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U.S. Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For quarterly period ended September 30, 2004

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)

111 Lookout Farm Drive, Crestview Hills, Kentucky 41017

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number: (859) 371-2340

Indicate by checkmark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x    No  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes  x    No  ¨

As of October 15, 2004, 5,924,174 shares of the registrant’s Common Stock, no par value, were issued and outstanding.

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The Bank of Kentucky Financial Corporation

INDEX

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THE BANK OF KENTUCKY FINANCIAL CORPORATION

PART I FINANCIAL INFORMATION

Item 1. Financial Statements

THE BANK OF KENTUCKY FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Dollars in thousands - unaudited)

See accompanying notes

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THE BANK OF KENTUCKY FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2004 AND 2003

(Dollars in thousands, except per share data - unaudited)

See accompanying notes

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THE BANK OF KENTUCKY FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30

(Dollars in thousands -unaudited)

See accompanying notes

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THE BANK OF KENTUCKY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30

(Dollars in thousands - unaudited)

See accompanying notes

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THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2004

Note 1 - Basis of Presentation:

The condensed consolidated financial statements include the accounts of The Bank of Kentucky Financial Corporation (“BKFC” or the “Company”) and its wholly owned subsidiary, The Bank of Kentucky, Inc. (the “Bank”). All significant intercompany accounts and transactions have been eliminated.

Note 2 - General:

These financial statements were prepared in accordance with the instructions for Form 10-Q and, therefore, do not include all of the disclosures necessary for a complete presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. Except for required accounting changes, these financial statements have been prepared on a basis consistent with the annual financial statements and include, in the opinion of management, all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the results of operations and financial position at the end of and for the periods presented.

Note 3 - Earnings per Share:

Earnings per share are computed based upon the weighted average number of shares outstanding during the respective three and nine month periods. Diluted earnings per share are computed assuming that average stock options outstanding are exercised and the proceeds, including the relevant tax benefit, are used entirely to reacquire shares at the average price for the period. The weighted average number of options that were not considered, as they were not dilutive, for the three months ended September 2004 and 2003 were 233,135 and 71,025, and the weighted average number of options that were not considered, as they were not dilutive, for the Nine months ended September 2004 and 2003, were 207,466 and 48,027. The following table presents the numbers of shares used to compute basic and diluted earnings per share for the indicated periods:

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Note 4 – 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 for the periods indicated if expense was measured using the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation.

Note 5 – Cash and Cash Equivalents:

Cash and cash equivalents include cash on hand, amounts due from banks, federal funds sold, and investments in money market mutual funds. 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.

Note 6 – Reclassification:

Certain prior period amounts have been reclassified to conform to the current period presentation. Such reclassifications have no effect on previously reported net income or shareholders’ equity.

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Note 7 – Newly Issued But Not Yet Effective Accounting Standards:

EITF Issue 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments, contains accounting guidance regarding other-than-temporary impairment on securities that was to take effect for the quarter ended September 30,2004. However, the effective date of portions of this guidance has been delayed, and more interpretive guidance is to be issued in the near future. The effect of this new and pending guidance on the Company’s financial statements is not known, but it is possible this guidance could change management’s assessment of other-than-temporary impairment in future periods.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Form 10-Q 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 The Bank of Kentucky Financial Corporation (“BKFC” or the “Company”) or The Bank of Kentucky, Inc (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.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Company’s financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported periods.

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Management continually evaluates the Company’s accounting policies and estimates it uses to prepare the consolidated financial statements. In general, management’s estimates are based on historical experience, on information from regulators and third party professionals and on various assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ from those estimates made by management.

The Company believes its critical accounting policies and estimates include the valuation of the allowance for loan losses. Based on management’s calculations, an allowance of $7.4 million or 1.04% of total loans was an appropriate estimate of losses within the loan portfolio as of September 30, 2004. This estimate resulted in a provision for loan losses on the income statement of $1,175,000 for the nine months ended September 30, 2004. If the mix and amount of future losses differ significantly from those assumptions used by management in making its determination, the allowance for loan losses and provision for loan losses on the income statement could be materially affected.

OVERVIEW

Highlighting the third quarter and first nine months results was the effect that loan growth has had on the earnings of the Company. Total loans were $85 million (14%) higher at the end of the third quarter of 2004 than the same date in 2003. This loan growth helped drive the $952,000 (14%) growth in net interest income from the third quarter of 2003 to third quarter of 2004, and helped increase the net interest margin from 3.79% to 4.10% for the same time periods. The growth in net interest income in the third quarter partially offset the $733,000 (77%) reduction in gains on loans sold caused by the slowdown in the mortgage loan refinancing market.

FINANCIAL CONDITION

Total assets at September 30, 2004 were $853,444,000 compared to $815,976,000 at December 31, 2003, an increase of $37,468,000 (5%). Loans outstanding increased $51,833,000 (8%) from $660,442,000 at December 31, 2003 to $712,275,000 at September 30, 2004, while available-for-sale securities decreased $8,997,000 (20%) for the same time period. As table 1 illustrates, the largest increase in the overall loan portfolio for the year has been in nonresidential real estate loans, which have increased $41,356,000 (17%) since December 31, 2003 and reflects the current strength in the demand for commercial real estate loans. The decrease in available-for-sale securities was the result of run-off in short-term investments purchased with excess liquidity in the second half of 2003. Deposits increased $9,759,000 (1.40%) to $708,486,000 at September 30, 2004, compared to $698,727,000 at December 31, 2003, while short-term borrowings increased $22,667,000 (272%) to $31,014,000 at September 30, 2004 from $8,347,000 at December 31, 2003. Contributing to the slow growth in deposits was the seasonal fluctuation in public fund deposits, which represent the collateralized balances of local municipalities, school boards and other county government agencies. Public funds deposits were down approximately $15,000,000 from December 31, 2003 to September 30, 2004. This seasonal fluctuation is the result of the timing of tax receipts at the local municipalities, the majority of which are received in the fourth quarter of the year. The increase in short-term borrowings was a result of higher overnight federal funds borrowed from correspondent banks. Federal Funds borrowed are used for short-term funding needs as growth in assets outpaces the growth in deposits and equity.

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Table 1 The following table sets forth the composition of the Bank’s loan portfolio by type of loan at the dates indicated:

RESULTS OF OPERATIONS

GENERAL

Net income year to date increased to $7,378,000, an increase of $112,000 (2%) as compared to the same period in 2003. Net income for the quarter ended September 30, 2004 was $2,465,000 ($.41 diluted earnings per share) compared to $2,521,000 ($.42 diluted earnings per share) during the same period of 2003, a decrease of $56,000 (2%). For the first nine months of 2004 the primary reason for the earnings gain from 2003 was the $2,301,000 (12%) increase in net interest income as described below. For the third quarter the net interest income increased $952,000 (14%). The increase in net interest income was offset by lower gains on loans sold, which were $1,579,000 (61%) lower than 2003 on a year to date basis and $733,000 (77%) lower for the quarter. This decrease was a result of a slowdown in the mortgage loan refinance market. The provision for loan losses was $585,000 (99%) higher for the nine month ended September 30, 2004, and $235,000 (89%) higher for the third quarter, than 2003. The increase in the provision expense was primarily the result of higher losses.

NET INTEREST INCOME

Net interest income increased $952,000 (14%) in the third quarter of 2004 over the same period in 2003, while the year to date total increased $2,301,000 (12%) from $19,811,000 in 2003 to $22,112,000 in 2004. The increase in the net interest income was the result of the growth in earning assets and the reduction on rates paid on interest bearing liabilities from 2003 to 2004. As illustrated in Table 4, net interest income, from the third quarter of 2003 to third quarter of 2004, was positively impacted by volume additions to the balance sheet by $790,000 and by a net favorable rate variance of $154,000. The main contributor to the growth in earning assets was loans, which were up $85 million or 14% at the end of the third quarter of 2004 from the same

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period a year earlier. The loan growth and the resulting higher yielding mix of earning assets produced a net interest margin of 4.05% for the third quarter of 2004, which was 26 basis points higher than the 3.79% net interest margin for the third quarter of 2003. The mix of earning assets changed significantly from the third quarter of 2003, as higher yielding loans increased and lower yielding overnight investments declined. Average loans for the third quarter of 2004 increased $82 million (13%) from a year earlier, while lower yielding overnight investments decreased $36 million (100%) from the same period in 2003. The favorable mix is illustrated in Table 2 which shows that the yield on earning assets has improved from 5.47% for the third quarter of 2003 to 5.62% for the same period in 2004 despite the yield on loans declining from 5.88% to 5.79% for the same time period. Table 2 also shows that the Bank’s percentage of average interest-earning assets to interest-bearing liabilities improved to 114.84% in the third quarter of 2004 from 113.32% in 2003. Management expects this ratio to increase as the balance sheet grows. This growth will leverage the non-earning assets, fixed assets, goodwill and purchase intangibles, acquired through the Company’s purchase of certain assets and the assumption of certain liabilities of the Peoples Bank of Northern Kentucky (“PBNK”) in November 2002.

The Bank uses an earnings simulation model to estimate and evaluate the impact of changing interest rates on earnings. The model projects the effect of instantaneous movements in interest rates of both 100 and 200 basis points. As shown below, the September 30, 2004 simulation analysis indicates that an increase in interest rates would have a positive effect on net interest income, and a decrease in rates would have a negative effect on net interest income. As shown below, lower rates would have a more dramatic effect on earnings than rising rates. This is due to interest bearing transaction accounts whose rates can not drop appreciably lower than their current levels.

Net interest income estimates are summarized below.

Tables 2 & 3 set forth certain information relating to the Bank’s average balance sheet information and reflects the average yield on interest-earning assets, on a tax equivalent basis, and the average cost of interest-bearing liabilities for the periods indicated. Such yields and costs are derived by dividing income or expense by the average monthly balance of interest-earning assets or interest-bearing liabilities, respectively, for the years presented. Average balances are daily averages for the Bank and include nonaccruing loans in the loan portfolio, net of the allowance for loan losses.

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Table 2- Average Balance Sheet Rates for Three Months Ended September 30, 2004 and 2003 (presented on a tax equivalent basis in thousands)

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Table 3- Average Balance Sheet Rates for Nine Months Ended September 30, 2004 and 2003 (presented on a tax equivalent basis in thousands)