BANK OF KENTUCKY FINANCIAL CORP - 10-K Annual Report

Back to GetFilings.com

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, 2002

OR

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

For the transition period from to .
-------------- ----------------

Commission File Number: 0-25960

THE BANK OF KENTUCKY FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)

Kentucky 61-1256535
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) 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. Yes [ ] No [X]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act) Yes [ ] No [X]

State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was last sold, or the average bid and asked price of such common equity, as of
the last business day of the registrant's most recently completed second fiscal
quarter $72.1 million.

At March 14, 2002 there were 5,960,849 shares of the Registrant's Common Stock
issued and outstanding.

Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [X] No [ ]

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 report.

1

PART I

Item 1. Business

General

This Form 10-K contains forward-looking statements. Statements that are not
historical or current facts, including statements about beliefs and
expectations, are forward-looking statements. These forward-looking statements
cover, among other things, anticipated future revenue and expenses and the
future prospects of either BKFC or the Bank or both. Forward-looking statements
involve inherent risks and uncertainties, and important factors could cause
actual results to differ materially from those anticipated, including the
following, in addition to those contained in BKFC's reports on file with the
Commission: (i) general economic or industry conditions could be less favorable
than expected, resulting in a deterioration in credit quality, a change in the
allowance for credit losses, or a reduced demand for credit or fee-based
products and services; (ii) changes in the domestic interest rate environment
could reduce net interest income and could increase credit losses; (iii) the
conditions of the securities markets could change, adversely affecting revenues
from capital markets businesses, the value or credit quality of the Company's
assets, or the availability and terms of funding necessary to meet the Company's
liquidity needs; (iv) changes in the extensive laws, regulations and policies
governing financial services companies could alter BKFC's and the Bank's
business environment or affect operations; (v) the potential need to adapt to
industry changes in information technology systems, on which the Bank is highly
dependent, could present operational issues or require significant capital
spending; (vi) competitive pressures could intensify and affect the Bank's
profitability, including as a result of continued industry consolidation, the
increased availability of financial services from non-banks, technological
developments or bank regulatory reform; and (vii) acquisitions may not produce
revenue enhancements or cost savings at levels or within timeframes originally
anticipated, or may result in unforeseen integration difficulties.
Forward-looking statements speak only as of the date they are made, and BFKC
undertakes no obligation to update them in light of new information or future
events.

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

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,
-----------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
Amount % Amount % Amount % Amount % Amount %
-------- ----- -------- ----- -------- ----- -------- ----- -------- ------
(Dollars in thousands)

Type of Loan:
Nonresidential real estate loans $216,579 35.6% $126,161 30.6% $116,974 30.4% $ 82,698 24.7% $ 66,449 22.0%
One- to four-family residential
real estate loans 176,546 29.1 136,194 33.1 150,222 39.1 147,316 44.1 140,159 46.4
Commercial loans 119,446 19.7 81,051 19.7 73,538 19.1 62,320 18.7 57,877 19.1
Consumer loans 19,258 3.2 14,959 3.6 12,661 3.3 11,819 3.5 10,286 3.4
Construction and land
development loans 72,522 11.9 52,184 12.7 23,586 6.1 25,633 7.6 24,165 8.0
Municipal obligations 3,013 0.5 1,443 0.3 7,849 2.0 4,568 1.4 3,346 1.1
-------- ----- -------- ----- -------- ----- -------- ----- -------- ------
Total loans $607,364 100.0% $411,992 100.0% $384,830 100.0% $334,354 100.0% $302,282 100.00%
===== ===== ===== ===== ======
Less:
Deferred loan fees 549 520 749 905 948
Allowance for loan losses 6,408 4,244 3,806 3,257 2,897
-------- -------- -------- -------- --------
Net loans $600,407 $407,228 $380,275 $330,192 $298,437
======== ======== ======== ======== ========

3

Loan Maturity Schedule. The following table sets forth certain information,
as of December 31, 2002, 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 2002:

Due after 1
year to 5 Due after 5
Due within one year years years Total
------------------- ----------- ----------- --------
(Dollars in thousands)

Commercial loans $ 71,575 $45,051 $ 2,820 $119,446
Construction and land
development loans 72,522 -- 72,522
-------- ------- ------- --------
Total $144,097 $45,051 $ 2,820 $191,968
======== ======= ======= ========

Interest sensitivity:
With fixed rates $16,579 $ 288
With variable rates 28,472 2,532
------- ------
Total $45,051 $2,820
======= ======

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
either each year or every three years based upon the interest rates of the
applicable one- or three- 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, 2002, the Bank had a total of $217 million invested in
nonresidential real estate loans, all of which were secured by property located
in the Northern Kentucky area. Such loans comprised approximately 36% of the
Bank's total loans at such date, $358,000 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 banks 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.

Federal regulations also limit the LTV on residential real estate loans to
95%. The Bank requires private mortgage insurance for the amount of any such
loan with an LTV in excess of 90%.

4

The aggregate amount of the Bank's residential real estate loans equaled
approximately $177 million at December 31, 2002, and represented 29% of total
loans at such date. At December 31, 2002, the Bank had $2.6 million of
non-performing loans of this type.

Loans held for sale. The Bank originates residential real estate loans to
be sold, service released, subject to commitment to purchase in the secondary
market. These loans are fixed rate with terms ranging from fifteen to thirty
years. At December 31, 2002 these loans totaled $11 million.

Commercial Loans. The Bank offers commercial loans to individuals and
businesses located throughout Northern Kentucky. 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 the personal guarantees of one or more of the principals
backing the borrower. At December 31, 2002, the Bank had $119 million, or 20% of
total loans, invested in commercial loans, $523,000 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, 2002, the Bank had $19 million, or 3% of total
loans, invested in consumer loans, $109,000 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, 2002, a total of $73 million, or
approximately 12% of the Bank's total loans, consisted of construction and land
development loans, $572,000 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 and provide certain tax benefits for the Bank. At December 31, 2002,
the Bank had $3.0 million, or 0.5% 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

5

borrower and prior projects completed by the borrower. Personal guarantees of
one or more principals of the borrower are generally obtained. An environmental
study of such real estate is normally conducted. Upon the completion of the
appraisal of the nonresidential real estate and the receipt of information on
the borrower, the loan application is submitted to the Loan Committee for
approval or rejection. If, however, the loan amount is in excess of $1.25
million, the loan will be submitted to the 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 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, a lawyer's
opinion of title 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 loan quality. The
system assigns a risk rating from 1 to 9 for each loan. Classified loans are
those with risk ratings of 5 or higher. 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

6

and values questionable and (ii) there is a high possibility of loss. An asset
classified "loss" is considered uncollectable and of such little value that its
continuance as an asset of the institution is not warranted. The regulations
also contain a "special mention" category, consisting of assets which do not
currently expose an institution to a sufficient degree of risk to warrant
classification but which possess credit deficiencies or potential weaknesses
deserving management's close attention.

Generally, the Bank classifies as "substandard" all 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, 2002,
were as follows:

(In thousands)

Substandard (risk rating 7) $ 0
Doubtful (risk rating 8) 931
Loss (risk rating 9) 0
----

Total classified assets $931
====

The following table reflects the amount of loans in delinquent status as of
December 31, 2002:

(In thousands)
Loans delinquent
30 to 59 days $ 4,936
60 to 89 days 4,714
90 or more days 3,241
-------

Total delinquent loans $12,891
=======

Ratio of total delinquent
loans to total loans 2.12%
=======

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, 2002,
the Bank had designated $1,946 million as impaired loans. Management evaluates
for impairment all loans selected for specific review during the quarterly
allowance analysis. Generally, that analysis will not address smaller balance
consumer credits.

7

At December 31,
------------------------------------------
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
(Dollars in thousands)

Loans accounted for on a non-accrual basis:/(1)/
Real estate:
Nonresidential $ 0 $ 427 $ 344 $ 0 $ 0
Residential 318 329 226 1,902 3,259
Construction 248 0 0 361 335
Commercial 365 198 192 0 159
Consumer and ot her 0 0 122 0 0
------ ------ ------ ------ ------
Total 931 954 884 2,263 3,753
------ ------ ------ ------ ------

Accruing loans which are contractually past
due 90 days or more:
Real estate:
Nonresidential $358 0 0 0 0
Residential 2,292 2,114 3,125 899 112
Construction 324 0 0 0 0
Commercial 158 44 628 210 59
Consumer and other loans 109 41 262 161 19
------ ------ ------ ------ ------
Total 3,241 2,199 4,105 1,270 190
------ ------ ------ ------ ------

Total of non-accrual and 90 days past due
loans $4,172 $3,153 $4,989 $3,533 $3,943
====== ====== ====== ====== ======

Percentage of total loans .69% .77% 1.30% 1.06% 1.31%
====== ====== ====== ====== ======

Other nonperforming assets/(2)/ $1,754 $ 292 $ 94 $ 248 $ 200
====== ====== ====== ====== ======

- ----------

/(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, 2002, the
Bank's allowance for loan losses totaled $6.4 million.

On at least a quarterly basis, a formal analysis of the adequacy of the
allowance is prepared and reviewed by management and the 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 loan portfolio, trends in delinquent and non-performing
loans, and economic trends affecting our market. These components are added
together and compared to the balance of our allowance at the evaluation date.

8

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

Year ended at December 31,
--------------------------------------------
2002 2001 2000 1999 1998
------- ------- ------ ------ ------
(Dollars in thousands)

Balance of allowance at beginning of period $ 4,244 $ 3,806 $3,257 $2,897 $2,554
Recoveries of loans previously charged off:
Commercial loans 10 49 64 13 8
Consumer loans 9 10 10 21 19
Mortgage loans 6 2 0 0 0
------- ------- ------ ------ ------
Total recoveries 25 61 74 34 27
------- ------- ------ ------ ------
Loans charged off:
Commercial loans 152 242 383 150 431
Consumer loans 211 69 78 53 60
Mortgage loans 115 93 137 158 63
------- ------- ------ ------ ------
Total charge-offs 478 404 598 361 554
------- ------- ------ ------ ------
Net charge-offs (453) (343) (524) (327) (527)
Provision for loan losses 1,235 781 1,143 687 870
Merger adjustment 1,382 0 (70) 0 0
------- ------- ------ ------ ------
Balance of allowance at end of period $ 6,408 $ 4,244 $3,806 $3,257 $2,897
======= ======= ====== ====== ======
Net charge-offs to average loans outstanding
for period .10% .09% .15% .10% .18%
======= ======= ====== ====== ======
Allowance at end of period to loans at end of
period 1.06% 1.02% .99% .97% .96%
======= ======= ====== ====== ======
Allowance to nonperforming loans at end of
period 153.60% 134.60% 76.29% 92.19% 73.47%
======= ======= ====== ====== ======

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

At December 31,
------------------------------------------
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
(Dollars in thousands)

Loan type
Commercial $3,139 $2,099 $1,757 $1,271 $1,007
Real estate 2,433 1,556 1,497 1,438 1,528
Consumer, CRA and credit cards 836 589 552 548 362
------ ------ ------ ------ ------

Total allowance for loan losses $6,408 $4,244 $3,806 $3,257 $2,897
====== ====== ====== ====== ======

The Bank increased its allowance for loan losses from $4.2 million at
December 31, 2001, to $6.4 million at December 31, 2002, due primarily to the
PBNK transaction and other 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

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

At December 31,
---------------------------------------------------------------
2002 2001 2000
------------------- ------------------- -------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
--------- ------- --------- ------- --------- -------
(Dollars in thousands)

Held-to-maturity securities:

U.S. Government obligations $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
U.S. Government agency obligations 3,000 3,086 4,498 4,631 17,960 17,888
Municipal and other obligations 12,694 12,984 12,636 12,837 11,780 11,768
------- ------- ------- ------- ------- -------

Total held-to-maturity securities $15,694 $16,070 $17,134 $17,468 $29,740 $29,656
======= ======= ======= ======= ======= =======

Available-for-sale securities:

U.S. Government obligations $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
U.S. Government agency obligations 33,218 33,770 34,855 35,164 22,588 22,633
Money Market Mutual Fund 10,000 10,000 0 0 0 0
------- ------- ------- ------- ------- -------

Total available-for-sale securities $43,218 $43,770 $34,855 $35,164 $22,588 $22,633
======= ======= ======= ======= ======= =======

The following table sets forth the amortized cost of the Bank's securities
portfolio at December 31, 2002 by contractual or expected maturity. Securities
with call features are presented at call date if management expects that option
to be exercised.

Maturing within Maturing after one Maturing after five
one year And within five years and within ten years
------------------- --------------------- --------------------
Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield
--------- ------- --------- --------- ---------- -------

Held-to-maturity:
U.S. Government obligations 0 0.00% 0 0.00% 0 0.00%
U.S. Government agency obligations 1,500 5.85% 1,500 5.33% 0 0.00%
Municipal and other obligations (1) 3,819 5.93% 7,524 5.11% 1,351 4.51%

Available for sale:
U.S. Government obligations 0 0.00% 0 0.00% 0 0.00%
U.S. Government agency obligations 0 0.00% 24,021 4.55% 4,933 4.70%

Maturing after
ten years Total
------------------- -------------------
Amortized Average Amortized Average
Cost Yield Cost Yield
--------- ------- --------- -------

Held-to-maturity:
U.S. Government obligations 0 0.00% 0 0.00%
U.S. Government agency obligations 0 0.00% 3,000 5.59%
Municipal and other obligations (1) 0 0.00% 12,694 5.29%

Available for sale:
U.S. Government obligations 0 0.00% 0 0.00%
U.S. Government agency obligations 4,264 5.63% 33,218 4.71%

- ----------
(1) Yield stated on a tax-equivalent basis using a 34% 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, 2002 the Bank had $5.9 million in retail
repurchase agreements.

10

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 $103,000 at December 31,
2002, and $126,000 at December 31, 2001. The Bank also entered into a capital
lease obligation for a branch in 1997 with a term of 20 years and a monthly
payment of $4,000.

Deposits. Deposits are attracted principally from within the Bank's
designated lending area through the offering of numerous deposit instruments,
including regular passbook savings accounts, negotiable order of withdrawal
("NOW") accounts, money market deposit accounts, term certificate accounts and
individual retirement accounts ("IRAs"). Interest rates paid, maturity terms,
service fees and withdrawal penalties for the various types of accounts are
established periodically by the Bank's Board of Directors based on the Bank's
liquidity requirements, growth goals and market trends. The Bank does not use
brokers to attract deposits. The Bank had $23 million in deposits from outside
its market area as of December 31, 2002. These deposits were assumed with the
PBNK transaction, $14 million of these deposits will terminate by December
31,2003, and $9 million will terminate by 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, 2002:

Maturity At December 31, 2002
- -------- --------------------
(In thousands)

Three months or less $21,617
Over 3 months to 6 months 13,954
Over 6 months to 12 months 21,667
Over 12 months 21,485
-------
Total $78,723
=======

Borrowings. In addition to repurchase agreements and the mortgage loan
described above, the Bank has agreements with correspondent banks to purchase
federal funds on an as needed basis to meet liquidity needs. As a member in good
standing of the FHLB since 1994, the Bank is authorized to apply for advances
from the FHLB, provided certain standards are met. The Bank had $24 million in
long term advances outstanding as of December 31, 2002.

In November of 2002, The Bank of Kentucky Capital Trust I (Trust), a trust
subsidiary of the Company, issued $17,000 of LIBOR plus 3.35% floating rate
obligated mandatory redeemable 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
similar to the Trust Preferred Securities. The Trust Preferred Securities are
classified as liabilities on the balance sheet and count as Tier 1 capital for
regulatory capital purposes, subject to certain limitations.

The following table sets forth the maximum month end balance amount of the
Bank's outstanding borrowings during the years ended December 31, 2001, 2000 and
1999, along with the average aggregate balances of the Bank's outstanding
borrowings for such periods:

During year ended December 31,
------------------------------
2002 2001 2000
------- ------- -------
(Dollars in thousands)
Maximum balance at any month-end during
the period $48,479 $35,792 $61,647

Average balance 24,846 18,660 40,859

Weighted average interest rate 3.19% 4.58% 6.47%

11

The following table sets forth certain information as to borrowings,
excluding the Mortgage Loan and the capital lease obligation, at the dates
indicated:

December 31,
---------------------------
2002 2001 2000
------- ------- -------
Borrowings outstanding $48,061 $35,343 $24,338
Weighted average interest rate 3.07% 4.43% 6.43%

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

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

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

In recognition of the foregoing factors, the management and the Board of
Directors of the Bank have implemented an asset and liability management
strategy directed toward maintaining a reasonable degree of interest rate
sensitivity. The principal elements of such strategy include: (i) meeting the
consumer preference for fixed-rate loans over the past two years by establishing
a correspondent lending program that has enabled the Bank to originate and sell
fixed-rate mortgage loans; (ii) maintaining relatively short weighted-average
terms to maturity in the securities portfolio as a hedge against rising interest
rates; (iii) emphasizing the origination and retention of adjustable-rate loans;
and (iv) utilizing longer term certificates of deposit as funding sources when
available. 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 assets still exceed the
contractual terms to maturity or repricing of the Bank's interest-bearing
liabilities. As a result, a rapid or protracted increase in the level of
interest rates will likely have a negative effect on the Bank's net interest
income. 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, 2002, 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

Within 3 Months 4 - 12 Months 1 through 5 years Over 5 years Total
--------------- ------------- ----------------- ------------ --------
(Dollars in thousands)

Interest-earning assets:
Federal funds sold $ 20,968 $ 0 $ 0 $ 0 $ 20,968
Interest bearing deposits with banks 2,015 0 0 0 2,015
Securities 13,759 5,319 33,328 10,817 63,223
Loans receivable (1) 267,893 64,127 271,799 13,502 617,321
-------- --------- -------- ------- --------
Total interest-earning assets 304,635 69,446 305,127 24,319 703,527
-------- --------- -------- ------- --------

Interest-bearing liabilities:
Savings deposits 32,897 0 0 0 32,897
Money market deposit accounts 55,424 0 0 0 55,424
NOW accounts 214,773 0 0 0 214,773
Certificates of deposit 60,042 110,198 61,409 128 231,777
IRA's 7,557 14,940 17,992 199 40,688
Federal funds purchased 0 0 0 0 0
Repurchase agreements 5,880 0 0 0 5,880
Notes payable 22,008 26 127 20,438 42,599
-------- --------- -------- ------- --------
Total interest-bearing liabilities 398,581 125,164 79,528 20,765 624,038
-------- --------- -------- ------- --------

Interest-earning assets less
Interest-bearing liabilities $(93,946) $ (55,718) $225,599 $ 3,554 $ 79,489
======== ========= ======== ======= ========
Cumulative interest-rate sensitivity gap $(93,946) $(149,664) $ 75,935 $79,489
======== ========= ======== =======

Cumulative interest-rate gap as a
Percentage of total interest earning (13.35)% (21.27)% 10.79% 11.30%
assets ======== ========= ======== =======

- ----------
(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

The following table sets forth certain information relating to the Bank's
average balance sheet information and reflects the average yield on
interest-earning assets and the average cost of interest-bearing liabilities for
the years 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.

Year ended December 31,
-----------------------------------------------------------------
2002 2001
------------------------------- -------------------------------
Average Interest Average Interest
outstanding earned/ Yield/ outstanding earned/ Yield/
balance paid rate balance paid rate
----------- -------- ------ ----------- -------- ------
(Dollars in thousands)

Interest-earning assets:
Loans receivable (1)(2) $454,887 $31,329 6.89% $390,546 $32,950 8.44%
Securities (2) 49,699 2,636 5.29 51,057 2,980 5.84
Other interest-earning assets 12,689 284 2.24 10,572 585 5.53
-------- ------- -------- -------
Total interest-earning assets 517,275 34,249 6.62 452,175 36,515 8.08
-------- ------- ---- -------- ------- ----

Non-interest-earning assets 36,989 27,035
-------- --------
Total assets $554,264 $479,210
======== ========

Interest-bearing liabilities:
Transaction accounts 227,587 3,919 1.72 178,010 6,335 3.56
Time deposits 187,448 7,409 3.95 184,031 10,226 5.56
Borrowings 24,846 792 3.19 18,660 854 4.58
-------- ------- -------- -------
Total interest-bearing
liabilities 439,881 12,120 2.76 380,701 17,415 4.57
-------- ------- ---- -------- ------- ----

Non-interest-bearing liabilities 59,327 49,863
-------- --------
Total liabilities 499,208 430,564

Shareholders' equity 55,056 48,646
-------- --------

Total liabilities and
shareholders' equity $554,264 $479,210
======== ========

Net interest income $22,129 $19,100
======= =======
Interest rate spread 3.86% 3.51%
==== ====
Net interest margin (net interest
income as a percent of average
interest-earning assets) 4.28% 4.22%
==== ====
Average interest-earning assets to
interest-bearing liabilities 117.59% 118.77%
======== ========

Year ended December 31,
---------------------------------
2000
---------------------------------
Average Interest
outstanding earned/ Yield/
balance paid rate
----------- -------- --------

Interest-earning assets:
Loans receivable (1)(2) $359,009 $32,865 9.15%
Securities (2) 57,406 3,415 5.95
Other interest-earning assets 4,340 354 8.16
-------- -------
Total interest-earning assets 420,755 36,634 8.71
-------- ------- -------

Non-interest-earning assets 23,872
--------
Total assets $444,627
========

Interest-bearing liabilities:
Transaction accounts 157,282 7,314 4.65
Time deposits 152,073 9,057 5.96
Borrowings 40,859 2,644 6.47
-------- -------
Total interest-bearing
liabilities 350,214 19,015 5.43
-------- ------- -------

Non-interest-bearing liabilities 50,680
--------
Total liabilities 400,894

Shareholders' equity 43,733
--------

Total liabilities and
shareholders' equity $444,627
========

Net interest income $17,619
=======
Interest rate spread 3.28%
=======
Net interest margin (net interest
income as a percent of average
interest-earning assets) 4.19%
=======
Average interest-earning assets to
interest-bearing liabilities 120.14%
========

- ----------
(1) Includes non-accrual loans.
(2) Income presented on a tax equivalent basis using a 34% tax rate. The tax
equivalent adjustment was $290,000, $432,000, and $387,000, in 2002, 2001, and
2000 respectively.

14

The table below 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 (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.

Year ended December 31,
--------------------------------------------------------
2002 vs. 2001 2001 vs. 2000
-------------------------- ---------------------------
Increase (Decrease) Increase (Decrease)
Due to due to
-------------------------- ---------------------------
Volume Rate Total Volume Rate Total
------ ------- ------- ------- ------- -------
(Dollars in thousands)

Interest income attributable to:
Loans receivable $4,957 $(6,578) $(1,621) $ 2,767 $(2,682) $ 85

Securities (78) (266) (344) (372) (63) (435)
Other interest-earning assets(1) 100 (401) (301) 375 (144) 231
------ ------- ------- ------- ------- -------

Total interest-earning assets 4,979 (7,245) (2,266) 2,770 (2,889) (119)
------ ------- ------- ------- ------- -------

Interest expense attributable to:
Transactions accounts 1,445 (3,861) (2,416) 883 (1,862) (979)
Time deposits 187 (3,004) (2,817) 1,807 (638) 1,169
Borrowings 238 (300) (62) (1,163) (627) (1,790)
------ ------- ------- ------- ------- -------

Total interest-bearing liabilities 1,870 (7,165) (5,295) 1,527 (3,127) (1,600)
------ ------- ------- ------- ------- -------

Increase (decrease) in net interest income $3,109 $ (80) $ 3,029 $(1,243) $ 238 $ 1,481
====== ======= ======= ======= ======= =======

- ----------
(1) Includes federal funds sold and interest-bearing deposits in other financial
institutions.

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.

15

Employees

As of December 31, 2002, the Bank had 146 full-time employees and 71
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 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.

16

Regulation of the Bank

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

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

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, 2002, 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.

17

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, 2002:

At December 31, 2002
-------------------------------------
BKFC The Bank
----------------- -----------------
Amount Percent Amount Percent
------- ------- ------- -------
(Dollars in thousands)

Tier 1 risk-based $60,859 9.40% $59,013 9.12%
Requirement 25,904 4.00 25,869 4.00
------- ----- ------- -----
Excess $34,955 5.40% $33,144 5.12%
======= ===== ======= =====

Total risk-based $67,267 10.39% $65,421 10.12%
Requirement 51,808 8.00 51,739 8.00
------- ----- ------- -----
Excess $15,459 2.39% $13,682 2.12%
======= ===== ======= =====

Leverage ratio $60,859 9.57% $59,013 9.28%
Requirement 25,449 4.00 25,449 4.00
------- ----- ------- -----
Excess $35,410 5.57% $33,564 5.28%
======= ===== ======= =====

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, 2002, 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.

18

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.

At December 31, 2002, the Bank had capital in excess of the FDIC's most
restrictive minimum capital requirements in an amount equal to $1 million from
which dividends could be paid, subject to the FDIC's general safety and
soundness review. In 2002, BKFC paid a cash dividend of $0.13 per share totaling
$775,000.

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 December 31, 2002 was $123 million, including the attributed growth factor,
remain insured by the SAIF. The Bank is a member of the BIF, and, at December
31, 2002, it had $527 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 $42.1 million of
such accounts (subject to an exemption of up to $6.0 million), and of 10% of net
transaction accounts in excess of $42.1 million. At December 31, 2002, 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 in an amount equal to the greater of 1.0% of the
aggregate outstanding principal amount of the Bank's residential mortgage loans,
home purchase contracts and similar obligations at the beginning of each year,
or 5% of its advances from the FHLB. The Bank is in compliance with this
requirement with an investment in stock of the FHLB of $3,759,000 at December
31, 2002. Generally, the FHLB is not permitted to make new advances to a member
without positive tangible capital.

19

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 Ft. Thomas Financial
Corporation. Ft. Thomas Financial Corporation was previously a savings bank.
Federal income tax laws provided savings banks with additional bad debt
deductions through 1987, totaling $1,255,000 for Ft. Thomas Financial
Corporation. Accounting standards do not require a deferred tax liability to be
recorded on this amount, which would otherwise total $427,000. Upon acquisition,
this unrecorded liability was transferred to the Bank. If the Bank was
liquidated or otherwise ceased to be a bank or if tax laws were to change, the
$427,000 would be recorded as a liability with an offset to income tax expense.

Kentucky Taxation

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

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

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

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

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.

20

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.

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

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 2002 High Low Fiscal Year 2001 High Low
- ---------------- ------ ------ ---------------- ------ ------
First Quarter $22.00 $19.00 First Quarter $21.25 $19.50
Second Quarter 22.25 20.05 Second Quarter 21.95 19.50
Third Quarter 25.55 20.80 Third Quarter 21.25 17.00
Fourth Quarter 28.50 24.00 Fourth Quarter 21.75 17.25

There were 5,953,849 shares of common stock of BKFC outstanding on December
31, 2002, which were held of record by 1,072 shareholders. The Board of
Directors declared cash dividends of $.05 per share in March and September 2001,
$.06 per share in March 2002, and $.07 per share in September 2002.

21

Item 6. Selected Financial Data

The following is a summary of selected consolidated financial data for The Bank
of Kentucky Financial Corporation for the five years ended December 31, 2002.
The summary should be read in conjunction with the Financial Statements and
Notes to Consolidated Financial Statements.

(Dollars In Thousands For Year Ended December 31st
----------------------------------------------------
Except Per Share Amounts) (a) 2002 2001 2000 1999 1998
-------- -------- -------- -------- --------

Earnings:
Total Interest Income $ 33,959 $ 36,083 $ 36,247 $ 30,741 $ 28,805
Total Interest Expense 12,120 17,415 19,015 14,972 14,371
-------- -------- -------- -------- --------
Net Interest Income 21,839 18,668 17,232 15,769 14,434
Provision for Loan Losses 1,235 781 1,143 687 870
Noninterest Income 5,515 4,346 2,850 2,571 2,581
Noninterest Expense 13,583 11,854 12,747 9,634 8,600
-------- -------- -------- -------- --------
Income Before Income Taxes 12,536 10,379 6,192 8,019 7,545
Federal Income Taxes 4,085 3,310 1,979 2,285 2,490
-------- -------- -------- -------- --------
Net Income $ 8,451 $ 7,069 $ 4,213 $ 5,734 $ 5,055
======== ======== ======== ======== ========
Per Common Share Data:
Basic Earnings $ 1.42 $ 1.16 $ 0.69 $ 0.94 $ 0.83
Diluted Earnings 1.41 1.15 0.68 0.93 0.83
Dividends Paid (b) 0.13 0.10 0.08 0.04 0.03
Balances at December 31:
Total Investment Securities $ 59,464 $ 52,298 $ 52,373 $ 56,803 $ 52,079
Total Loans 606,815 411,472 384,081 333,449 301,334
Allowance for Loan Losses 6,408 4,244 3,806 3,257 2,897
Total Assets 779,080 507,262 470,129 422,259 384,378
Noninterest Bearing Deposits 91,787 55,763 52,253 49,678 39,916
Interest Bearing Deposits 575,559 360,420 341,468 293,910 280,793
Total Deposits 667,346 416,183 393,721 343,588 320,709
Total Shareholders' Equity 58,423 51,521 47,777 42,584 37,161
Other Statistical Information:
Return on Average Assets 1.52% 1.48% 0.95% 1.45% 1.43%
Return on Average Equity 15.35% 14.05% 9.63% 14.56% 13.08%
Dividend Payout Ratio (b) 9.15% 8.62% 11.59% 4.26% 3.61%
Capital Ratios at December 31:
Total Equity to Total Assets 7.50% 10.16% 10.16% 10.08% 9.67%
Tier 1 Leverage Ratio 9.57% 10.46% 10.12% 10.73% 10.50%
Tier 1 Capital to Risk-Weighted Assets 9.40% 10.46% 11.39% 12.25% 13.67%
Total Risk-Based Capital to Risk-Weighted Assets 10.39% 12.12% 12.32% 13.19% 14.74%
Loan Quality Ratios at December 31:
Allowance for Loan Losses
To Total Loans 1.06% 1.02% 0.99% 0.98% 0.96%
Allowance for Loan Losses
To Nonperforming Loans 153.60% 136.33% 76.29% 92.19% 73.47%
Net Charge-Offs to Average Net Loans 0.10% 0.09% 0.15% 0.10% 0.18%

- ----------
(a) Financial Data reflects a combination accounted for as a pooling of
interest in 2000.
(b) Dividends per share are the Company's historical dividends.

22

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

December 31, 2002
GENERAL

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.

On November 22, 2002, the Bank 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 fair value of 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. Goodwill will be subject to an annual test for impairment and
the amount impaired, if any, will be charged to expense at the time of
impairment. BKFC issued $17,000,000 in trust preferred securities to provide
added capital for the addition of the assets acquired in the PBNK transaction.
The proceeds of these securities are considered part of Tier 1 capital and keep
BKFC in the well-capitalized category for both the FDIC and the Federal Reserve
bank.

FINANCIAL CONDITION

Total assets at December 31, 2002 were $779,080,000 compared to $507,262,000 at
December 31, 2001, an increase of $271,818,000 (54%). Contributing to this
increase was $176,937,000 in assets purchased from PBNK. Notwithstanding this
purchase, total assets increased $94,881,000 (18%) primarily due to increases in
net loans $52,849,000 (13%), and other short term investments, which includes
federal funds sold and money market investments, of $25,501,000 (927%). The loan
growth, net of the PBNK purchase, was fueled by the continued growth in the
commercial and commercial real estate loan portfolio of $64,306,000 (31%) these
were partially offset by a decrease in residential loans outstanding of
$9,139,000 (7%). The decrease in residential real estate loans was due to a
large amount of refinancing done in the secondary market. At year-end 2002, the
Corporation had $10,799,000 of loans held for sale. These loans were committed
for sale, service released, and were delivered shortly after year-end. The
majority of the asset growth was funded by an increase in deposits of
$251,163,000 (60%), from $416,183,000 at December 31, 2001 to $667,346,000 at
December 31, 2002. Included in the deposit growth was $161,768,000 of deposits
assumed from PBNK. Net of the PBNK transaction, deposits grew $89,395,000 (21%)
in 2002. Driving the deposit growth was NOW accounts which were up $96,839,000
(97%) which was partially offset with a drop in Money

23

Market accounts of $25,986,000 (33%). The growth in the NOW accounts was the
result of the introduction of the Elite checking product which pays a
competitive rate of interest, 2% at December 31, 2002, on a transaction account.
An increase in notes payable of $33,150,000 (351%), from $9,449,000 at December
31, 2001 to $42,599,000 at December 31, 2002 was partially offset with a
decrease in short-term borrowings of $20,463,000 (78%) from $26,343,000 at
December 31, 2001 to $5,880,000 at December 31, 2002. The added notes payable
included $16,201,000 in Federal Home Loan Bank advances assumed in the PBNK
transaction and $17,000,000 of trust preferred security. The trust preferred
securities were issued to keep the Bank and BKFC well capitalized as defined by
the FDIC and the Federal Reserve bank even after the closing of the PBNK
transaction.

RESULTS OF OPERATIONS

SUMMARY

Net income was $8,451,000 for the year ended December 31, 2002 compared to
$7,069,000 in 2001, an increase of $1,382,000 (20%). Net income for the year
ended December 31, 2001 increased $2,856,000 (68%) from the $4,213,000 recorded
in 2000. The 2000 earnings reflected restructuring and merger related expenses
incurred, which aggregated to $1,500,000 net of taxes. Absent that expense, net
income for 2001 increased $1,356,000 (24%) over net income for 2000.

NET INTEREST INCOME

Net interest income grew to $21,839,000 in 2002, an increase of $3,171,000 (17%)
over the $18,688,000 earned in 2001. The increase was driven by volume, with
average earning assets and average interest-bearing liabilities growing by 14%
and 16% respectively. The net interest margin increased to 4.28% in 2002 from
4.22% in 2001. The increase was due to an increase in the net interest spread to
3.86% in 2002 from 3.51% in 2001, which was partially offset with a decrease in
the effect on net free funds to .42% in 2002 from .71% in 2001. Net free funds
represent the portion of earning assets that are funded by non interest bearing
liabilities, and all else being equal, the contribution of net free funds to the
net interest margin goes down when rates go down. Net interest income in 2001
increased $1,436,000 (8.3%) over the $17,232,000 earned in 2000. The increase
was driven by volume, with average earning assets and average interest-bearing
liabilities growing by 7.5% and 8.7% respectively. The net interest margin
increased to 4.22% in 2001 from 4.19% in 2000 due to a 16% decrease in cost of
funds compared to a 7.2% decrease in yield on earning assets.

PROVISION FOR LOAN LOSSES

The provision for loan losses was $1,235,000 for the year ended December
31,2002, compared to $781,000 for 2001. The increase of $454,000 (58%) in the
provision reflected the growth in the loan portfolio, net of the PBNK
transaction, and brings the allowance to the level indicated in management's
quarterly analysis. To reflect their fair value, PBNK loans were recorded net of

24

an allowance that in management's judgement, fairly reflected the probable
losses of the portfolio. For the year 2002, net charge offs were $453,000 or
..10% of average loan balances compared to 2001 figures of $343,000 or .09%
respectively. Total non-accrual loans and loans past due 90 days or more were
$4,172,000 (.69% of loans outstanding) at December 31, 2002 compared to
$3,153,000 (.77% of loans outstanding) at December 31, 2001. The provision for
loan losses was $781,000 for the year ended December 31, 2001, compared to
$1,143,000 for 2000. The higher provision in 2000 reflected the increase in
non-performing loans following the acquisition of FTSB and increase in
classified credits and their related reserves in the economic downturn. The
remainder of the decrease was in response to lower net charge-offs during 2001.
Net charge-offs for 2001 decreased to $343,000, compared to $524,000 in 2000.
Total non-accrual loans and loans past due 90 days or more decreased to
$3,153,000 (.77% of loans outstanding) at December 31, 2001 compared to
$4,989,000 (1.30% of loans outstanding) at year end 2000.

The allowance is maintained at an amount management believes sufficient to
absorb probable incurred losses in the loan portfolio. 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.

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 loan portfolios, based upon a variety of factors,
including historical loss history experience, trends in the type and volume of
the loan portfolios, trends in delinquent and non-performing loans, and economic
trends affecting our market. These components are added together and compared to
the balance of our allowance at the evaluation date and adjustments are made
accordingly.

NONINTEREST INCOME

Total noninterest income increased by $1,169,000 (27%) to $5,515,000 for 2002
compared to $4,346,000 for 2001. The mortgage refinancing activity remained
strong in 2002 and led to the increased gains on sales of real estate loans of
$301,000 (30%) to $1,316,000 compared to $1,015,000 in 2001. This income results
from the sale, service released, of fixed-rate residential real estate mortgage
loans. During 2002, the principal balance of loans originated for sale increased
due to the continued low rate environment to $113.8 million, compared to $89.6
million in 2001. Service charges on deposits increased $707,000 (36%) to
$2,666,000 for 2002, compared to $1,959,000 for 2001. This was due to both an
increase in the service charge assessed on deposit accounts and an increase in
the number of accounts. Commensurate with the added PBNK deposits and branch
system, management feels future service charge income will increase
proportionally to the balances obtained in the transaction. Trust fee income,
part of other noninterest income, increased $78,000 (58%) to $213,000 for 2002,
compared to $135,000 for 2001. At year-end 2002, total trust assets stood at
$150 million compared to $28 million at the

25

end of 2001. The addition of the PBNK trust department added approximately
$40,000 in trust fees and $86 million in trust assets in 2002. Gains from the
sale of investments were $113,000 in 2002, compared to $93,000 for 2001. Other
fees increased $63, 000 (5.5%) to $1,207,000 for 2002, compared to $1,144,000
for 2001.

Total noninterest income increased by $1,496,000 (52%) to $4,346,000 for 2001,
compared to $2,850,000 for 2000. Interest rate decreases fueled mortgage
refinancing activity and increased gains on sales of real estate loans in the
secondary market. These gains increased $768,000 (311%) to $1,015,000 in 2001,
compared to $247,000 for 2000. During 2001, the principal balance of loans
originated for sale significantly increased due to the low rate environment to
$89.6 million, compared to $18.7 million in 2000. Service charges on deposits
increased $345,000 (21%) to $1,959,000 for 2001, compared to $1,614,000 for
2000. This was due to both an increase in the service charge assessed on deposit
accounts and an increase in the number of accounts. Trust fee income, part of
other noninterest income, increased $115,000 (575%) to $135,000 for 2001,
compared to $20,000 for 2000. This was the first full year of operations for the
trust department, which was started in the first quarter of 2000. Gains from the
sale of investments were $93,000 in 2001, compared to $0 for 2000. Other fees
increased $175,000 (18%) to $1,144,000 for 2001, compared to $969,000 for 2000.
Increases in debit card interchange fees and letter of credit fees accounted for
$102,000 of the increase.

NONINTEREST EXPENSE

Noninterest expense increased $1,729,000 (15%) to $13,583,000 for 2002, compared
to $11,854,000 in 2001. A significant portion of the increase in expense can be
attributed to the PBNK transaction. The operating expenses associated with this
transaction began as of November 22, 2002 and included the additional cost of
over 60 employees, 8 banking offices and over 15,000 loan and deposit accounts.
The largest increases were seen in salaries and employee benefits $1,007,000
(18%), Occupancy and equipment expense $144,000 (7%) and ATM cost $198,000
(39%). The increase in salaries and employee benefits was due to the increased
staffing associated with the PBNK transaction, additional staffing associated in
the growth outside the PBNK transaction and annual merit increases. Contributing
to the increases in occupancy and equipment was the cost of running eight
additional locations for over a month. Contributing to the ATM expenses was a
$100,000 charge for converting PBNK debit card customers and ATM machines to our
processor. Exclusive of the added amortization of the intangible assets
associated with the PBNK transacation, (see note 6 of the financial statements)
management feels that the additional expenses associated with the PBNK
acquisition will be proportionate to the assets assumed and liabilities
acquired.

Noninterest expense decreased $893,000 (7.0%) to $11,854,000 for 2001, compared
to $12,747,000 in 2000. Most of the decrease was related to 2000's restructuring
and merger and acquisition expenses related to the merger with Fort Thomas
Financial Corporation of $1,993,000. This was partially offset by a $460,000
increase in salaries and employee benefits to $5,475,000 for 2001, compared to
$5,015,000 for 2000. The increase in salaries and employee benefits was due to
increased staffing associated with two additional branch locations opened in
2001 and annual merit increases. Computer service expense increased $142,000 to
$857,000 for

26

2001, compared to $715,000 for 2000. The increase was due to data processing
associated with trust processing and increased data communication expense
associated with the upgrading of data communication links between the main
office and the branches. Other operating expenses increased $441,000 (14%) to
$3,521,000 for 2001, compared to $3,080,000 for 2000. Bank shares tax and
deposit tax accounted for $174,000 of the increase. ATM expenses increased
$148,000 due to two additional machines and a large increase in the rates to
service the machines. Advertising expense increased $33,000 in 2001 due to a
more aggressive marketing campaign and the opening of two new branches.

TAX EXPENSE

Federal income tax expense increased $775,000 (23%) to $4,085,000 for 2002
compared to $3,310,000 for 2001, due primarily to an increase in earnings. The
effective tax rate was 33% for 2002, which was an increase of .1% from 32% in
2001. The increase in the effective rate was primarily the result of a smaller
percentage of tax-free income to total income in 2002 versus 2001.

Federal income tax expense increased $1,331,000 (67%) to $3,310,000 for 2001
compared to $1,979,000 for 2000, due primarily to an increase in earnings. The
effective tax rate remained 32.0% for 2001.

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 trust preferred securities. The
source of the funds for BKFC's debt obligations is dependent on the Bank. During
2002, The Bank funded its loan growth with deposits and notes payable. At
December 31, 2002, the Bank's customers have available $141,464,000 in unused
lines and letters of credit, and the Bank has further extended loan commitments
totaling $20,506,000. 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
$20,968,000 in Fed Funds and $43,770,000 of securities designated as
available-for-sale and an additional $5,319,000 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, 2002 to meet known
and potential obligations.

27

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 2002 BKFC paid cash dividends of $.13 per
share totaling $775,000.

The FDIC has issued regulations that relate a bank's deposit insurance
assessment and certain aspects of its operations to specified capital levels. A
"well-capitalized" bank, one with a leverage ratio of 5% or more and a total
risk-based capital ratio of 10% or more, and no particular areas of supervisory
concern, pays the lowest premium and is subject to the fewest restrictions. The
Bank's capital levels and ratios exceed the regulatory definitions of
well-capitalized institutions. At December 31, 2002 BKFC's leverage and total
risk-based capital ratios were 9.6% and 10.4%, respectively, which exceed all
required ratios established for bank holding companies.

28

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 engages in a formal process of measuring and defining 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. 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.

At December 31, 2002, BKFC's twelve-month interest rate gap position was
negative. Over the succeeding twelve months, interest rate sensitive liabilities
exceed interest rate sensitive assets by $24,738,000 (3.5% of interest earning
assets). At December 31, 2001 the one-year interest rate gap was negative
$69,763,000 (14.8% of interest earning assets). An assumption contributing to
this result is that all NOW and savings accounts can be changed within two years
if market rates change. 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 rate risk the
Corporation wants the Bank to assume, and management continually monitors BKFC's
gap position and other key indicators.

The table below provides information about the quantitative market risk of
interest sensitive instruments at December 31, 2002 (dollars in thousands) and
shows the contractually repricing intervals, and related average interest rates,
for each of the next five years and thereafter:

29

Repricing in: 2003 2004 2005 2006 2007 Thereafter Total Fair Value
------- ------- ------ ------ ------ ---------- ------- ----------

Assets
Fed Funds Sold 20,968 20,968 20,968

Average Interest Rate 1.25%

Interest bearing time
Deposits 2,015 2,015 2,015

Average Interest Rate 1.39%

Fixed Securities 15,320 5,822 13,425 11,823 2,279 10,795 59,464 59,840

Average Interest Rate 1.75% 3.57% 4.07% 5.23% 2.96% 4.48%

FHLB Stock 3,759 -- -- -- -- -- 3,759 3,759

Average Interest Rate 4.25% -- -- -- -- -- -- --

Fixed Rate Loans 38,806 11,459 6,890 5,520 5,481 8,460 76,616 78,096

Average Interest Rate 5.62% 7.57% 8.02% 7.31% 7.10% 8.47% -- --

Variable Rate Loans 313,449 106,553 87,761 15,425 15,412 2,106 540,705 553,931

Average Interest Rate 5.27% 6.98% 6.80% 6.84% 6.84% 9.27% -- --

Liabilities

Savings, NOW, MMA 303,093 -- -- -- -- -- 303,093 303,093

Average Interest Rate 1.41% -- -- -- -- -- -- --

CD's and IRA's 192,593 59,808 13,925 5,274 737 128 272,465 278,255

Average Interest Rate 3.18% 4.09% 4.70% 4.51% 4.51% 4.43% -- --

Borrowings 5,880 -- -- -- -- -- 5,880 5,880

Average Interest Rate 1.53% -- -- -- -- -- -- --

Notes Payable 22,000 -- -- -- -- 20,599 42,599 43,114

Average Interest Rate 4.38% -- -- -- -- 3.28% -- --

Item 8. Financial Statements and Supplementary Data

30

THE BANK OF KENTUCKY FINANCIAL CORPORATION
Florence, Kentucky

FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000

CONTENTS

REPORT OF INDEPENDENT AUDITORS.............................................. 32

CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS.............................................. 33

CONSOLIDATED STATEMENTS OF INCOME........................................ 34

CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY.................................................. 35

CONSOLIDATED STATEMENTS OF CASH FLOWS.................................... 36

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS............................... 37

31

REPORT OF INDEPENDENT AUDITORS

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, 2002 and 2001 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, 2002. 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 auditing standards generally accepted
in the United States of America. 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, 2002 and 2001, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2002, in conformity with auditing standards generally accepted in
the United States of America.

As disclosed in Note 1, during 2002 the Company adopted new accounting guidance
for goodwill and intangible assets.

Crowe, Chizek and Company LLP

Louisville, Kentucky
January 29, 2003

32

THE BANK OF KENTUCKY FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 2002 and 2001
(Dollar amounts in thousands, except per share amounts)

- --------------------------------------------------------------------------------

2002 2001
-------- --------

ASSETS
Cash and due from banks $ 42,350 $ 24,225
Federal funds sold 20,968 2,481
-------- --------
Total cash and cash equivalents 63,318 26,706
Interest bearing deposits with banks 2,015 --
Available-for-sale securities 43,770 35,164
Held-to-maturity securities
(Fair value of $16,070 and $17,468) 15,694 17,134
Loans held for sale 10,799 5,509
Loans, net of allowance ($6,408 and $4,244) 600,407 407,228
Premises and equipment - net 16,242 6,081
Federal Home Loan Bank stock, at cost 3,759 3,590
Goodwill 9,329 --
Acquisition intangibles 4,871 --
Accrued interest receivable and other assets 8,876 5,850
-------- --------
$779,080 $507,262
======== ========

LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Non interest-bearing deposits $ 91,787 $ 55,763
Interest-bearing deposits 575,559 360,420
-------- --------
Total deposits 667,346 416,183
Short-term borrowings 5,880 26,343
Notes payable 42,599 9,449
Accrued expenses and other liabilities 4,832 3,766
-------- --------
720,657 455,741

Shareholders' equity
Common stock, no par value, 15,000,000 shares authorized,
5,953,849 (2002) and 5,994,595 (2001) shares issued 3,098 3,098
Additional paid-in capital 10,379 11,313
Retained earnings 44,582 36,906
Accumulated other comprehensive income 364 204
-------- --------
58,423 51,521
-------- --------
$779,080 $507,262
======== ========

- --------------------------------------------------------------------------------

See accompanying notes.

33

THE BANK OF KENTUCKY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2002, 2001 and 2000
(Dollar amounts in thousands, except per share amounts)

- --------------------------------------------------------------------------------

2002 2001 2000
------- ------- -------
Interest income
Loans, including related fees $31,290 $32,773 $32,742
Securities
Taxable 1,898 2,230 2,638
Tax exempt 487 495 513
Other 284 585 354
------- ------- -------
33,959 36,083 36,247
Interest expense
Deposits 11,328 16,561 16,371
Borrowings 792 854 2,644
------- ------- -------
12,120 17,415 19,015
------- ------- -------

Net interest income 21,839 18,668 17,232

Provision for loan losses 1,235 781 1,143
------- ------- -------

Net interest income after provision
for loan losses 20,604 17,887 16,089

Noninterest income
Service charges and fees 2,666 1,959 1,614
Gain on sale of real estate loans 1,316 1,015 247
Gain on sale of securities 113 93 --
Other 1,420 1,279 989
------- ------- -------
5,515 4,346 2,850
Noninterest expense
Salaries and employee benefits 6,482 5,475 5,015
Occupancy and equipment 2,145 2,001 1,944
Data processing 907 857 715
Advertising 411 366 333
Restructuring charges -- -- 1,450
Merger and acquisition -- -- 543
Other 3,638 3,155 2,747
------- ------- -------
13,583 11,854 12,747
------- ------- -------
Income before income taxes 12,536 10,379 6,192

Federal income taxes 4,085 3,310 1,979
------- ------- -------
Net income $ 8,451 $ 7,069 $ 4,213
======= ======= =======

Per share data
Earnings per share $ 1.42 $ 1.16 $ .69
======= ======= =======

Earnings per share, assuming dilution $ 1.41 $ 1.15 $ .68
======= ======= =======
- --------------------------------------------------------------------------------

See accompanying notes.

34

THE BANK OF KENTUCKY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS
OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 2002, 2001 and 2000
(Dollar amounts in thousands, except per share amounts)

- -------------------------------------------------------------------------------------------------------

Additional
Common Paid-in Unearned
Shares Stock Capital Compensation
--------- ------ ---------- ------------

Balance January 1, 2000 6,104,778 $3,098 $14,080 $(815)

Comprehensive income
Net income -- -- -- --
Change in net unrealized gain (loss), net of tax -- -- -- --

Total comprehensive income
Cash dividends - $.08 per share -- -- -- --
Benefit plan amortization -- -- 23 83
Exercise of stock options 55,525 -- 710 --
Payment for fractional and dissenting shares (3,386) -- (94) --
Adjustments related to merger -- -- (181) 397
--------- ------ ------- -----

Balance December 31, 2000 6,156,917 3,098 14,538 (335)

Comprehensive income
Net income -- -- -- --
Change in net unrealized gain (loss), net of tax -- -- -- --

Total comprehensive income
Cash dividends - $.10 per share -- -- -- --
Termination of ESOP -- -- 123 335
Exercise of stock options 1,508 -- 15 --
Repurchase and retirement of common shares (163,830) -- (3,363) --
--------- ------ ------- -----

Balance December 31, 2001 5,994,595 3,098 11,313 --

Comprehensive income
Net income -- -- -- --
Change in net unrealized gain (loss), net of tax -- -- -- --

Total comprehensive income
Cash dividends - $.13 per share -- -- -- --
Exercise of stock options 15,884 -- 234 --
Repurchase and retirement of common shares (56,630) -- (1,168) --
--------- ------ ------- -----

Balance December 31, 2002 5,953,849 $3,098 $10,379 $ --
========= ====== ======= =====

Accumulated
Other
Retained Comprehensive
Earnings Income (Loss) Total
-------- ------------- -------

Balance January 1, 2000 $26,459 $(238) $42,584

Comprehensive income
Net income 4,213 -- 4,213
Change in net unrealized gain (loss), net of tax -- 268 268
-------
Total comprehensive income 4,481
Cash dividends - $.08 per share (458) -- (458)
Benefit plan amortization -- -- 106
Exercise of stock options -- -- 710
Payment for fractional and dissenting shares -- -- (94)
Adjustments related to merger 232 -- 448
------- ----- -------

Balance December 31, 2000 30,446 30 47,777

Comprehensive income
Net income 7,069 -- 7,069
Change in net unrealized gain (loss), net of tax -- 174 174
-------
Total comprehensive income 7,243
Cash dividends - $.10 per share (609) -- (609)
Termination of ESOP -- -- 458
Exercise of stock options -- -- 15
Repurchase and retirement of common shares -- -- (3,363)
------- ----- -------

Balance December 31, 2001 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 -- -- 234
Repurchase and retirement of common shares -- -- (1,168)
------- ----- -------

Balance December 31, 2002 $44,582 $ 364 $58,423
======= ===== =======

- -------------------------------------------------------------------------------------------------------

See accompanying notes.

35

THE BANK OF KENTUCKY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2002, 2001 and 2000
(Dollar amounts in thousands)

- --------------------------------------------------------------------------------------------------

2002 2001 2000
-------- -------- --------

Cash flows from operating activities
Net income $ 8,451 $ 7,069 $ 4,213
Adjustments related to merger -- -- 448
Adjustments to reconcile net income to net
cash from operating activities
Benefit plan amortization -- 458 106
Depreciation and amortization 675 684 692
Net accretion on securities 32 (251) (40)
Provision for loan losses 1,235 781 1,143
Federal Home Loan Bank stock dividend (169) (231) (252)
Securities gains (113) (93) --
Amortization of acquisition intangibles 37 -- --
Net change in:
Loans held for sale (5,290) (5,509) --
Accrued interest receivable and other assets (1,926) (284) 912
Accrued expenses and other liabilities (603) (48) 664
-------- -------- --------
Net cash from operating activities 2,329 2,576 7,886

Cash flows from investing activities
Net change in interest-bearing deposits with banks (2,015) -- 1,000
Proceeds from maturities and principal reductions of
held-to-maturity securities 7,215 17,156 6,707
Purchase of held-to-maturity securities (5,778) (4,298) (3,476)
Proceeds from maturities and sales of
available-for-sale securities 20,001 26,566 4,144
Purchase of available-for-sale securities (25,282) (38,742) (2,500)
Loans made to customers, net of principal collections thereon (54,159) (27,734) (51,226)
Property and equipment expenditures, net (515) (542) (1,847)
Net payments in acquisition 10,601 -- --
-------- -------- --------
Net cash from investing activities (49,932) (27,594) (47,198)

Cash flows from financing activities
Net change in deposits 89,468 22,462 50,133
Net change in short-term borrowings (20,463) 13,700 (7,802)
Advances on notes payable 17,000 5,000 --
Payments on notes payable (31) (7,725) (318)
Dividends paid on common stock (775) (609) (458)
Fractional and dissenting shares redeemed -- -- (94)
Stocks repurchase and retirement, net (1,168) (3,363) --
Proceeds from exercise of stock options 184 11 692
-------- -------- --------
Net cash from financing activities 84,215 29,476 42,153
-------- -------- --------

Net change in cash and cash equivalents 36,612 4,458 2,841

Cash and cash equivalents at beginning of year 26,706 22,248 19,407
-------- -------- --------
Cash and cash equivalents at end of year $ 63,318 $ 26,706 $ 22,248
======== ======== ========

Cash paid for interest $ 11,044 $ 17,284 $ 18,578

Cash paid for income taxes 4,365 3,597 2,041

- --------------------------------------------------------------------------------------------------

See accompanying notes.

36

THE BANK OF KENTUCKY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
(Dollar amounts in thousands, except per share amounts)

- --------------------------------------------------------------------------------

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation: The consolidated financial statements include the
accounts of The Bank of Kentucky Financial Corporation (the Company) and its
wholly owned subsidiary, The Bank of Kentucky (the Bank). Intercompany
transactions are eliminated in consolidation.

Business Combinations: As described in Note 2, on November 22, 2002, the Company
acquired substantially all the banking assets and assumed the deposit
liabilities and liabilities associated with certain loans and contracts of
Peoples Bank of Northern Kentucky. The acquisition was accounted for under the
purchase method.

On June 14, 2000, the Company merged with Fort Thomas Financial Corporation
(FTFC) and its wholly owned subsidiary, the Fort Thomas Savings Bank. To effect
the merger, 865,592 shares of the Company's common stock were issued for
substantially all of the outstanding shares of FTFC. The combination was
accounted for as a pooling of interests and the historical financial position
and results of operations of the two companies have been combined for financial
reporting purposes.

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.

- --------------------------------------------------------------------------------

(Continued)

37

THE BANK OF KENTUCKY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
(Dollar amounts in thousands, except per share amounts)

- --------------------------------------------------------------------------------

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Interest income includes amortization of purchase premium or discount. 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.

Loans: Loans are reported at the principal balance outstanding, net of unearned
interest, deferred loan fees and costs, and an allowance for loan losses. The
Bank originates loans for sale, servicing released, to secondary market brokers.
Loans held for sale are loans which have been closed and are awaiting delivery
to these brokers. They are reported at the lower of cost or market, on an
aggregate basis.

Interest income is reported on the interest method and includes amortization of
net deferred loan fees and costs over the loan term. 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.

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.

Premises and Equipment: Premises and equipment are stated at cost less
accumulated depreciation. Premises and equipment are depreciated on the
straight-line and declining-balance methods over the estimated useful lives of
the assets.

- --------------------------------------------------------------------------------

(Continued)

38

THE BANK OF KENTUCKY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
(Dollar amounts in thousands, except per share amounts)

- --------------------------------------------------------------------------------

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Other Real Estate: Other real estate acquired through foreclosure is carried at
the lower of cost (fair value at foreclosure) or fair value less estimated
selling costs. Expenses incurred in carrying other real estate are charged to
operations as incurred.

Company Owned Life Insurance: The Bank has purchased life insurance policies on
certain key executives. Bank owned life insurance is recorded at its cash
surrender value, or the amount that can be realized which totaled $1,374 and
$1,357 at December 31, 2002 and 2001.

Goodwill and Acquisition Intangibles: 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.
Upon adoption of new accounting guidance on January 1, 2002, goodwill is no
longer amortized. The Company had no goodwill prior to 2002, so there was no
impact of the adoption on the financial statements. Goodwill is assessed at
least annually for impairment and any such impairment will be recognized in the
period identified.

Acquisition intangibles consist of core deposit and acquired customer
relationship intangible assets arising from whole bank and branch acquisitions
accounted for under the purchase method of accounting. They are initially
measured at fair value and then are amortized over their estimated useful lives,
which is 8 and 7 years respectively.

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.

Restructuring Charges: Restructuring charges relate to severance benefits for
three former FTFC executives and penalties associated with the early termination
of data processing and equipment lease contracts associated with FTFC's
operations.

- --------------------------------------------------------------------------------

(Continued)

39

THE BANK OF KENTUCKY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
(Dollar amounts in thousands, except per share amounts)

- --------------------------------------------------------------------------------

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

2002 2001 2000
------ ------ ------

Net income as reported $8,451 $7,069 $4,213
Deduct: Stock-based compensation expense
determined under fair value based method 277 203 189
------ ------ ------
Pro forma net income 8,174 6,866 4,024

Basic earnings per share as reported 1.42 1.16 .69
Pro forma basic earnings per share 1.37 1.13 .66

Diluted earnings per share as reported 1.41 1.15 .68
Pro forma diluted earnings per share 1.36 1.11 .65

The pro forma effects are computed using option pricing models, using the
following weighted-average assumptions as of grant date. Beginning in 2002,
management determined that stock transactions had risen to a sufficient level to
include a price volatility component in the fair value calculation.

2002 2001 2000
-------- ------- -------

Risk-free interest rate 4.09% 4.81% 6.54%
Expected option life 5.8 yrs. 5.4 yrs. 5.7 yrs.
Expected stock price volatility 28.93% -- --
Dividend yield .67% .48% .27%

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.

- --------------------------------------------------------------------------------

(Continued)

40

THE BANK OF KENTUCKY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
(Dollar amounts in thousands, except per share amounts)

- --------------------------------------------------------------------------------

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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.

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.

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 discounted amounts.

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.

Industry Segment: Internal financial information is reported and aggregated in
one line of business, banking.

- --------------------------------------------------------------------------------

(Continued)

41

THE BANK OF KENTUCKY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
(Dollar amounts in thousands, except per share amounts)

- --------------------------------------------------------------------------------

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Newly Issued But Not Yet Effective Accounting Standards: New accounting
standards on asset retirement obligations, restructuring activities and exit
costs, operating leases, and early extinguishment of debt were issued in 2002.
Management determined that when the new accounting standards are adopted in 2003
they will not have a material impact on the Company's financial condition or
results of operations.

NOTE 2 - ACQUISITION

On September 24, 2002, the Bank entered into a Purchase and Assumption Agreement
with Peoples Bank of Northern Kentucky, Inc. and Peoples Bancorporation of
Northern Kentucky, located in Crestview Hills, Kentucky to acquire substantially
all banking assets and assume the deposit liabilities and liabilities associated
with certain loans and contracts of Peoples Bank of Northern Kentucky, Inc. The
transaction was consummated on November 22, 2002 with the Bank acquiring the
assets and assuming the liabilities described above. The Bank received net cash
of $2,986 at settlement. The results of operations from the assets acquired and
liabilities assumed from November 22, 2002 are included in the Company's 2002
financial statements. The merger provides the Company with an opportunity to
expand into an adjacent and attractive market area.

The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed.

Cash and cash equivalents $ 7,900
Investment securities 2,998
Loans, net 140,330
Premises and equipment 10,339
Goodwill 9,329
Core deposit and acquisition intangibles 4,908
Other assets 1,133
---------

Total assets acquired $ 176,937
=========

Deposits (161,768)
Federal Home Loan Bank advances (16,201)
Other liabilities (1,669)
---------
Total liabilities assumed (179,638)
---------

Net cash received, less
merger related costs $ (2,701)
=========

- --------------------------------------------------------------------------------

(Continued)

42

THE BANK OF KENTUCKY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
(Dollar amounts in thousands, except per share amounts)

- --------------------------------------------------------------------------------

NOTE 2 - ACQUISITION (Continued)

The total acquisition price for the assets acquired and liabilities assumed was
$13,780, including merger related costs of $285.

The following table presents pro forma information as if the acquisition had
occurred at the beginning of 2002 and 2001. The pro forma information includes
adjustments for the amortization of intangibles arising from the transaction,
depreciation expense on property acquired, interest income on assets acquired,
interest expense on deposits acquired, and the related income tax effects. The
pro forma financial information is not necessarily indicative of the results of
operations as they would have been had the transaction been effected on the
assumed dates.

2002 2001
------- -------
Net interest income $27,751 $26,074

Net income $ 9,215 $ 8,864

Basic earnings per share $ 1.55 $ 1.46
Diluted earnings per share $ 1.54 $ 1.44

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:

Gross Gross
Fair Unrealized Unrealized
Available-for-Sale Value Gains Losses
- ------------------ ------- ---------- ----------
2002
U.S. Government and federal agency $33,770 $552 $ --
Money market mutual fund 10,000 -- --
------- ---- -----
$43,770 $552 $ --
======= ==== =====

2001
U.S. Government and federal agency $35,164 $466 $(157)
======= ==== =====

- --------------------------------------------------------------------------------

(Continued)

43

THE BANK OF KENTUCKY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
(Dollar amounts in thousands, except per share amounts)

- --------------------------------------------------------------------------------

NOTE 3 - SECURITIES (Continued)

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

Gross Gross
Carrying Unrecognized Unrecognized Fair
Held-to-Maturity Amount Gains Losses Value
- ---------------- -------- ------------ ------------ -------

2002
U.S. Government and federal agency $ 3,000 $ 86 $-- $ 3,086
Municipal and other obligations 12,694 296 (6) 12,984
------- ---- --- -------
$15,694 $382 $(6) $16,070
======= ==== === =======

2001
U.S. Government and federal agency $ 4,498 $133 $-- $ 4,631
Municipal and other obligations 12,636 209 (8) 12,837
------- ---- --- -------
$17,134 $342 $(8) $17,468
======= ==== === =======

The fair value of debt securities and carrying amount, if different, at year-end
2002 by contractual maturity were as follows.

Available-for-Sale Held-to-Maturity
------------------ ------------------
Fair Carrying Fair
Value Value Value
------- -------- -------
Due in one year or less $ -- $ 5,319 $ 5,377
Due after one year through five years 24,304 9,024 9,342
Due after five years through ten years 5,041 1,351 1,351
Due after ten years 4,425 -- --
------- ------- -------
$33,770 $15,694 $16,070
======= ======= =======

Gross proceeds from sales of available-for-sale securities during 2002 were
$8,113 and in 2001 were $9,068. There were no security sales in 2000. Gross
gains of $113 and $93 were realized for 2002 and 2001.

At December 31, 2002 and 2001, securities with a carrying value of $45,146 and
$49,163 were pledged to secure public deposits and repurchase agreements.

- --------------------------------------------------------------------------------

(Continued)

44

THE BANK OF KENTUCKY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
(Dollar amounts in thousands, except per share amounts)

- --------------------------------------------------------------------------------

NOTE 4 - LOANS

Year-end loans are as follows:

2002 2001
-------- --------
Commercial $119,446 $ 81,051
Residential real estate 176,546 136,194
Nonresidential real estate 216,579 126,161
Construction 72,522 52,184
Consumer 19,258 14,959
Municipal obligations 3,013 1,443
-------- --------
Gross loans 607,364 411,992
Less: Deferred loan origination fees (549) (520)
Allowance for loan losses (6,408) (4,244)
-------- --------
Net loans $600,407 $407,228
======== ========

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

Balance, January 1, 2002 $ 11,746
New loans and advances on lines of credit 16,843
Loan reductions (15,747)
Other changes, net 793
--------
Balance, December 31, 2002 $ 13,635
========

- --------------------------------------------------------------------------------

(Continued)

45

THE BANK OF KENTUCKY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
(Dollar amounts in thousands, except per share amounts)

- --------------------------------------------------------------------------------

NOTE 5 - ALLOWANCE FOR LOAN LOSSES

Activity in the allowance for loan losses is as follows:

2002 2001 2000
------ ------ ------
Beginning balance $4,244 $3,806 $3,257
Provision charged to operations 1,235 781 1,143
Adjustments related to business combination 1,382 -- (70)
Loans charged off (478) (404) (598)
Recoveries 25 61 74
------ ------ ------
Ending balance $6,408 $4,244 $3,806
====== ====== ======

Nonaccrual loans at year end $ 931 $ 954 $ 884
Loans past due over 90 days, still accruing at
year-end 3,241 2,199 4,105
Average impaired loans during the year 2,211 1,785 1,025
Interest income recognized during impairment 119 54 81
Interest income received during impairment 112 54 81
Loans designated as impaired at year end 1,946 1,639 1,301
Allowance allocated to impaired loans at year end 884 559 250

There were no loans designated as impaired for which there was no allowance for
loan losses allocated at December 31, 2002, 2001 or 2000.

NOTE 6 - PREMISES AND EQUIPMENT

Year-end premises and equipment are as follows:

2002 2001
------- -------
Land and improvements $ 4,219 $ 1,468
Leasehold improvements 1,408 1,309
Buildings 9,904 3,772
Furniture, fixtures and equipment 5,705 3,851
------- -------
Total 21,236 10,400
Accumulated depreciation (4,994) (4,319)
------- -------
Net premises and equipment $16,242 $ 6,081
======= =======

- --------------------------------------------------------------------------------

(Continued)

46

THE BANK OF KENTUCKY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
(Dollar amounts in thousands, except per share amounts)

- --------------------------------------------------------------------------------

NOTE 7 - GOODWILL ACQUISITION INTANGIBLES

Goodwill

The change in the carrying amount of goodwill for the year is solely
attributable to the initial recording of goodwill in connection with the
acquisition described in Note 2.

Acquisition Intangibles

Acquisition intangibles were as follows as of year-end:

2002
Gross
Carrying
Amount
--------
Core deposit intangibles $2,863
Other customer relationship intangibles 2,045
------
Total 4,908
Accumulated amortization 37
------

Net $4,871
======

Aggregate amortization expense was $37, $0, and $0 for 2002, 2001 and 2000.

Estimated amortization expense for each of the next five years:

2003 $645
2004 645
2005 645
2006 645
2007 645

- --------------------------------------------------------------------------------

(Continued)

47

THE BANK OF KENTUCKY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
(Dollar amounts in thousands, except per share amounts)

- --------------------------------------------------------------------------------

NOTE 8 - INTEREST BEARING DEPOSITS

Time deposits of $100 or more were $78,723 and $53,372 at year-end 2002 and
2001.

Scheduled maturities of time deposits are as follows:

2003 $192,155
2004 59,681
2005 8,520
2006 7,769
2007 3,431
Thereafter 327
--------
271,883
Remaining premium reflecting market
rate adjustment on assumed certificates 582
--------
$272,465
========

Deposits from principal officers, directors, and their affiliates at year-end
2002 and 2001 were $12,195 and $17,259, comprising 1.83% and 4.15% 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 $0 and $5,880, and $21,800 and $4,543 at year end 2002
and 2001. Repurchase agreements outstanding at year-end 2002 had remaining
maturities ranging from one day up to one year.

Information regarding repurchase agreements for the years ended December 31,
2002 and 2001 is presented below:

2002 2001
------ ------
Average balance during the year $5,151 $4,292

Maximum month end balance during the year 5,880 4,623

Average rate paid during the year 2.20% 4.25%

- -------------------------------------------------------------------------------

(Continued)

48

THE BANK OF KENTUCKY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
(Dollar amounts in thousands, except per share amounts)

- --------------------------------------------------------------------------------

NOTE 10 - NOTES PAYABLE

Notes payable consist of the following:

2002 2001
------- ------
FHLB advances $25,181 $9,000
Trust preferred securities 17,000 --
Other notes payable 418 449
------- ------

$42,599 $9,449
======= ======

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, 2002:

Fixed rate advance with a maturity date in 2003
with an interest rate of 3.11% $ 5,000

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
-------
24,000
Remaining premium reflecting market rate
adjustment of assumed advances 1,181
-------

$25,181
=======

In November of 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 Trust
Preferred Securities are classified as liabilities on the balance sheet and
count as Tier 1 capital for regulatory capital purposes, subject to certain
limitations. Debt issue costs of $236 have been capitalized and are being
amortized over the term of the securities.

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

- --------------------------------------------------------------------------------

(Continued)

49

THE BANK OF KENTUCKY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
(Dollar amounts in thousands, except per share amounts)

- --------------------------------------------------------------------------------

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 $312, $228 and $177 for the years ended December 31,
2002, 2001 and 2000.

FTSB also maintained an Employee Stock Ownership Plan (ESOP) covering,
essentially, all full-time employees. The ESOP plan was terminated in 2001.
Proceeds from the sale of 17,104 unallocated shares were used to pay off the
outstanding ESOP loan which had a principal balance of $335. The remaining 4,724
shares were allocated to the participants. ESOP expense is based upon the fair
value of shares committed to be released to participants. During the previous
periods the expense was $123 and $76 in 2001 and 2000.

FTFC also maintained a stock award plan under which shares were awarded to
directors and executive officers. The cost of shares awarded was amortized to
expense as the awards vested. Expense recorded in 2000 was $30. Upon
consummation of the merger, the remaining unawarded shares, which had an
aggregate cost of $398, were retired.

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 720,000 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)

50

THE BANK OF KENTUCKY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
(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.

2002 2001 2000
----------------------- ---------------------- ----------------------
Weighted- Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
----------- --------- ----------- -------- ----------- --------

Outstanding beginning of year 220,249 $20.36 169,682 $ 20.25 114,315 $15.82
Granted 71,550 19.44 59,750 20.66 57,600 29.78
Issued in exchange for FTFC options -- -- -- -- 12,441 12.54
Exercised (15,884) 11.56 (1,508) 8.17 (6,135) 12.52
Forfeited (357) 22.71 (7,675) 22.66 (8,539) 18.93
----------- ------ ----------- -----------
Outstanding at end of year 275,558 $20.63 220,249 $ 20.36 169,682 $20.25
=========== ====== =========== ======= =========== ======
Exercisable at end of year 165,566 $20.39 129,482 $ 19.49 105,105 $19.11
=========== ====== =========== ======= =========== ======
Weighted average contractual remaining
life of outstanding 5.57 years 5.41 years 6.63 years

Weighted average fair value of options
granted during the year $ 5.60 $ 4.11 $ 8.51

Options outstanding at the end of the year ended December 31, 2002 have exercise
prices ranging from $8.17 to $31.50

- --------------------------------------------------------------------------------

(Continued)

51

THE BANK OF KENTUCKY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
(Dollar amounts in thousands, except per share amounts)

- --------------------------------------------------------------------------------

NOTE 11 - EMPLOYEE BENEFITS (Continued)

Proceeds recorded upon exercise of the stock options include cash received from
the option holder and the tax benefit derived by the Company. During 2002, 2001
and 2000, proceeds from the exercise of stock options, excluding the converted
FTFC options, totaled $184, $11 and $94. The tax benefit recognized was $50, $4
and $18.

NOTE 12 - FEDERAL INCOME TAXES

Federal income taxes consist of the following components:

2002 2001 2000
------ ------ ------
Income tax/(benefit)
Currently payable $4,088 $3,499 $2,259
Deferred (3) (189) (280)
------ ------ ------

$4,085 $3,310 $1,979
====== ====== ======

The following is a reconciliation of income tax expense and the amount computed
by applying the effective federal income tax rate of 35% (34% in 2001 and 2000)
to income before income taxes:

2002 2001 2000
------ ------ ------

Statutory rate applied to income
before income taxes $4,388 $3,529 $2,105
Tax exempt income (169) (235) (203)
Merger and acquisition expenses -- -- 184
Other (134) 16 (107)
------ ------ ------

$4,085 $3,310 $1,979
====== ====== ======

- --------------------------------------------------------------------------------

(Continued)

52

THE BANK OF KENTUCKY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
(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:

2002 2001
------ ------
Deferred tax assets from:
Allowance for loan losses $2,314 $1,535
Deferred loan fees 13 21
Premises and equipment -- 45
Benefit plans 169 194
Severance pay 67 206
------ ------
2,563 2,001
Deferred tax liabilities for:
FHLB stock dividends (590) (532)
Premises and equipment (28) --
Net unrealized gain on available for sale
securities (188) (105)
Acquisition intangibles and other (36) (33)
------ ------
(842) (670)
------ ------

Net deferred tax asset $1,721 $1,331
====== ======

NOTE 13 - EARNINGS PER SHARE

Earnings per share are computed based upon the weighted average number of shares
outstanding during the period which were 5,960,880 for 2002, 6,092,027 for 2001
and 6,136,538 for 2000. 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 2002, 2001 and 2000 this would
result in an additional 39,299, 26,299 and 25,613 shares outstanding. For 2002,
2001 and 2000, 52,275, 165,884 and 55,950 options were not considered, as they
were not dilutive.

- --------------------------------------------------------------------------------

(Continued)

53

THE BANK OF KENTUCKY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
(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 $732, $669 and $632 for
2002, 2001 and 2000. Minimum lease payments, excluding the capital lease
obligation, at December 31, 2002 for all non-cancelable leases are as follows:

2003 $ 826
2004 793
2005 736
2006 547
2007 370
Thereafter 1,978
------
Total minimum lease payments $5,250
======

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.

2002 2001
---------------- ----------------
Fixed Variable Fixed Variable
Rate Rate Rate Rate
----- -------- ----- --------
Commitments to make loans
(at market rates) $-- $ 20,506 $-- $14,512
Unused lines of credit and
letters of credit $-- $141,464 $-- $94,031

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.

The Bank maintains a $65,000 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.

- --------------------------------------------------------------------------------

(Continued)

54

THE BANK OF KENTUCKY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
(Dollar amounts in thousands, except per share amounts)

- --------------------------------------------------------------------------------

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

At December 31, 2002, the Bank was required to have $26,764 on deposit with the
Federal Reserve or as cash on hand as reserve.

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, 2002 and 2001, the Bank's capital levels result in it being
designated "well capitalized" under these guidelines.

- --------------------------------------------------------------------------------

(Continued)

55

THE BANK OF KENTUCKY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
(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, 2002
and 2001 are presented below:

To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------- ------ ------ -------

2002
Total Capital to risk
weighted assets
Consolidated $67,267 10.39% $51,808 8.00% $64,759 10.00%
Bank 65,421 10.12% 51,739 8.00% 64,673 10.00%
Tier 1 (Core) Capital to risk
weighted assets
Consolidated $60,859 9.40% $25,904 4.00% $38,856 6.00%
Bank 59,013 9.12% 25,869 4.00% 38,804 6.00%
Tier 1 (Core) Capital to
average assets
Consolidated $60,859 9.57% $25,449 4.00% $31,811 5.00%
Bank 59,013 9.28% 25,449 4.00% 31,811 5.00%

To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- -------- ------ ------- -------

2001
Total Capital to risk
weighted assets
Consolidated $55,561 12.12% $36,671 8.00% $45,839 10.00%
Bank 52,850 11.54% 36,625 8.00% 45,781 10.00%
Tier 1 (Core) Capital to risk
weighted assets
Consolidated $51,317 10.46% $19,125 4.00% $28,688 6.00%
Bank 48,606 10.62% 18,313 4.00% 27,469 6.00%
Tier 1 (Core) Capital to
average assets
Consolidated $51,317 10.46% $19,125 4.00% $23,906 5.00%
Bank 48,606 9.91% 19,625 4.00% 24,531 5.00%

- --------------------------------------------------------------------------------

(Continued)

56

THE BANK OF KENTUCKY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
(Dollar amounts in thousands, except per share amounts)

- --------------------------------------------------------------------------------

NOTE 16 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

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

2002 2001
--------------------- ---------------------
Carrying Fair Carrying Fair
Value Value Value Value
--------- --------- --------- ---------

Financial assets
Cash, cash equivalents, and
deposits with banks $ 63,318 $ 63,318 $ 26,706 $ 26,706
Interest-bearing deposits with
banks 2,015 2,015 -- --
Available-for-sale securities 43,770 43,770 35,164 35,164
Held-to-maturity securities 15,694 16,070 17,134 17,468
Federal Home Loan Bank stock 3,759 3,759 3,590 3,590
Loans held for sale 10,799 10,799 5,509 5,509
Loans (net) 600,407 615,113 407,228 414,773
Accrued interest receivable 3,053 3,053 2,608 2,608

Financial liabilities
Deposits (667,346) (673,135) (416,183) (418,943)
Short-term borrowings (5,880) (5,880) (26,343) (26,343)
Notes payable (42,599) (43,114) (9,449) (9,696)
Accrued interest payable (2,599) (2,599) (1,629) (1,629)

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 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 for
off-balance-sheet loan commitments are considered nominal.

- --------------------------------------------------------------------------------

(Continued)

57

THE BANK OF KENTUCKY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
(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, 2002 and 2001

2002 2001
------- -------
Assets
Cash $ 862 $ 2,134
Investment in subsidiaries 74,104 48,810
Other assets 1,094 577
------- -------
$76,060 $51,521
======= =======

Liabilities and shareholders' equity
Junior subordinated debentures $17,526 $ --
Other liabilities 111 --
------- -------
Total liabilities 17,637 --

Shareholders' equity 58,423 51,521
------- -------
$76,060 $51,521
======= =======

CONDENSED STATEMENTS OF INCOME
Years ended December 31, 2002 and 2001

2002 2001 2000
------ ------ ------

Interest income $ -- $ 34 $ 68
Dividends from subsidiary 1,000 4,900 300
Interest expense (106) -- --
Operating expenses (132) (267) (826)
Tax benefit 81 54 176
------ ------ ------

Income before equity in undistributed income
of the Bank 843 4,721 (282)

Equity in undistributed income of the Bank 7,608 2,348 4,495
------ ------ ------
Net income $8,451 $7,069 $4,213
====== ====== ======

- --------------------------------------------------------------------------------

(Continued)

58

THE BANK OF KENTUCKY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
(Dollar amounts in thousands, except per share amounts)

- --------------------------------------------------------------------------------

NOTE 17 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)

CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31, 2002, 2001 and 2000

2002 2001 2000
-------- ------- -------

Cash flows from operating activities
Net income $ 8,451 $ 7,069 $ 4,213
Adjustment relative to merger -- -- 448
Adjustments to reconcile net income to
net cash from operating activities
Equity in undistributed income of the Bank (7,608) (2,348) (4,495)
Benefit plan amortization -- 123 --
Change in other assets and other liabilities (356) (66) 81
-------- ------- -------
Net cash from operating activities 487 4,778 247

Cash flows from investing activities
ESOP loan repayment -- 335 60
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) 335 60

Cash flows from financing activities
Dividends paid (775) (609) (458)
Exercise of stock options 184 11 692
Fractional and dissenting shares redeemed -- -- (94)
Stock repurchase and retirement (1,168) (3,363) --
Net proceeds from issuance of junior
subordinated debentures 17,526 -- --
-------- ------- -------
Net cash from financing activities 15,767 (3,961) 140
-------- ------- -------

Net change in cash (1,272) 1,152 447

Cash at beginning of year 2,134 982 535
-------- ------- -------

Cash at end of year $ 862 $ 2,134 $ 982
======== ======= =======

- --------------------------------------------------------------------------------

(Continued)

59

THE BANK OF KENTUCKY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
(Dollar amounts in thousands, except per share amounts)

- --------------------------------------------------------------------------------

NOTE 18 - SELECTED QUARTERLY DATA (Unaudited)

2002
------------------------------------------------------------------------
Net Provision Earnings Per Share
Interest Interest Interest for Loan Net ------------------
Income Expense Income Losses Income Basic Diluted
------- -------- -------- --------- ------ ------ ---------

March 31 $8,065 $2,874 $5,191 $(172) $2,004 $.34 $.33
June 30 8,225 2,896 5,329 (348) 1,943 .33 .32
September 30 8,333 2,947 5,386 (380) 2,187 .37 .37
December 31 9,336 3,403 5,933 (335) 2,317 .38 .38

2001
------------------------------------------------------------------------
Net Provision Earnings Per Share
Interest Interest Interest for Loan Net ------------------
Income Expense Income Losses Income Basic Diluted
-------- -------- -------- --------- ------ ------ ---------

March 31 $9,424 $5,024 $4,400 $ (86) $1,706 $.28 $.28
June 30 9,176 4,622 4,554 (190) 1,535 .25 .25
September 30 8,988 4,228 4,760 (365) 1,724 .28 .28
December 31 8,495 3,541 4,954 (140) 2,104 .34 .34

- --------------------------------------------------------------------------------

60

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

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 2003 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 2003 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 2003 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 2003 Annual Meeting of Shareholders.

Item 14. 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 within 90 days of the filing date of this annual report,
and, 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 or in other
factors that could significantly affect our internal controls subsequent to the
date of our most recent evaluation.

PART IV

Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

(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.

61

(b) Reports of Form 8-K. BKFC filed a current report on Form 8-K on
December 9, 2002, disclosing under Items 2 and 7, the acquisition of certain
assets and assumption of certain liabilities of Peoples Bank of Northern
Kentucky, Inc., a Kentucky state bank.

(c) Exhibits.

Exhibit Number 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 Purchase Agreement among The Bank of Kentucky Financial
Corporation, The Bank of Kentucky Capital Trust I and Trapeza
CDO I, LLC, dated as of November 14, 2002/(4)/

21 Subsidiaries of the BKFC

23 Consent of Crowe, Chizek and Company LLP
99.1 Section 906 of Sarbanes-Oxley Act of 2002 Certification of
Robert W. Zapp
99.2 Section 906 of Sarbanes-Oxley Act of 2002 Certification of
Robert D. Fulkerson

/(1)/ Incorporated by reference to Form 10-Q for the period ended September 30,
2001, 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.

62

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 27th day of
March 2003.

THE BANK OF KENTUCKY FINANCIAL
CORPORATION

By /s/ Robert W. Zapp
---------------------------------
Robert 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/ Robert Fulkerson
------------------------------------------------
Robert Fulkerson
Treasurer

By /s/ Charles M. Berger
------------------------------------------------
Charles M. Berger
Director

By /s/ Rodney S. Cain
------------------------------------------------
Rodney S. Cain
Secretary and Director

By /s/ R.C. Durr
------------------------------------------------
R.C. Durr
Chairman and Director

By /s/ Harry J. Humpert
------------------------------------------------
Harry J. Humpert
Director

By /s/ David E. Meyer
------------------------------------------------
David E. Meyer
Director

By /s/ John E. Miracle
------------------------------------------------
John E. Miracle
Director

63

By /s/ Mary Sue Rudicill
------------------------------------------------
Mary Sue Rudicill
Director

By /s/ Ruth Seligman-Doering
------------------------------------------------
Ruth Seligman-Doering
Director

By /s/ John P. Williams, Jr.
------------------------------------------------
John P. Williams, Jr.
Director

By /s/ Herbert H. Works
------------------------------------------------
Herbert H. Works
Director

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

Dated: March 27, 2003

64

Certification of Robert W. Zapp

I, Robert W. Zapp, certify that:

1. I have reviewed this annual report on Form 10-K of The Bank of Kentucky
Financial Corporation;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;

(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and

(c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):

(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Date: March 27, 2003

/s/ Robert W. Zapp
-------------------------------------
Robert W. Zapp
Chief Executive Officer and President

65

Certification of Robert D. Fulkerson

I, Robert D. Fulkerson, certify that:

1. I have reviewed this annual report on Form 10-K of The Bank of Kentucky
Financial Corporation;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;

(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and

(c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):

(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Date: March 27, 2003

/s/ Robert D. Fulkerson
---------------------------------
Robert D. Fulkerson
Treasurer and Assistant Secretary

66