | 28,310   |      |  |   | 84,741   |  
|                                                                                 |  |      |         |   |      |   |          |      |  |   |          |  
|Net change in cash and cash equivalents                                          |  |      | 85      |   |      |   | (25,997  | )    |  |   | 46,612   |  
|Cash and cash equivalents at beginning of year                                   |  |      | 47,321  |   |      |   | 73,318   |      |  |   | 26,706   |  
|                                                                                 |  |      |         |   |      |   |          |      |  |   |          |  
|Cash and cash equivalents at end of year                                         |  | $    | 47,406  |   |      | $ | 47,321   |      |  | $ | 73,318   |  
|                                                                                 |  |      |         |   |      |   |          |      |  |   |          |  
|Cash paid for interest                                                           |  | $    | 11,389  |   |      | $ | 13,262   |      |  | $ | 11,044   |  
|Cash paid for income taxes                                                       |  |      | 4,638   |   |      |   | 4,245    |      |  |   | 4,365    |  



See accompanying notes.



42



---

##### Table of Contents



THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004, 2003 and 2002

(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). As further discussed in Note 10, a trust that had previously been
consolidated with the Company is now reported separately. Intercompany transactions are eliminated in consolidation.



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



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



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



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



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



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



(Continued)

43



---

##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004, 2003 and 2002

(Dollar amounts in thousands, except per share amounts)



NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)



basis. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings. All loans are sold servicing released such that there
would be no servicing asset recognized upon the sale.



Loans: Loans that
management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of unearned interest, deferred loan fees and costs, and an allowance for loan losses.



Interest income is reported on the interest method and includes amortization
of net deferred loan fees and costs over the loan term. Deferred loan fees and cost are amortized on the level-yield method without anticipating prepayments. Interest income on commercial loans is discontinued at the time the loan is 90 days
delinquent unless the loan is well-secured and in process of collection. Interest income is not reported when full loan repayment is in doubt, typically when the loan is impaired or payments are significantly past due. Payments received on such
loans are reported as principal reductions.



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 or loans otherwise classified as substandard or doubtful. The general
component covers non-classified loans and is based on historical loss experience adjusted for current factors.



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. 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.



(Continued)

44



---

##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004, 2003 and 2002

(Dollar amounts in thousands, except per share amounts)



NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)



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 foreclosure is initially recorded at fair value when acquired, establishing a
new cost basis. Expenses incurred in carrying other real estate are charged to operations as incurred. A total of $1,434 of other real estate was owned on December 31, 2004.



Company Owned Life Insurance: The Company has purchased life insurance policies on certain key executives. Company owned life
insurance is recorded at its cash surrender value, or the amount that can be realized. The cash surrender value of Company owned life insurance was $12,106 on December 31, 2004.



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



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



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



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



(Continued)

45



---

##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004, 2003 and 2002

(Dollar amounts in thousands, except per share amounts)



|                                                                                  |  |      |        |      |   |       |  |   |      
|--------------------------------------------------------------------------------- |  | ---- | ------ | ---- | - | ----- |  | - | -----
|                                                                                  |  | 2004 |        | 2003 |   | 2002 
|Net income as reported                                                            |  | $    | 10,058 |      | $ | 9,359 |  | $ | 8,451
|Deduct: Stockbased compensation expense determined under fair value based method |  |      | 546    |      |   | 526   |  |   | 277  
|                                                                                  |  |      |        |      |   |       |  |   |      
|Pro forma net income                                                              |  |      | 9,512  |      |   | 8,833 |  |   | 8,174
|Basic earnings per share as reported                                              |  |      | 1.69   |      |   | 1.57  |  |   | 1.42 
|Pro forma basic earnings per share                                                |  |      | 1.60   |      |   | 1.48  |  |   | 1.37 
|Diluted earnings per share as reported                                            |  |      | 1.68   |      |   | 1.55  |  |   | 1.41 
|Pro forma diluted earnings per share                                              |  |      | 1.58   |      |   | 1.46  |  |   | 1.36 



(Continued)

46



---

##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004, 2003 and 2002

(Dollar amounts in thousands, except per share amounts)



NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)



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



|                                |  |        |   |  |         |   |  |          |  
|------------------------------- |  | ------ | - |  | ------- | - |  | -------- | -
|                                |  | 2004   |   |  | 2003    |   |  | 2002     |  
|Risk-free interest rate         |  | 3.60   | % |  | 2.72    | % |  | 4.09     | %
|Expected option life            |  | 6.8yrs |   |  | 5.2 yrs |   |  | 5.8 yrs. |  
|Expected stock price volatility |  | 37.27  | % |  | 31.40   | % |  | 28.93    | %
|Dividend yield                  |  | .80    | % |  | .48     | % |  | .67      | %



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



Financial Instruments: Financial instruments include
credit instruments, such as commitments to make loans and standby letters of credit, issued to meet customer financing needs. The face amount of these items represents the exposure to loss, before considering customer collateral or ability to repay.



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



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



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



(Continued)

47



---

##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004, 2003 and 2002

(Dollar amounts in thousands, except per share amounts)



NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)



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.



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



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



Reclassifications: Some items in the prior year financial statements
were reclassified to conform to the current presentation.



Adoption of New
Accounting Standards: No new accounting policies were adopted in 2004 which had a significant impact on the financial statements.



Effect of Newly Issued But Not Yet Effective Accounting Standards: Statement of Financial Accounting Standards 123, Revised, requires all public companies to
record compensation cost for stock options provided to employees in return for employee service. The cost is measured at the fair value of the options when granted, and this cost is expensed over the employee service period, which is normally the
vesting period of the options. This will apply to awards granted or modified after the first quarter beginning after June 15, 2005. Compensation cost will also be recorded for prior option grants that vest after the date of adoption. The effect on
results of operations will depend on the level of future option grants and the calculation of the fair value of the options granted at such future date, as well as the vesting periods provided, and so cannot currently be predicted. Existing options
that will vest after adoption date are expected to result in additional compensation expense of approximately $185, $335, $279 and $179 during 2005, 2006, 2007 and 2008. There will be no significant effect on financial position as total equity will
not change.



(Continued)

48



---

##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004, 2003 and 2002

(Dollar amounts in thousands, except per share amounts)



NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)



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



NOTE 2 - ACQUISITION



On November 22,
2002, the Bank acquired substantially all banking assets and assumed the deposit liabilities associated with certain loans and contracts of Peoples Bank of Northern Kentucky, Inc. The transaction was accounted for as a purchase, therefore, the
results of operations from the assets acquired and liabilities assumed are included in the Companys financial statements beginning on November 22, 2002. The merger provides the Company with an opportunity to expand into an adjacent and
attractive market area. The assets acquired totaled $176,937. The acquisition price for the assets acquired and liabilities assumed was $13,780.



NOTE 3 - SECURITIES



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



|                                                                       |  |           |        |                      |   |                       |  |   |      |  
|---------------------------------------------------------------------- |  | --------- | ------ | -------------------- | - | --------------------- |  | - | ---- | -
|Available-for-Sale                                                     |  | FairValue |        | GrossUnrealizedGains |   | GrossUnrealizedLosses | 
|2004                                                                   |  |           |        |                      |   |                       |  |   |      |  
|U.S. Government, federal agencies and Government sponsored enterprises |  | $         | 43,447 |                      | $ | 41                    |  | $ | (163 | )
|Mortgage-backed                                                        |  |           | 7,302  |                      |   | 74                    |  |   | (106 | )
|Corporate                                                              |  |           | 1,455  |                      |   |                      |  |   |     |  
|                                                                       |  |           |        |                      |   |                       |  |   |      |  
|                                                                       |  | $         | 52,204 |                      | $ | 115                   |  | $ | (269 | )
|                                                                       |  |           |        |                      |   |                       |  |   |      |  
|2003                                                                   |  |           |        |                      |   |                       |  |   |      |  
|U.S. Government, federal agencies and Government sponsored enterprises |  | $         | 36,203 |                      | $ | 129                   |  | $ | (12  | )
|Mortgage-backed                                                        |  |           | 6,721  |                      |   | 118                   |  |   | (28  | )
|Corporate                                                              |  |           | 1,500  |                      |   |                      |  |   |     |  
|                                                                       |  |           |        |                      |   |                       |  |   |      |  
|                                                                       |  | $         | 44,424 |                      | $ | 247                   |  | $ | (40  | )
|                                                                       |  |           |        |                      |   |                       |  |   |      |  



(Continued)

49



---

##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004, 2003 and 2002

(Dollar amounts in thousands, except per share amounts)



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



|                                                                       |  |                |        |                         |   |                         |  |   |           |   |  |   |       
|---------------------------------------------------------------------- |  | -------------- | ------ | ----------------------- | - | ----------------------- |  | - | --------- | - |  | - | ------
|Held-to-Maturity                                                       |  | CarryingAmount |        | Gross UnrecognizedGains |   | GrossUnrecognizedLosses |  |   | FairValue
|2004                                                                   |  |                |        |                         |   |                         |  |   |           |   |  |   |       
|U.S. Government, federal agencies and Government sponsored enterprises |  | $              |       |                         | $ |                        |  | $ |          |   |  | $ |      
|Municipal and other obligations                                        |  |                | 12,062 |                         |   | 107                     |  |   | (40       | ) |  |   | 12,129
|                                                                       |  |                |        |                         |   |                         |  |   |           |   |  |   |       
|                                                                       |  | $              | 12,062 |                         | $ | 107                     |  | $ | (40       | ) |  | $ | 12,129
|                                                                       |  |                |        |                         |   |                         |  |   |           |   |  |   |       
|2003                                                                   |  |                |        |                         |   |                         |  |   |           |   |  |   |       
|U.S. Government, federal agencies and Government sponsored enterprises |  | $              | 1,500  |                         | $ | 23                      |  | $ |          |   |  | $ | 1,523 
|Municipal and other obligations                                        |  |                | 13,611 |                         |   | 222                     |  |   | (40       | ) |  |   | 13,793
|                                                                       |  |                |        |                         |   |                         |  |   |           |   |  |   |       
|                                                                       |  | $              | 15,111 |                         | $ | 245                     |  | $ | (40       | ) |  | $ | 15,316
|                                                                       |  |                |        |                         |   |                         |  |   |           |   |  |   |       



The fair value of debt securities and
carrying amount, if different, at year-end 2004 by contractual maturity were as follows. Securities not due at a single maturity date, primarily mortgage backed securities, are shown separately.



|                                       |  |                    |        |                  |   |           |  |   |       
|-------------------------------------- |  | ------------------ | ------ | ---------------- | - | --------- |  | - | ------
|                                       |  | Available-for-Sale |        | Held-to-Maturity
|                                       |  | Fair Value         |        | CarryingValue    |   | FairValue
|Due in one year or less                |  | $                  | 8,980  |                  | $ | 1,580     |  | $ | 1,587 
|Due after one year through five years  |  |                    | 34,467 |                  |   | 7,488     |  |   | 7,535 
|Due after five years through ten years |  |                    |       |                  |   | 2,994     |  |   | 3,007 
|Due after ten years                    |  |                    | 1,455  |                  |   |          |  |   |      
|Mortgage-backed                        |  |                    | 7,302  |                  |   |          |  |   |      
|                                       |  |                    |        |                  |   |           |  |   |       
|                                       |  | $                  | 52,204 |                  | $ | 12,062    |  | $ | 12,129
|                                       |  |                    |        |                  |   |           |  |   |       



|                                                       |  |      |       |   |      |   |      |  |   |      
|------------------------------------------------------ |  | ---- | ----- | - | ---- | - | ---- |  | - | -----
|Sales of available for sale securities were as follows |  | 2004 |       |   | 2003 |   | 2002
|Proceeds                                               |  | $    | 3,016 |   |      | $ |     |  | $ | 8,113
|Gross gains                                            |  |      | 15    |   |      |   |     |  |   | 113  
|Gross losses                                           |  |      | (5    | ) |      |   |     |  |   |     



The tax benefit (provision) related to
these net realized gains and losses was $3, $0, and $40, respectively.



(Continued)

50



---

##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004, 2003 and 2002

(Dollar amounts in thousands, except per share amounts)



NOTE 3 - SECURITIES(Continued)



At December 31, 2004 and 2003, securities with a carrying value of $57,303 and $48,992 were pledged to secure public
deposits and repurchase agreements.



Securities with unrealized losses at
year-end 2004 and 2003, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows:



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



|                                                                       |  |                     |       |                |                   |     |           |  |                |   |           |   |                |  |   |       |  |   |     |  
|---------------------------------------------------------------------- |  | ------------------- | ----- | -------------- | ----------------- | --- | --------- |  | -------------- | - | --------- | - | -------------- |  | - | ----- |  | - | --- | -
|                                                                       |  | Less than 12 Months |       |                | 12 Months or More |     | Total     | 
|2003 Description of Securities                                         |  | FairValue           |       | UnrealizedLoss |                   |     | FairValue |  | UnrealizedLoss |   | FairValue |   | UnrealizedLoss | 
|U.S. Government, federal agencies and government sponsored enterprises |  | $                   | 1,988 |                | $                 | (12 | )         |  | $              |  |           | $ |               |  | $ | 1,988 |  | $ | (12 | )
|Mortgage-backed                                                        |  |                     | 2,676 |                |                   | (28 | )         |  |                |  |           |   |               |  |   | 2,676 |  |   | (28 | )
|Corporate                                                              |  |                     |      |                |                   |    |           |  |                |  |           |   |               |  |   |      |  |   |    |  
|Municipal & other obligations                                          |  |                     | 4,193 |                |                   | (40 | )         |  |                |  |           |   |               |  |   | 4,193 |  |   | (40 | )
|                                                                       |  |                     |       |                |                   |     |           |  |                |   |           |   |                |  |   |       |  |   |     |  
|Total temporarily impaired                                             |  | $                   | 8,857 |                | $                 | (80 | )         |  | $              |  |           | $ |               |  | $ | 8,857 |  | $ | (80 | )
|                                                                       |  |                     |       |                |                   |     |           |  |                |   |           |   |                |  |   |       |  |   |     |  



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 increased in market interest rates. The fair value is expected to recover as the bonds approach their maturity date and/or market rates decline.



(Continued)

51



---

##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004, 2003 and 2002

(Dollar amounts in thousands, except per share amounts)



NOTE 4 - LOANS



Year-end loans are as follows:



|                                     |  |      |         |   |      |   |         |  
|------------------------------------ |  | ---- | ------- | - | ---- | - | ------- | -
|                                     |  | 2004 |         |   | 2003 |  
|Commercial                           |  | $    | 130,760 |   |      | $ | 130,022 |  
|Residential real estate              |  |      | 188,140 |   |      |   | 175,492 |  
|Nonresidential real estate           |  |      | 290,684 |   |      |   | 249,683 |  
|Construction                         |  |      | 84,690  |   |      |   | 82,356  |  
|Consumer                             |  |      | 20,606  |   |      |   | 19,367  |  
|Municipal obligations                |  |      | 5,074   |   |      |   | 4,183   |  
|                                     |  |      |         |   |      |   |         |  
|Gross loans                          |  |      | 719,954 |   |      |   | 661,103 |  
|Less: Deferred loan origination fees |  |      | (797    | ) |      |   | (661    | )
|Allowance for loan losses            |  |      | (7,214  | ) |      |   | (6,855  | )
|                                     |  |      |         |   |      |   |         |  
|Net loans                            |  | $    | 711,943 |   |      | $ | 653,587 |  
|                                     |  |      |         |   |      |   |         |  



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



|                                          |  |      |         |   |      |   |         |  
|----------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                          |  | 2004 |         |   | 2003 |  
|Beginning balance                         |  | $    | 16,251  |   |      | $ | 13,635  |  
|New loans and advances on lines of credit |  |      | 11,891  |   |      |   | 15,585  |  
|Loan reductions                           |  |      | (15,565 | ) |      |   | (13,309 | )
|Other changes, net                        |  |      | (317    | ) |      |   | 340     |  
|                                          |  |      |         |   |      |   |         |  
|Ending balance                            |  | $    | 12,260  |   |      | $ | 16,251  |  
|                                          |  |      |         |   |      |   |         |  



(Continued)

52



---

##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004, 2003 and 2002

(Dollar amounts in thousands, except per share amounts)



NOTE 5 - ALLOWANCE FOR LOAN LOSSES



Activity in the allowance for loan losses is as follows:



|                                                        |  |      |        |   |      |   |       |      |  |   |       |  
|------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                                        |  | 2004 |        |   | 2003 |   |       | 2002 | 
|Beginning balance                                       |  | $    | 6,855  |   |      | $ | 6,408 |      |  | $ | 4,244 |  
|Provision charged to operations                         |  |      | 1,675  |   |      |   | 1,090 |      |  |   | 1,235 |  
|Adjustments related to business combination             |  |      |       |   |      |   |      |      |  |   | 1,382 |  
|Loans charged off                                       |  |      | (1,326 | ) |      |   | (676  | )    |  |   | (478  | )
|Recoveries                                              |  |      | 10     |   |      |   | 33    |      |  |   | 25    |  
|                                                        |  |      |        |   |      |   |       |      |  |   |       |  
|Ending balance                                          |  | $    | 7,214  |   |      | $ | 6,855 |      |  | $ | 6,408 |  
|                                                        |  |      |        |   |      |   |       |      |  |   |       |  
|Nonperforming and impaired loans are as follows         |  |      |        |   |      |   |       |      |  |   |       |  
|Nonaccrual loans at year end                            |  | $    | 3,487  |   |      | $ | 1,466 |      |  | $ | 931   |  
|Loans past due over 90 days, still accruing at year-end |  |      | 1,658  |   |      |   | 2,007 |      |  |   | 3,241 |  
|Average impaired loans during the year                  |  |      | 4,138  |   |      |   | 1,909 |      |  |   | 2,211 |  
|Interest income recognized during impairment            |  |      | 162    |   |      |   | 74    |      |  |   | 119   |  
|Interest income received during impairment              |  |      | 133    |   |      |   | 77    |      |  |   | 112   |  
|Loans designated as impaired at year end                |  |      | 6,024  |   |      |   | 1,659 |      |  |   | 1,946 |  
|Allowance allocated to impaired loans at year end       |  |      | 2,550  |   |      |   | 575   |      |  |   | 884   |  



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



NOTE 6 - PREMISES AND EQUIPMENT



Year-end premises and equipment are as follows:



|                                  |  |      |        |   |      |   |        |  
|--------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                  |  | 2004 |        |   | 2003 |  
|Land and improvements             |  | $    | 4,817  |   |      | $ | 4,802  |  
|Leasehold improvements            |  |      | 1,458  |   |      |   | 1,373  |  
|Buildings                         |  |      | 10,954 |   |      |   | 10,122 |  
|Furniture, fixtures and equipment |  |      | 6,708  |   |      |   | 6,169  |  
|                                  |  |      |        |   |      |   |        |  
|Total                             |  |      | 23,937 |   |      |   | 22,466 |  
|Accumulated depreciation          |  |      | (7,472 | ) |      |   | (6,220 | )
|                                  |  |      |        |   |      |   |        |  
|Net premises and equipment        |  | $    | 16,465 |   |      | $ | 16,246 |  
|                                  |  |      |        |   |      |   |        |  



Depreciation expense was $1,252,
$1,286, and $693 for 2004, 2003, and 2002.



(Continued)

53



---

##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004, 2003 and 2002

(Dollar amounts in thousands, except per share amounts)



NOTE 7 - GOODWILL AND ACQUISITION INTANGIBLES



Goodwill



The change in balance for goodwill during the years is as follows:



|                                           |  |      |       |      |   |      
|------------------------------------------ |  | ---- | ----- | ---- | - | -----
|                                           |  | 2004 |       | 2003
|Beginning of year                          |  | $    | 9,867 |      | $ | 9,799
|Additional payments related to acquisition |  |      |      |      |   | 68   
|                                           |  |      |       |      |   |      
|End of year                                |  | $    | 9,867 |      | $ | 9,867
|                                           |  |      |       |      |   |      



Acquisition Intangibles



Acquisition intangibles were as follows as of year-end:



|                                        |  |      |       |      |   |      
|--------------------------------------- |  | ---- | ----- | ---- | - | -----
|                                        |  | 2004 |       | 2003
|Core deposit intangibles                |  | $    | 2,863 |      | $ | 2,863
|Other customer relationship intangibles |  |      | 2,045 |      |   | 2,045
|                                        |  |      |       |      |   |      
|Total                                   |  |      | 4,908 |      |   | 4,908
|Accumulated amortization                |  |      | 1,327 |      |   | 682  
|                                        |  |      |       |      |   |      
|Net                                     |  | $    | 3,581 |      | $ | 4,226
|                                        |  |      |       |      |   |      



Aggregate amortization expense was
$645, $645 and $37 for 2004, 2003 and 2002.



Estimated amortization expense for
each of the next five years:



|     |  |   |    
|---- |  | - | ---
|2005 |  | $ | 645
|2006 |  |   | 645
|2007 |  |   | 645
|2008 |  |   | 645
|2009 |  |   | 645



(Continued)

54



---

##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004, 2003 and 2002

(Dollar amounts in thousands, except per share amounts)



NOTE 8 - INTEREST BEARING DEPOSITS



Time deposits of $100 or more were $80,477 and $76,748 at year-end 2004 and 2003.



Scheduled maturities of time deposits are as follows:



|           |  |   |        
|---------- |  | - | -------
|2005       |  | $ | 152,722
|2006       |  |   | 67,056 
|2007       |  |   | 24,975 
|2008       |  |   | 12,953 
|2009       |  |   | 4,577  
|Thereafter |  |   | 48     
|           |  |   |        
|           |  | $ | 262,331
|           |  |   |        



Deposits from principal officers,
directors, and their affiliates at year-end 2004 and 2003 were $13,404 and $15,044, comprising 1.78% and 2.15% of total deposits at those dates.



NOTE 9 -SHORT-TERM BORROWINGS



Short-term borrowings consisted of daily federal funds purchased and retail repurchase agreements of $3,922 and $5,239, and $4,446 and $3,901 at year-end 2004 and 2003.
Repurchase agreements outstanding at year-end 2004 had remaining maturities ranging from one day up to one year.



Information regarding repurchase agreements for the years ended December 31, 2004 and 2003 is presented below:



|                                          |  |      |       |   |      |   |       |  
|----------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | -
|                                          |  | 2004 |       |   | 2003 |  
|Average balance during the year           |  | $    | 4,802 |   |      | $ | 5,462 |  
|Maximum month end balance during the year |  |      | 6,150 |   |      |   | 6,648 |  
|Average rate paid during the year         |  |      | 1.54  | % |      |   | 1.41  | %



(Continued)

55



---

##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004, 2003 and 2002

(Dollar amounts in thousands, except per share amounts)



NOTE 10 - NOTES PAYABLE



Notes payable consist of the following:



|                        |  |      |        |      |   |       
|----------------------- |  | ---- | ------ | ---- | - | ------
|                        |  | 2004 |        | 2003
|FHLB advances           |  | $    | 19,700 |      | $ | 19,940
|Subordinated debentures |  |      | 17,526 |      |   | 17,526
|Other notes payable     |  |      | 347    |      |   | 384   
|                        |  |      |        |      |   |       
|                        |  | $    | 37,573 |      | $ | 37,850
|                        |  |      |        |      |   |       



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, 2004:



|                                                                                                                                               |  |   |       
|---------------------------------------------------------------------------------------------------------------------------------------------- |  | - | ------
|Convertible fixed rate advances with maturity dates ranging from 2008 to 2011 with interest rates ranging from 3.78% to 5.01%, averaging
4.59% |  | $ | 19,000
|Remaining premium reflecting market rate adjustment of assumed advances                                                                        |  |   | 700   
|                                                                                                                                               |  |   |       
|                                                                                                                                               |  | $ | 19,700
|                                                                                                                                               |  |   |       



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



In November 2002, The
Bank of Kentucky Capital Trust I (Trust), a wholly-owned 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)

56



---

##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004, 2003 and 2002

(Dollar amounts in thousands, except per share amounts)



NOTE 10 - NOTES PAYABLE(Continued)



Prior to 2003, the trust was consolidated in the Companys financial statements, with the trust preferred
securities issued by the trust reported in notes payable as trust preferred securities and the subordinated debentures were eliminated in consolidation. Under new accounting guidance, FASB Interpretation No. 46, as revised in December
2003, the trust was no longer consolidated with the Company beginning December 31, 2003. Accordingly, the Company does not report the securities issued by the trust as liabilities, and instead reports as liabilities the subordinated debentures
issued by the Company and held by the trust, as these are no longer eliminated in consolidation. Since the amount of the subordinated debentures equals the amount of trust preferred securities and common stock, the effect of no longer consolidating
the trust changes certain balance sheet classifications, but does not change the Companys equity or net income. Accordingly, the amounts previously reported as trust preferred securities in notes payable have been recaptioned
subordinated debentures and continue to be presented in notes payable on the balance sheet.



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



The Bank maintains a $100,000 letter of credit from the Federal Home Loan Bank of Cincinnati. The letter is pledged to secure public funds deposit accounts and is secured
by a blanket pledge of the Banks residential and commercial real estate loans.



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 $480, $393 and $312 for the years ended December 31, 2004, 2003 and 2002.



In 2003, the Company adopted a benefit program for certain officers to encourage long-term
retention. The program consists principally of a defined benefit component, providing each officer with payments equal to 30% of final average pay for 10 years after retirement, and a deferral component, permitting each officer the ability to defer
a portion of their current compensation and earn pre-tax returns on such deferred amounts. The accrued liability under the defined benefit component was $294 at December 31, 2004.



Options to buy stock are granted to directors, officers and employees under the Companys stock option and incentive plan which provide
for the issuance of up to 1,080,000 shares. The specific terms of each option agreement are determined by the Compensation Committee at the date of the grant. For current options outstanding, options granted to directors vest immediately and options
granted to employees generally vest evenly over a five-year period.



(Continued)

57



---

##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004, 2003 and 2002

(Dollar amounts in thousands, except per share amounts)



NOTE 11 - EMPLOYEE BENEFITS(Continued)



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



|                                                               |  |         |            |      |                                |      |         |  |   |                              |   |         |   |       |                              |   |            |   |  |   |      
|-------------------------------------------------------------- |  | ------- | ---------- | ---- | ------------------------------ | ---- | ------- |  | - | ---------------------------- | - | ------- | - | ----- | ---------------------------- | - | ---------- | - |  | - | -----
|                                                               |  | 2004    |            | 2003 |                                | 2002
|                                                               |  | Options |            |      | Weighted- AverageExercisePrice |      | Options |  |   | WeightedAverageExercisePrice |   | Options |   |       | WeightedAverageExercisePrice
|Outstanding beginning of year                                  |  |         | 337,958    |      |                                | $    | 23.86   |  |   | 275,558                      |   |         | $ | 20.63 |                              |   | 220,249    |   |  | $ | 20.36
|Granted                                                        |  |         | 102,150    |      |                                |      | 29.88   |  |   | 97,850                       |   |         |   | 30.23 |                              |   | 71,550     |   |  |   | 19.44
|Exercised                                                      |  |         | (30,930    | )    |                                |      | 20.06   |  |   | (31,200                      | ) |         |   | 15.49 |                              |   | (15,884    | ) |  |   | 11.56
|Forfeited                                                      |  |         | (20,565    | )    |                                |      | 27.46   |  |   | (4,250                       | ) |         |   | 22.79 |                              |   | (357       | ) |  |   | 22.71
|                                                               |  |         |            |      |                                |      |         |  |   |                              |   |         |   |       |                              |   |            |   |  |   |      
|Outstanding at end of year                                     |  |         | 388,613    |      |                                | $    | 25.58   |  |   | 337,958                      |   |         | $ | 23.86 |                              |   | 275,558    |   |  | $ | 20.63
|                                                               |  |         |            |      |                                |      |         |  |   |                              |   |         |   |       |                              |   |            |   |  |   |      
|Exercisable at end of year                                     |  |         | 250,710    |      |                                | $    | 24.63   |  |   | 215,603                      |   |         | $ | 23.37 |                              |   | 165,566    |   |  | $ | 20.39
|                                                               |  |         |            |      |                                |      |         |  |   |                              |   |         |   |       |                              |   |            |   |  |   |      
|Weighted average contractual remaining life of outstanding     |  |         | 5.12 years |      |                                |      |         |  |   | 5.38 years                   |   |         |   |       |                              |   | 5.57 years |   |  |   |      
|Weighted average fair value of options granted during the year |  | $       | 11.64      |      |                                |      |         |  | $ | 9.09                         |   |         |   |       |                              | $ | 5.60       |   |  |   |      



(Continued)

58



---

##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004, 2003 and 2002

(Dollar amounts in thousands, except per share amounts)



NOTE 11 - EMPLOYEE BENEFITS(Continued)



The following table details total options outstanding and exerciseable at December 31, 2004.



|                         |  |             |  |                                         |  |                              |  |         |  |                             
|------------------------ |  | ----------- |  | --------------------------------------- |  | ---------------------------- |  | ------- |  | ----------------------------
|                         |  | Outstanding |  | Exerciseable                           
|Range of Exercise Prices |  | Options     |  | WeightedAverageRemainingContractualLife |  | WeightedAverageExercisePrice |  | Options |  | WeightedAverageExercisePrice
|$8-$9                    |  | 16,148      |  | 3.09                                    |  | 8.17                         |  | 16,148  |  | 8.17                        
|$19-$23                  |  | 141,150     |  | 4.46                                    |  | 20.25                        |  | 107,830 |  | 20.47                       
|$26-$27                  |  | 14,500      |  | .72                                     |  | 26.00                        |  | 14,300  |  | 26.00                       
|$29-$32                  |  | 216,815     |  | 6.25                                    |  | 30.31                        |  | 112,432 |  | 30.81                       
|                         |  |             |  |                                         |  |                              |  |         |  |                             
|Outstanding at year end  |  | 388,613     |  |                                         |  |                              |  | 250,710 |  |                             
|                         |  |             |  |                                         |  |                              |  |         |  |                             



Proceeds recorded upon exercise of the
stock options include cash received from the option holder and the tax benefit derived by the Company. During 2004, 2003 and 2002, proceeds from the exercise of stock options totaled $617, $484 and $184. The tax benefit recognized was $84, $75 and
$50.



NOTE 12 - FEDERAL INCOME TAXES



Federal income taxes consist of the following components:



|                     |  |      |       |      |   |       |  |   |       |  
|-------------------- |  | ---- | ----- | ---- | - | ----- |  | - | ----- | -
|                     |  | 2004 |       | 2003 |   | 2002  | 
|Income tax/(benefit) |  |      |       |      |   |       |  |   |       |  
|Currently payable    |  | $    | 4,901 |      | $ | 4,240 |  | $ | 4,088 |  
|Deferred             |  |      | 28    |      |   | 446   |  |   | (3    | )
|                     |  |      |       |      |   |       |  |   |       |  
|                     |  | $    | 4,929 |      | $ | 4,686 |  | $ | 4,085 |  
|                     |  |      |       |      |   |       |  |   |       |  



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:



|                                                     |  |      |       |   |      |   |       |      |  |   |       |  
|---------------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                                     |  | 2004 |       |   | 2003 |   |       | 2002 | 
|Statutory rate applied to income before income taxes |  | $    | 5,245 |   |      | $ | 4,915 |      |  | $ | 4,388 |  
|Tax exempt income                                    |  |      | (158  | ) |      |   | (176  | )    |  |   | (169  | )
|Company owned life insurance income                  |  |      | (163  | ) |      |   | (69   | )    |  |   | 6     |  
|Other                                                |  |      | 5     |   |      |   | 16    |      |  |   | (140  | )
|                                                     |  |      |       |   |      |   |       |      |  |   |       |  
|                                                     |  | $    | 4,929 |   |      | $ | 4,686 |      |  | $ | 4,085 |  
|                                                     |  |      |       |   |      |   |       |      |  |   |       |  



(Continued)

59



---

##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004, 2003 and 2002

(Dollar amounts in thousands, except per share amounts)



NOTE 12 - FEDERAL INCOME TAXES(Continued)



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



|                                                     |  |      |        |   |      |   |        |  
|---------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                                     |  | 2004 |        |   | 2003 |  
|Deferred tax assets from:                            |  |      |        |   |      |   |        |  
|Allowance for loan losses                            |  | $    | 2,525  |   |      | $ | 2,399  |  
|Benefit plans                                        |  |      | 243    |   |      |   | 181    |  
|Net unrealized loss on available for sale securities |  |      | 56     |   |      |   |       |  
|Other                                                |  |      | 73     |   |      |   | 49     |  
|                                                     |  |      |        |   |      |   |        |  
|                                                     |  |      | 2,897  |   |      |   | 2,629  |  
|Deferred tax liabilities for:                        |  |      |        |   |      |   |        |  
|FHLB stock dividends                                 |  |      | (718   | ) |      |   | (660   | )
|Premises and equipment                               |  |      | (190   | ) |      |   | (195   | )
|Net unrealized gain on available for sale securities |  |      |       |   |      |   | (70    | )
|Acquisition intangibles                              |  |      | (894   | ) |      |   | (781   | )
|Other                                                |  |      | (74    | ) |      |   |       |  
|                                                     |  |      |        |   |      |   |        |  
|                                                     |  |      | (1,876 | ) |      |   | (1,706 | )
|                                                     |  |      |        |   |      |   |        |  
|Net deferred tax asset                               |  | $    | 1,021  |   |      | $ | 923    |  
|                                                     |  |      |        |   |      |   |        |  



NOTE 13 - EARNINGS PER SHARE



Earnings per share are computed based upon the weighted average number of
shares outstanding during the period which were 5,950,508 for 2004, 5,969,118 for 2003 and 5,960,880 for 2002. 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 2004, 2003 and 2002 this would result in an additional 52,214, 72,931 and 39,299 shares outstanding. For 2004, 2003 and 2002, 225,315, 71,025 and 52,275 options were not considered, as they were
not dilutive.



(Continued)

60



---

##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004, 2003 and 2002

(Dollar amounts in thousands, except per share amounts)



NOTE 14 - 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 $822, $818 and $732 for 2004, 2003 and 2002.
Minimum lease payments, excluding the capital lease obligation, at December 31, 2004 for all non-cancelable leases are as follows:



|                             |  |   |      
|---------------------------- |  | - | -----
|2005                         |  | $ | 835  
|2006                         |  |   | 649  
|2007                         |  |   | 485  
|2008                         |  |   | 455  
|2009                         |  |   | 365  
|Thereafter                   |  |   | 1,281
|                             |  |   |      
|Total minimum lease payments |  | $ | 4,070
|                             |  |   |      



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



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



|                                            |  |           |       |              |   |           |  |              |       |  |   |        
|------------------------------------------- |  | --------- | ----- | ------------ | - | --------- |  | ------------ | ----- |  | - | -------
|                                            |  | 2004      |       | 2003        
|                                            |  | FixedRate |       | VariableRate |   | FixedRate |  | VariableRate
|Commitments to make loans (at market rates) |  | $         | 3,163 |              | $ | 6,498     |  | $            | 6,155 |  | $ | 27,196 
|Unused lines of credit                      |  | $         |      |              | $ | 171,655   |  | $            |      |  | $ | 134,207
|Unused letters of credit                    |  | $         |      |              | $ | 60,668    |  | $            |      |  | $ | 42,213 



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.



(Continued)

61



---

##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004, 2003 and 2002

(Dollar amounts in thousands, except per share amounts)



NOTE 14 - COMMITMENTS AND OFF BALANCE SHEET ACTIVITIES(Continued)



At December 31, 2004 and 2003, the Bank was required to have $29,976 and $28,429 respectively on deposit with the
Federal Reserve or as cash on hand as reserve.



In November 2004, the bank made
a commitment to purchase land for a future branch development with a purchase price of $675.



NOTE 15 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS



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



Compliance with these regulations can limit dividends paid by either entity. Both entities
must comply with regulations that establish minimum levels of capital adequacy. The Bank must also comply with capital requirements promulgated by the FDIC under its prompt corrective action rules. The Banks deposit insurance
assessment rate is based, in part, on these measurements. At December 31, 2004 and 2003, the Banks capital levels result in it being designated well capitalized under these guidelines. There are no conditions or events since that
notification that management believes have changed the institutions category.



(Continued)

62



---

##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004, 2003 and 2002

(Dollar amounts in thousands, except per share amounts)



NOTE 15 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS(Continued)



The consolidated and the Banks capital amounts and ratios, at December 31, 2004 and 2003 are presented below:



|                                              |  |        |        |       |                               |   |        |                                                                  |        |  |      |        |  |       |        |  |       |  
|--------------------------------------------- |  | ------ | ------ | ----- | ----------------------------- | - | ------ | ---------------------------------------------------------------- | ------ |  | ---- | ------ |  | ----- | ------ |  | ----- | -
|                                              |  | Actual |        |       | For Capital Adequacy Purposes |   |        | To Be Well Capitalized Under Prompt Corrective Action Provisions |       
|                                              |  | Amount |        | Ratio |                               |   | Amount |                                                                  | Ratio  |  |      | Amount |  | Ratio |       
|2004                                          |  |        |        |       |                               |   |        |                                                                  |        |  |      |        |  |       |        |  |       |  
|Total Capital to risk weighted assets         |  |        |        |       |                               |   |        |                                                                  |        |  |      |        |  |       |        |  |       |  
|Consolidated                                  |  | $      | 84,998 |       | 10.38                         | % |        | $                                                                | 65,520 |  | 8.00 | %      |  | $     | 81,899 |  | 10.00 | %
|Bank                                          |  |        | 83,838 |       | 10.25                         | % |        |                                                                  | 65,418 |  | 8.00 | %      |  |       | 81,772 |  | 10.00 | %
|Tier 1 (Core) Capital to risk weighted assets |  |        |        |       |                               |   |        |                                                                  |        |  |      |        |  |       |        |  |       |  
|Consolidated                                  |  | $      | 77,784 |       | 9.50                          | % |        | $                                                                | 32,760 |  | 4.00 | %      |  | $     | 49,140 |  | 6.00  | %
|Bank                                          |  |        | 76,624 |       | 9.37                          | % |        |                                                                  | 32,709 |  | 4.00 | %      |  |       | 49,063 |  | 6.00  | %
|Tier 1 (Core) Capital to average assets       |  |        |        |       |                               |   |        |                                                                  |        |  |      |        |  |       |        |  |       |  
|Consolidated                                  |  | $      | 77,784 |       | 9.08                          | % |        | $                                                                | 34,278 |  | 4.00 | %      |  | $     | 42,848 |  | 5.00  | %
|Bank                                          |  |        | 76,624 |       | 8.96                          | % |        |                                                                  | 34,225 |  | 4.00 | %      |  |       | 42,781 |  | 5.00  | %
|                                              |  |        |       
|                                              |  | Actual |        |       | For CapitalAdequacy Purposes  |   |        | To Be WellCapitalized UnderPrompt CorrectiveAction Provisions    |       
|                                              |  | Amount |        | Ratio |                               |   | Amount |                                                                  | Ratio  |  |      | Amount |  | Ratio |       
|2003                                          |  |        |        |       |                               |   |        |                                                                  |        |  |      |        |  |       |        |  |       |  
|Total Capital to risk weighted assets         |  |        |        |       |                               |   |        |                                                                  |        |  |      |        |  |       |        |  |       |  
|Consolidated                                  |  | $      | 76,784 |       | 10.54                         | % |        | $                                                                | 58,286 |  | 8.00 | %      |  | $     | 72,857 |  | 10.00 | %
|Bank                                          |  |        | 75,120 |       | 10.32                         | % |        |                                                                  | 58,211 |  | 8.00 | %      |  |       | 72,763 |  | 10.00 | %
|Tier 1 (Core) Capital to risk weighted assets |  |        |        |       |                               |   |        |                                                                  |        |  |      |        |  |       |        |  |       |  
|Consolidated                                  |  | $      | 69,929 |       | 9.60                          | % |        | $                                                                | 29,143 |  | 4.00 | %      |  | $     | 43,714 |  | 6.00  | %
|Bank                                          |  |        | 68,267 |       | 9.38                          | % |        |                                                                  | 29,106 |  | 4.00 | %      |  |       | 43,658 |  | 6.00  | %
|Tier 1 (Core) Capital to average assets       |  |        |        |       |                               |   |        |                                                                  |        |  |      |        |  |       |        |  |       |  
|Consolidated                                  |  | $      | 69,929 |       | 8.87                          | % |        | $                                                                | 31,545 |  | 4.00 | %      |  | $     | 39,429 |  | 5.00  | %
|Bank                                          |  |        | 68,267 |       | 8.67                          | % |        |                                                                  | 31,504 |  | 4.00 | %      |  |       | 39,380 |  | 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



(Continued)

63



---

##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004, 2003 and 2002

(Dollar amounts in thousands, except per share amounts)



NOTE 15 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS(Continued)



net profits of the preceding two years, subject to the capital requirements described above. During 2005, the Bank could, without prior approval, declare
dividends of approximately $16 million plus any 2005 net profits retained to the date of the dividend declaration.



On November 29, 2004, the Companys Board of Directors approved the extension of the share repurchase program it previously approved in June of 2003. This repurchase
program, which was scheduled to expire on December 31, 2004, now expires on December 31, 2005. The repurchase program authorized the repurchase up to 200,000 shares of the Companys outstanding common shares in the over-the-counter market from
time to time. At December 31, 2004 a total of 85,500 of the 200,000 shares have been repurchased. Any repurchases will be funded, as needed, by dividends from the Bank.



NOTE 16 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS



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



|                                     |  |               |          |   |            |   |          |               |  |   |            |   |  |   |          |  
|------------------------------------ |  | ------------- | -------- | - | ---------- | - | -------- | ------------- |  | - | ---------- | - |  | - | -------- | -
|                                     |  | 2004          |          |   | 2003       |  
|                                     |  | CarryingValue |          |   | Fair Value |   |          | CarryingValue |  |   | Fair Value |  
|Financial assets                     |  |               |          |   |            |   |          |               |  |   |            |   |  |   |          |  
|Cash and cash equivalents            |  | $             | 47,406   |   |            | $ | 47,406   |               |  | $ | 47,321     |   |  | $ | 47,321   |  
|Interest-bearing deposits with banks |  |               |         |   |            |   |         |               |  |   | 1,935      |   |  |   | 1,935    |  
|Available-for-sale securities        |  |               | 52,204   |   |            |   | 52,204   |               |  |   | 44,424     |   |  |   | 44,424   |  
|Held-to-maturity securities          |  |               | 12,062   |   |            |   | 12,129   |               |  |   | 15,111     |   |  |   | 15,316   |  
|Federal Home Loan Bank stock         |  |               | 4,075    |   |            |   | 4,075    |               |  |   | 3,912      |   |  |   | 3,912    |  
|Loans held for sale                  |  |               | 1,391    |   |            |   | 1,408    |               |  |   | 1,017      |   |  |   | 1,033    |  
|Loans (net)                          |  |               | 711,943  |   |            |   | 707,291  |               |  |   | 653,587    |   |  |   | 659,513  |  
|Accrued interest receivable          |  |               | 2,572    |   |            |   | 2,572    |               |  |   | 2,572      |   |  |   | 2,572    |  
|Financial liabilities                |  |               |          |   |            |   |          |               |  |   |            |   |  |   |          |  
|Deposits                             |  |               | (752,800 | ) |            |   | (752,776 | )             |  |   | (698,727   | ) |  |   | (703,493 | )
|Short-term borrowings                |  |               | (9,161   | ) |            |   | (9,161   | )             |  |   | (8,347     | ) |  |   | (8,347   | )
|Notes payable                        |  |               | (37,573  | ) |            |   | (37,729  | )             |  |   | (37,850    | ) |  |   | (38,396  | )
|Accrued interest payable             |  |               | (2,216   | ) |            |   | (2,216   | )             |  |   | (2,027     | ) |  |   | (2,027   | )



The estimated fair value approximates
carrying amount for all items except those described below. Estimated fair value for securities is based on quoted market values for the individual securities or for equivalent securities. Estimated fair value of loans held for sale is based on
market quotes. Estimated fair value for loans is based on the rates charged at year-end for new loans with similar maturities, applied until the loan is assumed to reprice or be paid. Estimated fair value for time deposits is based on the rates paid
at year-end for new deposits, applied until maturity. Estimated fair value of debt is based on current rates for similar financing. Estimated fair value for off-balance-sheet loan commitments are considered nominal.



(Continued)

64



---

##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004, 2003 and 2002

(Dollar amounts in thousands, except per share amounts)



NOTE 17 - 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, 2004 and 2003



|                                     |  |      |        |      |   |       
|------------------------------------ |  | ---- | ------ | ---- | - | ------
|                                     |  | 2004 |        | 2003
|Assets                               |  |      |        |      |   |       
|Cash                                 |  | $    | 466    |      | $ | 826   
|Investment in bank subsidiary        |  |      | 89,503 |      |   | 82,027
|Investment in trust                  |  |      | 526    |      |   | 526   
|Other assets                         |  |      | 818    |      |   | 935   
|                                     |  |      |        |      |   |       
|                                     |  | $    | 91,313 |      | $ | 84,314
|                                     |  |      |        |      |   |       
|Liabilities and shareholders equity |  |      |        |      |   |       
|Subordinated debentures              |  | $    | 17,526 |      | $ | 17,526
|Other liabilities                    |  |      | 123    |      |   | 99    
|                                     |  |      |        |      |   |       
|Total liabilities                    |  |      | 17,649 |      |   | 17,625
|Shareholders equity                 |  |      | 73,664 |      |   | 66,689
|                                     |  |      |        |      |   |       
|                                     |  | $    | 91,313 |      | $ | 84,314
|                                     |  |      |        |      |   |       



CONDENSED STATEMENTS OF
INCOME

Years ended December 31, 2004 and 2003



|                                                         |  |      |        |   |      |   |       |      |  |   |       |  
|-------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                                         |  | 2004 |        |   | 2003 |   |       | 2002 | 
|Dividends from subsidiary                                |  | $    | 3,000  |   |      | $ | 1,300 |      |  | $ | 1,000 |  
|Interest expense                                         |  |      | (830   | ) |      |   | (795  | )    |  |   | (106  | )
|Operating expenses                                       |  |      | (175   | ) |      |   | (155  | )    |  |   | (132  | )
|Tax benefit                                              |  |      | 352    |   |      |   | 333   |      |  |   | 81    |  
|                                                         |  |      |        |   |      |   |       |      |  |   |       |  
|Income before equity in undistributed income of the Bank |  |      | 2,347  |   |      |   | 683   |      |  |   | 843   |  
|Equity in undistributed income of the Bank               |  |      | 7,711  |   |      |   | 8,676 |      |  |   | 7,608 |  
|                                                         |  |      |        |   |      |   |       |      |  |   |       |  
|Net income                                               |  | $    | 10,058 |   |      | $ | 9,359 |      |  | $ | 8,451 |  
|                                                         |  |      |        |   |      |   |       |      |  |   |       |  



(Continued)

65



---

##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004, 2003 and 2002

(Dollar amounts in thousands, except per share amounts)



NOTE 17 - PARENT COMPANY FINANCIAL STATEMENTS(Continued)



CONDENSED STATEMENTS OF CASH FLOWS

Years ended December 31, 2004, 2003 and 2002



|                                                                          |  |      |        |   |      |   |        |      |  |   |         |  
|------------------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------- | -
|                                                                          |  | 2004 |        |   | 2003 |   |        | 2002 | 
|Cash flows from operating activities                                      |  |      |        |   |      |   |        |      |  |   |         |  
|Net income                                                                |  | $    | 10,058 |   |      | $ | 9,359  |      |  | $ | 8,451   |  
|Adjustments to reconcile net income to net cash from operating activities |  |      |        |   |      |   |        |      |  |   |         |  
|Equity in undistributed income of the Bank                                |  |      | (7,711 | ) |      |   | (8,676 | )    |  |   | (7,608  | )
|Change in other assets and other liabilities                              |  |      | 225    |   |      |   | 222    |      |  |   | (356    | )
|                                                                          |  |      |        |   |      |   |        |      |  |   |         |  
|Net cash from operating activities                                        |  |      | 2,572  |   |      |   | 905    |      |  |   | 487     |  
|Cash flows from investing activities                                      |  |      |        |   |      |   |        |      |  |   |         |  
|Capital investment into The Bank of Kentucky                              |  |      |       |   |      |   |       |      |  |   | (17,000 | )
|Capital investment into The Bank of Kentucky Capital Trust I              |  |      |       |   |      |   |       |      |  |   | (526    | )
|                                                                          |  |      |        |   |      |   |        |      |  |   |         |  
|Net cash from investing activities                                        |  |      |       |   |      |   |       |      |  |   | (17,526 | )
|Cash flows from financing activities                                      |  |      |        |   |      |   |        |      |  |   |         |  
|Dividends paid                                                            |  |      | (1,370 | ) |      |   | (1,015 | )    |  |   | (775    | )
|Exercise of stock options                                                 |  |      | 617    |   |      |   | 484    |      |  |   | 184     |  
|Stock repurchase and retirement                                           |  |      | (2,179 | ) |      |   | (410   | )    |  |   | (1,168  | )
|Net proceeds from issuance of subordinated debentures                     |  |      |       |   |      |   |       |      |  |   | 17,526  |  
|                                                                          |  |      |        |   |      |   |        |      |  |   |         |  
|Net cash from financing activities                                        |  |      | (2,932 | ) |      |   | (941   | )    |  |   | 15,767  |  
|                                                                          |  |      |        |   |      |   |        |      |  |   |         |  
|Net change in cash                                                        |  |      | (360   | ) |      |   | (36    | )    |  |   | (1,272  | )
|Cash at beginning of year                                                 |  |      | 826    |   |      |   | 862    |      |  |   | 2,134   |  
|                                                                          |  |      |        |   |      |   |        |      |  |   |         |  
|Cash at end of year                                                       |  | $    | 466    |   |      | $ | 826    |      |  | $ | 862     |  
|                                                                          |  |      |        |   |      |   |        |      |  |   |         |  



(Continued)

66



---

##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004, 2003 and 2002

(Dollar amounts in thousands, except per share amounts)



NOTE 18 - OTHER COMPREHENSIVE INCOME (LOSS)



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



|                                                                   |  |      |      |   |      |   |      |      |  |   |      |  
|------------------------------------------------------------------ |  | ---- | ---- | - | ---- | - | ---- | ---- |  | - | ---- | -
|                                                                   |  | 2004 |      |   | 2003 |   |      | 2002 | 
|Unrealized holding gains (losses) on availableforsale securities |  | $    | (351 | ) |      | $ | (345 | )    |  | $ | 356  |  
|Reclassification adjustment for losses (gains) realized in income  |  |      | (10  | ) |      |   |     |      |  |   | (113 | )
|                                                                   |  |      |      |   |      |   |      |      |  |   |      |  
|Net unrealized gains (losses)                                      |  |      | (361 | ) |      |   | (345 | )    |  |   | 243  |  
|Tax effect                                                         |  |      | 126  |   |      |   | 118  |      |  |   | (83  | )
|                                                                   |  |      |      |   |      |   |      |      |  |   |      |  
|                                                                   |  | $    | (235 | ) |      | $ | (227 | )    |  | $ | 160  |  
|                                                                   |  |      |      |   |      |   |      |      |  |   |      |  



(Continued)

67



---

##### Table of Contents

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004, 2003 and 2002

(Dollar amounts in thousands, except per share amounts)



NOTE 19 - SELECTED QUARTERLY DATA (Unaudited)



Presented below is a summary of the consolidated quarterly financial data for the years ended December 31, 2004 and 2003.



|              |  |                 |        |                 |   |                    |       |                           |         |           |   |                    |  |   |       |  |   |     |  |   |    
|------------- |  | --------------- | ------ | --------------- | - | ------------------ | ----- | ------------------------- | ------- | --------- | - | ------------------ |  | - | ----- |  | - | --- |  | - | ---
|              |  | 2004           
|              |  | Interest Income |        | InterestExpense |   | NetInterest Income |       | Provision for Loan Losses |         | NetIncome |   | Earnings Per Share
|              |  |                 |        |                 |   |                    | Basic |                           | Diluted
|Quarter ended |  |                 |        |                 |   |                    |       |                           |         |           |   |                    |  |   |       |  |   |     |  |   |    
|March 31      |  | $               | 9,777  |                 | $ | 2,713              |       | $                         | 7,064   |           | $ | 325                |  | $ | 2,311 |  | $ | .39 |  | $ | .38
|June 30       |  |                 | 10,041 |                 |   | 2,707              |       |                           | 7,334   |           |   | 350                |  |   | 2,602 |  |   | .44 |  |   | .43
|September 30  |  |                 | 10,632 |                 |   | 2,918              |       |                           | 7,714   |           |   | 500                |  |   | 2,465 |  |   | .42 |  |   | .41
|December 31   |  |                 | 11,141 |                 |   | 3,260              |       |                           | 7,881   |           |   | 500                |  |   | 2,680 |  |   | .45 |  |   | .45



|              |  |                 |        |                 |   |                    |       |                           |         |           |   |                    |  |   |       |  |   |     |  |   |    
|------------- |  | --------------- | ------ | --------------- | - | ------------------ | ----- | ------------------------- | ------- | --------- | - | ------------------ |  | - | ----- |  | - | --- |  | - | ---
|              |  | 2003           
|              |  | Interest Income |        | InterestExpense |   | NetInterest Income |       | Provision for Loan Losses |         | NetIncome |   | Earnings Per Share
|              |  |                 |        |                 |   |                    | Basic |                           | Diluted
|Quarter ended |  |                 |        |                 |   |                    |       |                           |         |           |   |                    |  |   |       |  |   |     |  |   |    
|March 31      |  | $               | 10,183 |                 | $ | 3,644              |       | $                         | 6,539   |           | $ | 150                |  | $ | 2,226 |  | $ | .37 |  | $ | .37
|June 30       |  |                 | 9,847  |                 |   | 3,337              |       |                           | 6,510   |           |   | 175                |  |   | 2,519 |  |   | .42 |  |   | .42
|September 30  |  |                 | 9,690  |                 |   | 2,928              |       |                           | 6,762   |           |   | 265                |  |   | 2,521 |  |   | .42 |  |   | .42
|December 31   |  |                 | 9,649  |                 |   | 2,781              |       |                           | 6,868   |           |   | 500                |  |   | 2,093 |  |   | .35 |  |   | .35



(Continued)

68



---

##### Table of Contents

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



None.



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



Disclosure Controls and Procedures



Disclosure controls and procedures are BKFCs controls and other procedures that are designed to ensure that information required to be disclosed by
BKFC in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the SECs rules and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief
financial officer, as appropriate to allow timely decisions regarding required disclosure. Under the supervision, and with the participation of our management, including our chief executive officer and chief financial officer, we have evaluated the
effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2004. 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.



There were no significant changes in our internal controls over financial reporting that occurred in the last fiscal quarter
that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.



Changes in Internal Control Over Financial Reporting



During the fourth quarter of 2004, no change occurred in our internal control over financial reporting that materially
affected, or is likely to materially affect, BKFCs internal control over financial reporting.



69



---

##### Table of Contents



REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL

CONTROL OVER FINANCIAL REPORTING



Board of Directors and Shareholders

The Bank
of Kentucky Financial Corporation

Crestview Hills, Kentucky



We have audited managements assessment, included in the accompanying Managements Report on Internal Control Over Financial Reporting, that The Bank of
Kentucky Financial Corporation maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control  Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Bank of Kentucky Financial Corporations management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the companys internal control over financial reporting based on our audit.



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



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



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



70



---

##### Table of Contents

subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures
may deteriorate.



In our opinion, management's assessment that The Bank of
Kentucky Financial Corporation maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on criteria established in Internal Control  Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). 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, 2004, based on criteria established in Internal Control  Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).



We have also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of The Bank of Kentucky Financial Corporation as of December 31, 2004 and 2003 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, 2004 and our report dated February 18, 2005 expressed an unqualified opinion.



Crowe Chizek and Company LLC

Columbus, Ohio

February 18, 2005



71



---

##### Table of Contents



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,
2004. Managements assessment of the effectiveness of internal control over financial reporting as of December 31, 2004 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 President & CEO |  |  |  | Martin J. Gerrety Treasurer and Assistant Secretary



72



---

##### Table of Contents

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



None.



PART III



|Item 10. | Directors and Executive Officers of the Registrant
|-------- | --------------------------------------------------



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



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



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



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



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



|Item 13. | Certain Relationships and Related Transactions
|-------- | ----------------------------------------------



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



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



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



73



---

##### Table of Contents



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.



74



---

##### Table of Contents



SIGNATURES



Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on this 11th day of March 2005.



THE BANK OF KENTUCKY FINANCIAL CORPORATIONBy

/s/    ROBERT W. ZAPPRobert W. Zapp, President, Chief Executive Officer 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.



|   |  |                         
|-- |  | ------------------------
|   | 
|By |  | /s/    MARTIN GERRETY   
|   |  | Martin Gerrety Treasurer



|   |  |                           
|-- |  | --------------------------
|   | 
|By |  | /s/    MARY SUE
RUDICILL  
|   |  | Mary Sue Rudicill Director



|   |  |                          
|-- |  | -------------------------
|   | 
|By |  | /s/    HARRY J. HUMPERT  
|   |  | Harry J. Humpert Director



|   |  |                         
|-- |  | ------------------------
|   | 
|By |  | /s/    DAVID E. MEYER   
|   |  | John E. Miracle Director



|   |  |                             
|-- |  | ----------------------------
|   | 
|By |  | /s/    JOHN P. WILLIAMS,
JR.
|   |  | John P. Williams, Jr.       
|   |  | Director                    



|   |  |                                
|-- |  | -------------------------------
|   | 
|By |  | /s/    R. C. DURR              
|   |  | R. C. Durr                     
|   |  | Chairman Emeritus, and Director



|   |  |                                                               
|-- |  | --------------------------------------------------------------
|   | 
|By |  | /s/    ROBERT W. ZAPP                                         
|   |  | Robert W. Zapp President, Chief Executive Officer and Director



Dated: March 11, 2005



75



---

##### 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           |  | Article of Incorporation of the Bank of Kentucky Financial Corporation(2)                                                                                                                                                                                                           
|              | 
|3.2           |  | By-laws of the Bank of Kentucky Financial Corporation(3)                                                                                                                                                                                                                            
|              | 
|4.1           |  | Junior Subordinated Indenture between The Bank of Kentucky Financial Corporation and The Bank of New York, as trustee, dated as of November 14, 2002(4)                                                                                                                             
|              | 
|4.2           |  | Amended and Restated Trust Agreement among The Bank of Kentucky Financial Corporation, as depositor, The Bank of New York, as Property Trustee, The Bank of New York (Delaware), as Delaware
Trustee and the Administrative Trustees named therein, dated as of November 14, 2002(4)
|              | 
|10.1          |  | The Bank of Kentucky Financial Corporation 1997 Stock Option and Incentive Plan(5)                                                                                                                                                                                                  
|              | 
|10.2          |  | The Bank of Kentucky, Inc. Executive Deferred Contribution Plan(6)                                                                                                                                                                                                                  
|              | 
|10.3          |  | The Bank of Kentucky, Inc. Executive Private Pension Plan(6)                                                                                                                                                                                                                        
|              | 
|10.4          |  | The Bank of Kentucky, Inc. Group Insurance Endorsement Plan(6)                                                                                                                                                                                                                      
|              | 
|10.5          |  | Purchase Agreement among The Bank of Kentucky Financial Corporation, The Bank of Kentucky Capital Trust I and Trapeza CDO I, LLC, dated as of November 14, 2002(4)                                                                                                                  
|              | 
|21.1          |  | Subsidiaries of BKFC                                                                                                                                                                                                                                                                
|              | 
|23.1          |  | Consent of Crowe Chizek and Company LLC                                                                                                                                                                                                                                             
|              | 
|31.1          |  | Certifications of Robert W. Zapp, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                               
|              | 
|31.2          |  | Certifications of Martin J. Gerrety, Treasurer and Assistant Secretary, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                  
|              | 
|32.1          |  | Section 906 of Sarbanes-Oxley Act of 2002 Certification of Robert W. Zapp                                                                                                                                                                                                           
|              | 
|32.2          |  | Section 906 of Sarbanes-Oxley Act of 2002 Certification of Martin J. Gerrety                                                                                                                                                                                                        



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



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



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



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



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



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



76