Bank of Kentucky Financial (BKYF) 10-Q 2007 Q2 Quarterly report

U.S. Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For quarterly period ended June 30, 2007

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

For the transition period from            to            

Commission File Number: 0-25960

THE BANK OF KENTUCKY FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

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

111 Lookout Farm Drive, Crestview Hills, Kentucky 41017

(Address of principal executive offices) (Zip Code)

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

Indicate by checkmark whether the registrant (1) has 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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer  ¨    Accelerated filer  x    Non-accelerated filer  ¨

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

As of July 25, 2007, 5,764,102 shares of the registrant’s Common Stock, no par value, were issued and outstanding.

The Bank of Kentucky Financial Corporation

INDEX

		PAGE
Part I	FINANCIAL INFORMATION
	Item 1 – Financial Statements	3
	Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations	10
	Item 3 – Quantitative and Qualitative Disclosures About Market Risk	20
	Item 4 – Controls and Procedures	20
Part II	OTHER INFORMATION
	Item 1 – Legal Proceedings	21
	Item 1A – Risk Factors	21
	Item 2 – Unregistered Sales of Equity Securities and Use of Proceed	21
	Item 3 – Defaults Upon Senior Securities	22
	Item 4 – Submission of Matters to a Vote of Security Holders	22
	Item 5 – Other Information	22
	Item 6 – Exhibits	23

2

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)

	June 30 2007			December 31 2006
Assets
Cash and cash equivalents	$	62,310		$	54,859
Interest bearing deposits with banks		100			100
Available-for-sale securities		87,717			106,926
Held-to-maturity securities		9,746			12,028
Loans held for sale		1,686			4,009
Total loans		909,377			814,101
Less: Allowances for loan losses		8,664			6,918
Net loans		900,713			807,183
Premises and equipment, net		16,889			17,069
FHLB stock, at cost		4,766			4,537
Goodwill		14,579			9,867
Acquisition intangibles, net		4,523			2,290
Cash surrender value of life insurance		20,150			19,779
Accrued interest receivable and other assets		18,904			12,916
Total assets	$	1,142,083		$	1,051,563
Liabilities & Shareholders’ Equity
Liabilities
Deposits	$	980,888		$	914,427
Short-term borrowings		17,667			15,960
Notes payable		42,397			23,907
Accrued interest payable and other liabilities		10,985			10,386
Total liabilities		1,051,937			964,680
Shareholders’ Equity
Common stock, no par value, 15,000,000 shares authorized, 5,764,102 (2007) and 5,794,699 (2006) shares issued and outstanding		3,098			3,098
Additional paid-in capital		5,746			6,207
Retained earnings		81,556			77,824
Accumulated other comprehensive loss		(254	)		(246	)
Total shareholders’ equity		90,146			86,883
Total liabilities and shareholders’ equity	$	1,142,083		$	1,051,563

See accompanying notes

3

THE BANK OF KENTUCKY FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 AND 2006

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

	Three Months Ended June 30						Six Months Ended June 30
	2007			2006			2007			2006
INTEREST INCOME
Loans, including related fees	$	16,820		$	14,344		$	32,780		$	27,549
Securities and other		1,594			1,053			3,159			2,317
Total interest income		18,414			15,397			35,939			29,866
INTEREST EXPENSE
Deposits		8,566			6,268			16,743			12,071
Borrowings		754			586			1,335			1,093
Total interest expense		9,320			6,854			18,078			13,164
Net interest income		9,094			8,543			17,861			16,702
Provision for loan losses		300			400			950			800
Net interest income after provision for loan losses		8,794			8,143			16,911			15,902
NON-INTEREST INCOME
Service charges and fees		2,119			1,229			3,969			2,358
Gain on loans sold		298			220			490			459
Other		1,293			1,125			2,523			2,205
Total non-interest income		3,710			2,574			6,982			5,022
NON-INTEREST EXPENSE
Salaries and benefits		4,082			3,718			8,117			7,335
Occupancy and equipment		1,094			1,018			2,181			1,997
Data processing		372			329			703			683
Advertising		247			172			423			303
Other		2,534			2,057			5,202			3,874
Total non-interest expense		8,329			7,294			16,626			14,192
INCOME BEFORE INCOME TAXES		4,175			3,423			7,267			6,732
Less: income taxes		1,327			1,043			2,262			2,086
NET INCOME	$	2,848		$	2,380		$	5,005		$	4,646
Other comprehensive income (loss)		(108	)		(125	)		(8	)		(213	)
COMPREHENSIVE INCOME	$	2,740		$	2,255		$	4,997		$	4,433
Earnings per share, basic	$	.49		$	.41		$	.87		$	.79
Earnings per share, diluted	$	.49		$	.41		$	.86		$	.79

See accompanying notes

4

THE BANK OF KENTUCKY FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE SIX MONTHS ENDED JUNE 30

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

	2007			2006
Balance January 1	$	86,883		$	80,447
Comprehensive Income:
Net Income		5,005			4,646
Change in net unrealized gain(loss), net of tax		(8	)		(213	)
Total Comprehensive Income		4,997			4,433
Cash dividends paid		(1,273	)		(1,054	)
Exercise of stock options (33,803 and 24,300 shares), including tax benefit		683			509
Stock-based compensation expense		529			490
Stock repurchase and retirement (64,400 and 74,700 shares)		(1,673	)		(1,930	)
Balance June 30	$	90,146		$	82,895
Dividends per share	$	0.22		$	0.18

See accompanying notes

5

THE BANK OF KENTUCKY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30

(Dollars in thousands—unaudited)

	2007			2006
Cash Flows from Operating Activities
Net income	$	5,005		$	4,646
Adjustments to reconcile net income to net cash From operating activities		3,005			(2,040	)
Net cash from operating activities		8,010			2,606
Cash flows from Investing Activities
Proceeds from paydowns and maturities of held-to-maturity securities		2,275			1,181
Proceeds from paydowns and maturities of available-for-sale securities		167,246			99,080
Purchases of held-to-maturity securities		0			0
Purchases of available-for-sale securities		(145,388	)		(78,467	)
Net change in loans		(33,432	)		(61,340	)
Proceeds from the sale of other real estate		17			3,511
Property and equipment expenditures		(396	)		(866	)
Net payments in acquisition		(12,124	)		0
Net cash from investing activities		(21,802	)		(36,901	)
Cash Flows from Financing Activities
Net change in deposits		3,279			(23,042	)
Net change in short-term borrowings		1,707			26,281
Advance on notes payable		18,557			0
Proceeds from exercise of stock options		683			509
Cash dividends paid		(1,273	)		(1,054	)
Stock repurchase and retirement		(1,673	)		(1,930	)
Payments on note payable		(37	)		(6,021	)
Net cash from financing activities		21,243			(5,257	)
Net change in cash and cash equivalents		7,451			(39,552	)
Cash and cash equivalents at beginning of period		54,859			71,344
Cash and cash equivalents at end of period	$	62,310		$	31,792

See accompanying notes

6

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2007

(unaudited)

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.

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, in particular, are subject to change.

Note 3 – Acquisitions:

On May 21, 2007, the Company announced it had completed its acquisition of FNB Bancorporation, Inc. and its subsidiary, First Bank of Northern Kentucky, Inc. (“First Bank”). First Bank was merged into the Bank, and will operate under The Bank of Kentucky name. As of the closing date of the acquisition, First Bank had approximately $74,000,000 in total assets, which included $63,000,000 in loans and $63,000,000 in deposits. The total purchase price for this acquisition was $20,400,000 which was funded in part by issuing $18,000,000 in Trust Preferred Securities, as further described below.

As of the date of this report, the Company was in the process of finalizing third party valuations and completing fair value estimates for certain assets acquired from First Bank and liabilities assumed. Accordingly, the allocation of the purchase price is subject to refinement. As of June 30, 2007 these valuations included a core deposit intangible asset of $1,500,000, a customer relationship intangible asset of $1,125,000 and goodwill of approximately $4,700,000. The acquisition also included a deferred tax asset of approximately $4,500,000 from net operating loss carryforward. The results of operations for this acquisition have been included since the transaction date was May 18, 2007.

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

Note 4 – Earnings per Share:

Earnings per share are computed based upon the weighted average number of shares outstanding during the three and six 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. For the three months ended June 2007 and 2006, 382,602 and 315,828 options were not considered, as they were not dilutive, and for the six months ended June 2007 and 2006, 371,900 and 316,021 options were not considered, as they were not dilutive. The following table presents the numbers of shares used to compute basic and diluted earnings per share for the indicated periods:

	Three Months Ended June 30		Six Months Ended June 30
	2007	2006	2007	2006
Weighted average shares outstanding	5,770,536	5,840,915	5,781,296	5,853,945
Dilutive effects of assumed exercises of Stock Options	26,733	26,923	29,444	28,650
Shares used to compute diluted Earnings per share	5,797,269	5,867,838	5,810,740	5,882,595

Note 5 – Stock Compensation:

Options to buy stock are granted to directors, officers and employees under the Company’s stock option and incentive plan (the “Plan”) which provides for the issuance of up to 1,200,000 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.

The Company recorded stock option expense of $209,000 ($190,000 net of taxes) and $530,000 ($453,000 net of taxes) in the three and six months ended June 30, 2007 in accordance with Statement of Financial Accounting Standards No. 123(R),Share-BasedPayment (“SFAS 123(R)”), adopted on January 1, 2006.

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Note 6 – 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 7 – 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.

Note 8 – New Accounting Pronouncements:

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement No. 157,Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The new standard is effective for fiscal years beginning after November 15, 2007. The Corporation has not completed its evaluation of the impact of the adoption of SFAS No. 157.

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

The Company adopted the provisions of FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes (“FIN 48”),on January 1, 2007. The adoption of FIN 48 had no effect on the Company’s financial statements. The Company has no unrecognized tax benefits and does not anticipate any increase in unrecognized benefits during 2007 relative to any tax positions taken prior to January 1, 2007. Should the accrual of any interest or penalties relative to unrecognized tax benefits be necessary, it is the Company’s policy to record such accruals in its income taxes accounts; no such accruals exist as of January 1, 2007.

9

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, in addition to those described in Item 1A of BKFC’s annual report on Form 10-K or other BKFC reports on file with the Commission, the following: (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.

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.

10

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 $8,664,000 or .95% of total loans was an appropriate estimate of losses within the loan portfolio as of June 30, 2007. This estimate resulted in a provision for loan losses on the income statement of $950,000 for the six months ended June 30, 2007. 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 second quarter results was the completion of the First Bank acquisition and strong growth in revenue. The acquisition of First Bank is detailed in Item 1, Note 3 of this report. Revenues increased $1,687,000 or 15% from the second quarter of 2006. Offsetting this increase was an increase in non-interest expense of $1,035,000, or 14% in the same time period which included approximately $233,000 in expenses relating to the improvement of a repossessed property. The revenue increase was the result of increases in net interest income of $551,000 or 6% and non-interest income of $1,136,000 or 44% in the second quarter of 2007, as compared to the same period in 2006. Contributing to the increase in non-interest income was the increase in revenue from the Bank’s new overdraft program, while the growth in earning assets, including the First Bank assets as of May 21, 2007, drove the increase in net interest income. The largest increases in non-interest expense were salaries and employee benefits expense which increased $364,000 or 10%.

FINANCIAL CONDITION

Total assets at June 30, 2007 were $1,142,083,000 as compared to $1,051,563,000 at December 31, 2006, an increase of $90,520,000 (9%) and included the First Bank acquisition which is detailed in Item 1, Note 3 of this report. Loans outstanding increased $95,276,000 (12%) from $814,101,000 at December 31, 2006 to $909,377,000 at June 30, 2007, while available-for-sale securities decreased 19,209,000 (18%) for the same time period. As Table 1 illustrates, the growth in the loan portfolio in the second quarter of 2007 came from increases in commercial loans of $33,583,000 (22%) and nonresidential real estate loans of $24,296,000 (7%), which were driven by the First Bank acquisition. The First Bank loan portfolio was similar to The Bank of Kentucky portfolio in the fact that the majority of the portfolio was concentrated in commercial and commercial real estate loans. The decrease in the available-for-sale securities was the result of the run-off of short-term investments purchased to pledge as collateral for public fund deposits, which have decreased since December 31, 2006.

Including the First Bank acquisition total deposits increased $66,461,000 (7%) to $980,888,000 at June 30, 2007, compared to $914,427,000 at December 31, 2006, while short-term borrowings increased $1,707,000 (11%) to $17,667,000 at June 30, 2007 from $15,960,000 at December 31, 2006. Notes payable as of June 30, 2007 increased by $18,490,000 (77%) as compared to the same period in 2006, as a result of the issuance of $18,000,000 in Trust Preferred Securities used for the acquisition of First Bank. Without the effects of the First Bank acquisition, total deposits would have been relatively flat. The deposits in the second quarter were affected by the seasonal fluctuation in public fund deposits, which represent the collateralized balances of local municipalities, school boards and other county government agencies. Public fund deposits were down approximately $17,000,000 from December 31, 2006 to June 30, 2007. Deposits other than public fund deposits and the First Bank deposits increased approximately $20,000,000 since

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December 31, 2006, with the largest increase from Money Market accounts which have increased approximately $34,000,000 in 2007. The Banks Money Market Index account, which is indexed to short term interest rates, has seen the majority of the growth as depositors have moved and invested funds into this attractive yielding account.

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

	June 30, 2007				December 31, 2006
	Amount		%		Amount		%
	(Dollars in thousands)
Type of Loan:
Nonresidential real estate loans	$	384,239	42.2	%	$	359,943	44.2	%
One- to four-family residential real estate loans		195,877	21.5			181,534	22.3
Commercial loans		184,796	20.3			151,213	18.5
Consumer loans		19,834	2.2			19,260	2.4
Construction and land development loans		118,038	13.0			95,812	11.7
Municipal obligations		7,263	0.8			6,970	0.9
Total loans	$	910,047	100.0	%	$	814,732	100.0	%
Less:
Deferred loan fees		670				631
Allowance for loan losses		8,664				6,918
Net loans	$	900,713			$	807,183

RESULTS OF OPERATIONS

GENERAL

Net income year to date increased from $4,646,000 ($.79 diluted earnings per share) in 2006 to $5,005,000 ($.86 diluted earnings per share) in 2007, an increase of $359,000 (8%). Net income for the quarter ended June 30, 2007 was $2,848,000 ($.49 diluted earnings per share) as compared to $2,380,000 ($.41 diluted earnings per share) during the same period of 2006, an increase of $468,000 (20%). The primary reason for the increase in earnings from 2006 was a $3,119,000 (14%) increase in revenue, which was partially offset by a $2,434,000 (17%) increase in non-interest expense. The increase in revenue included a $1,159,000 (7%) increase in net interest income and $1,960,000 (39%) increase in non-interest income. Contributing to the increase in non-interest income was service charges and fees (up $1,611,000, 68%), which included increased revenue from the Bank’s new overdraft program that was implemented in the third quarter of 2006. The increase in non-interest expense included approximately $733,000 in expenses relating to the improvement of a repossessed property.

NET INTEREST INCOME

Net interest income increased $551,000 (6%) in the second quarter of 2007 as compared to the same period in 2006, while the year to date total increased $1,159,000 (7%) from $16,702,000 in 2006 to $17,861,000 in 2007. The increase was driven by the growth in the balance sheet and an increase in the effect of net free funds (non-interest bearing liabilities funding earning assets). As illustrated in Table 3, net interest income was positively impacted by the volume additions, which includes the effect of net free funds, to the balance sheet by $1,211,000, and was offset by the rate variance, which had a $662,000 negative impact on net interest income.

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Contributing to the unfavorable rate variance was the flattening yield curve. The flatness of the yield curve has impacted interest on the Bank’s liabilities to a greater extent than interest income on assets as more immediately repriceable deposits and CD’s have repriced than have short-term assets. Also, long-term assets have repriced at relatively lower rates.

As illustrated in Table 2, the net interest margin of 3.71% for the second quarter of 2007 was 27 basis points lower than the 3.98% net interest margin for the second quarter of 2006. Contributing to the decrease in the net interest margin was the cost of interest bearing liabilities increasing faster than the yield on earning assets. The cost of interest bearing liabilities increased 73 basis points from 3.70% for the second quarter of 2006 to 4.43% in the second quarter of 2007, while the yield on earning assets only increased 34 basis points from 7.13% for the second quarter of 2006 to 7.47% in the second quarter of 2007. Partially offsetting the increase in deposit cost was growing demand deposit balances, coupled with rising rates, which increased the impact of net free funds to the net interest margin by 12 basis points, going from 55 basis points in the second quarter of 2006 to 67 basis points in same period of 2007. The balance sheet growth in the second quarter of 2007 was driven by the First Bank acquisition and growth in deposits since June 2006, which funded the increase in average earning assets of $122,814,000 or 14% from the second quarter of 2006. Average interest bearing liabilities increased $101,353,000, or 14% to $843,791,000 from the second quarter of 2006 to the second quarter of 2007, with growth in money market portion on transaction accounts, time deposits and borrowings. A lower yielding mix of earning assets added since the second quarter of 2006 also contributed to the lower net interest margin. As illustrated in Table 2, average loans increased $92,603,000 or 12% from the second quarter of 2006, while other interest-earning assets increased $34,258,000 or 240% in the same period. The majority of the other interest-earning asset balances are lower yielding federal fund sold balances.

The Company 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. By simulating the effects of movements in interest rates the model can estimate the Company’s interest rate exposure. The results of the model are used by management to approximate the results of rate changes and do not indicate actual expected results. As shown below, the June 30, 2007 simulation analysis indicates that the Company is in a relatively neutral interest rate sensitive position and any instantaneous movements would have a negligible effect on net interest income. A neutral interest rate sensitive position means that a relatively equal dollar volume of interest earning assets can, or will, reprice in the next year, as compared to the dollar volume of interest bearing liabilities.

Net interest income estimates are summarized below.

	Net Interest Income Change
Increase 200 bp	.08	%
Increase 100 bp	.12
Decrease 100 bp	(.17	)
Decrease 200 bp	(.89	)

Tables 2 and 3 sets forth certain information relating to the Bank’s average balance sheet information and reflect 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

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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 periods presented. Average balances are daily averages for the Bank and include nonaccruing loans in the loan portfolio, net of the allowance for loan losses.

Table 2- Average Balance Sheet Rates for Three Months Ended June 30, 2007 and 2006 (presented on a tax equivalent basis in thousands)

	Three Months ended June 30, 2007							Three Months ended June 30, 2006
	Average outstanding balance			Interest earned/ paid		Yield/ rate		Average outstanding balance			Interest earned/ paid		Yield/ rate
Interest-earning assets:
Loans receivable (1)(2)	$	860,607		$	16,861	7.86	%	$	768,004		$	14,372	7.51	%
Securities (2)		83,837			976	4.67			87,884			921	4.20
Other interest-earning assets		48,537			657	5.43			14,279			186	5.22
Total interest-earning assets		992,981			18,494	7.47			870,167			15,479	7.13
Non-interest-earning assets		85,664							84,133
Total assets	$	1,078,645						$	954,300
Interest-bearing liabilities:
Transaction accounts		448,103			4,202	3.76			391,405			3,022	3.10
Time deposits		351,824			4,364	4.98			312,776			3,246	4.16
Borrowings		43,864			754	6.89			38,257			586	6.14
Total interest-bearing liabilities		843,791			9,320	4.43			742,438			6,854	3.70
Non-interest-bearing liabilities		145,985							130,489
Total liabilities		989,776							872,927
Shareholders’ equity		88,869							81,373
Total liabilities and shareholders’ equity	$	1,078,645						$	954,300
Net interest income				$	9,174						$	8,625
Interest rate spread						3.04	%						3.43	%
Net interest margin (net interest income as a percent of average interest-earning assets)						3.71	%						3.98	%
Effect of Net Free Funds (earning assets funded by non interest bearing liabilities)						.67	%						.55	%
Average interest-earning assets to interest-bearing liabilities		117.68	%						117.20	%

(1) Includes non-accrual loans.

(2) Income presented on a tax equivalent basis using a 34.25% and 35% tax rate in 2007 and 2006, respectively. The tax equivalent adjustment was $80,000 and $82,000 in 2007 and 2006 respectively.

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Table 3- Average Balance Sheet Rates for Six Months Ended June 30, 2007 and 2006 (presented on a tax equivalent basis in thousands)

	Six Months ended June 30, 2007							Six Months ended June 30, 2006
	Average outstanding balance			Interest earned/ paid		Yield/ rate		Average outstanding balance			Interest earned/ paid		Yield/ rate
Interest-earning assets:
Loans receivable (1)(2)	$	842,170		$	32,859	7.87	%	$	753,316		$	27,605	7.39	%
Securities (2)		88,450			2,045	4.66			94,489			1,927	4.11
Other interest-earning assets		44,661			1,196	5.40			20,470			496	4.89
Total interest-earning assets		975,281			36,100	7.46			868,275			30,028	6.97
Non-interest-earning assets		84,722							84,823
Total assets	$	1,060,003						$	953,098
Interest-bearing liabilities:
Transaction accounts		447,883			8,427	3.79			391,965			5,786	2.98
Time deposits		340,915			8,316	4.92			313,590			6,285	4.04
Borrowings		43,722			1,335	6.16			38,254			1,093	5.76
Total interest-bearing liabilities		832,520			18,078	4.38			743,809			13,164	3.57
Non-interest-bearing liabilities		139,253							128,193
Total liabilities		971,773							872,002
Shareholders’ equity		88,230							81,096
Total liabilities and shareholders’ equity	$	1,060,003						$	953,098
Net interest income				$	18,022						$	16,864
Interest rate spread						3.08	%						3.40	%
Net interest margin (net interest income as a percent of average interest-earning assets)						3.73	%						3.92	%
Effect of Net Free Funds (earning assets funded by non interest bearing liabilities)						.65	%						.52	%
Average interest-earning assets to interest-bearing liabilities		117.15	%						116.73	%

(1) Includes non-accrual loans.

(2) Income presented on a tax equivalent basis using a 34.25% and 35% tax rate in 2007 and 2006, respectively. The tax equivalent adjustment was $161,000 and $162,000, in 2007 and 2006 respectively.

Table 4 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.

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Table 4-Volume/Rate Analysis (in thousands)

	Three months ended June 30, 2007 Compared to Three months ended June 30, 2006								Six months ended June 30, 2007 Compared to Six months ended June 30, 2006
	Increase (Decrease) Due to								Increase (Decrease) Due to
	Volume			Rate			Total		Volume			Rate			Total
Interest income attributable to:
Loans receivable	$	1,797		$	692		$	2,489	$	3,421		$	1,832		$	5,252
Securities		(44	)		99			55		(130	)		245			116
Other interest-earning assets(1)		464			7			471		648			52			700
Total interest-earning assets		2,217			798			3,015		3,939			2,129			6,068
Interest expense attributable to:
Transactions accounts		477			703			1,180		910			1,730			2,641
Time deposits		437			681			1,118		587			1,445			2,031
Borrowings		92			76			168		165			77			242
Total interest-bearing liabilities		1,006			1,460			2,466		1,662			3,252			4,914
Increase (decrease) in net interest income	$	1,211		$	(662	)	$	549	$	2,277		$	(1,123	)	$	1,154

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

PROVISION FOR LOAN LOSSES

The provision for loan losses was $950,000 for the six months ended June 30, 2007, an increase of $150,000 compared to the $800,000 provision recorded during the same period in 2006. For the second quarter of 2007 the provision for loan losses was $300,000, a decrease of $100,000 compared to the $400,000 provision for the second quarter of 2006. Contributing to the increase in the provision on a year to date basis was a specific reserve set up for an impaired loan in the first quarter of 2007. Non-performing loans increased to $10,095,000 or 1.11% of total loans outstanding at June 30, 2007, compared to $4,972,000 or .61% at December 31, 2006 and $6,080,000 or .77% at June 30, 2006. The largest increase in non-performing loans was a $2,100,000 residential development loan which resulted in the specific impairment reserve in the first quarter of 2007. Management continues to monitor these relationships and has established appropriate reserves. Net charge-offs, year to date 2007, were $214,000 or .05% on an annualized basis to average loans, compared to the $730,000 and .20% for the first six months of 2006. The allowance for loan losses was 86% of non-performing loans on June 30, 2007 compared to 139% at the end of 2006 and 126% at June 30, 2006. Management’s evaluation of the inherent risk in the loan portfolio considers both historic losses and information about specific borrowers. Management believes the provision for loan losses is directionally consistent with the Bank’s change in credit quality, and is sufficient to absorb probable incurred losses in the loan portfolio. Driving the increase in the loan loss allowance to total loans ratio, from .90% at March 31, 2007 to .95% at June 30, 2007, was the allowance brought over in the First Bank acquisition.

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Non-performing assets, which include non-performing loans and other real estate owned, totaled $13,872,000 at June 30, 2007 and $7,953,000 at December 31, 2006. This represents 1.22% of total assets at June 30, 2007 compared to .76% at December 31, 2006. Total non-performing assets as of June 30, 2007 increased from the level at June 30, 2006 when total non-performing assets were $11,199,000 or 1.17% of total assets.

The following table sets forth an analysis of certain credit risk information for the periods indicated:

Table 5-Summary of Loan Loss Experience and Allowance for Loan Loss Analysis (in thousands)

	Three Months ended June 30,						Six Months ended June 30,
	2007			2006			2007			2006
Balance of allowance at beginning of period	$	7,342		$	7,389		$	6,918		$	7,581
Adjustment related to business combination	$	1,010			—		$	1,010			—
Recoveries of loans previously charged off:
Commercial loans		116			8			143			16
Consumer loans		14			0			36			2
Mortgage loans		0			0			23			0
Total recoveries		129			8			202			18
Loans charged off:
Commercial loans		(44	)		(117	)		(191	)		(690	)
Consumer loans		(68	)		(28	)		(194	)		(57	)
Mortgage loans		(6	)		(2	)		(31	)		(2	)
Total charge-offs		(118	)		(147	)		(416	)		(749	)
Net charge-offs		11			(139	)		(214	)		(731	)
Provision for loan losses		300			400			950			800
Balance of allowance at end of period	$	8,664		$	7,650		$	8,664		$	7,650
Net charge-offs to average loans outstanding for period		.00	%		.07	%		.05	%		.20	%
Allowance at end of period to loans at end of period		.95	%		.97	%		.95	%		.97	%
Allowance to nonperforming loans at end of period		85.83	%		125.80	%		85.83	%		125.80	%

NON-INTEREST INCOME

Table 6-Major Components of Non-Interest Income (in thousands)

	Three Months ended June 30,				Six Months ended June 30,
	2007		2006		2007		2006
Non-interest income:
Service charges and fees	$	2,119	$	1,229	$	3,969	$	2,358
Gain on sale of securities		0		0		0		0
Gains on sale of real estate loans		298		220		490		459
Trust Fee Income		258		251		532		492
Bankcard transaction revenue		421		326		781		611
Company owned life insurance earnings		195		202		371		336
Other		419		346		839		766
Total non-interest income	$	3,710	$	2,574	$	6,982	$	5,022

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As illustrated in Table 6, total non-interest income increased $1,960,000 (39%) for the first six months of 2006 from $5,022,000 at June 30, 2006 to $6,982,000 at June 30, 2007. For the second quarter of 2007 non-interest income increased $1,136,000 (44%) to $3,710,000 compared to $2,574,000 for the same period in 2006. Increases for the six months ended June 30, 2007 included service charges and fees (up $1,611,000, 68%) and bankcard transaction revenue (up $170,000, 28%). Contributing to the increase in service charge income was increased revenue from the Bank’s new overdraft program that was implemented in the third quarter of 2006. This program allows qualified customers the courtesy of paying items that overdraw the account up to a set limit. The increase in bankcard transaction revenue reflects consumers continued acceptance of electronic forms of payments and the resulting growth in usage of the Bank’s debit and credit card products.

NON-INTEREST EXPENSE

Table 7-Major Components of Non-Interest Expense (in thousands)

	Three Months ended June 30,				Six Months ended June 30,
	2007		2006		2007		2006
Non-interest expense:
Salaries and benefits	$	4,082	$	3,718	$	8,117	$	7,335
Occupancy and equipment		1,094		1,018		2,181		1,997
Data processing		372		329		703		683
Advertising		247		172		423		303
State bank taxes		307		213		658		501
Amortization of intangible assets		230		162		391		323
Other		1,997		1,682		4,153		3,050
Total non-interest expense	$	8,329	$	7,294	$	16,626	$	14,192

As illustrated in Table 7, non-interest expense increased to $16,626,000 in the first half of 2007 and to $8,329,000 for the second quarter of 2007 from $14,192,000 and $7,294,000 in the same periods of 2006, an increase of $2,434,000 (17%) and $1,035,000 (14%). The largest increase in non-interest expense was in salaries and benefits, which increased $782,000 (11%) in the first six months of 2007 compared to the same period in 2006. The largest increase in other expenses was in expenses related to repossessed properties, which increased $671,000 in the first six months of 2007 and $195,000 in the second quarter of 2007 for the same periods in 2006. These expenses were primarily the result of certain improvements made to a repossessed commercial office building. Contributing to the increase in state bank taxes was a higher accrual associated with the apportionment of state taxes to the state of Ohio.

INCOME TAX EXPENSE

During the first six months of 2007, income tax expense increased $176,000 (8%) from $2,086,000 in the first six months of 2006 to $2,262,000 in the same period of 2007 as a result of higher earnings. For the second quarter of 2007 income tax expense increased $284,000 (27%) to $1,327,000 compared to $1,043,000 for the same period in 2006 as a result of higher earnings. The effective tax

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rate increased to 31.13% for the first six months of 2007 compared to 30.99% for the same period in 2006. For the second quarter of 2007 the effective tax rate increased to 31.78% compared to 30.47% for the same period of 2006. Contributing to the increased rate in the second quarter was the addition of non deductible amortization expense from the intangible assets added with the First Bank acquisition.

LIQUIDITY AND CAPITAL RESOURCES

The Bank achieves liquidity by maintaining an appropriate balance between its sources and uses of funds to assure that sufficient funds are available to meet loan demands and deposit fluctuations. The Bank has the ability to draw funds from the Federal Home Loan Bank and four of its correspondent banks to meet liquidity demands.

The Company’s total shareholders’ equity increased $3,263,000, from $86,883,000 at December 31, 2006 to $90,146,000 at June 30, 2007. In the first six months of 2007, the Company paid a cash dividend of $.22 per share totaling $1,274,000.

On December 15, 2006, the Company’s Board of Directors approved a new share repurchase program. The repurchase program began January 1, 2007 and will expire on December 31, 2007. The repurchase program authorized the repurchase of up to 200,000 shares of the Company’s outstanding common shares in the over-the-counter market from time to time. Any repurchases will be funded, as needed, by dividends from the Bank, or from the Company’s revolving line of credit.

The Company’s liquidity depends primarily on the dividends paid to it as the sole shareholder of the Bank and the Company’s line of credit. The Company needs liquidity to meet the financial obligations of its trust preferred securities, for the payment of dividends to shareholders, for the stock repurchase plan and for general operating expenses. The Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation (“FDIC”) have legal requirements, 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 the Company and the Bank can pay as dividends. At June 30, 2007, the Bank had capital in excess of the FDIC’s most restrictive minimum capital requirements in an amount over $5,400,000 from which dividends could be paid, subject to the FDIC’s general safety and soundness review.

For purposes of determining a bank’s deposit insurance assessment, the FDIC has issued regulations that define a “well capitalized” bank as one with a leverage ratio of 5% or more and a total risk-based ratio of 10% or more. At June 30, 2007, the Bank’s leverage and total risk-based ratios were 9.95% and 10.50% respectively, which exceed the well-capitalized thresholds.

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CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

On March 3, 2005, the Bank entered into an agreement with Northern Kentucky University whereby the University will grant to the Bank the naming rights for the new Northern Kentucky University Arena to be constructed on the campus of the University for a term commencing immediately upon execution of the agreement and expiring twenty years after the opening of the Arena. In consideration therefore the Bank will pay the lesser of 10% of the total construction cost of the Arena or $6,000,000, such sum to be paid in seven equal annual installments beginning after substantial completion and opening of the Arena. The cost of the naming rights will be amortized over the life of the contract commencing on the opening of the Arena.

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

There have been no other significant changes to the Bank’s contractual obligations or off-balance sheet arrangements since December 31, 2006. For additional information regarding the Bank’s contractual obligations and off-balance sheet arrangements, refer to the Company’s Form 10-K for the year ending December 31, 2006.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

There has been no material change in market risk since December 31, 2006. For information regarding the Company’s market risk, refer to the Company’s Form 10-K for the year ending December 31, 2006. Market risk is discussed further under the heading “Net Interest Income” above.

Item 4. Controls and Procedures.

Disclosure Controls and Procedures

Disclosure controls and procedures are the Company’s controls and other procedures that are designed to ensure that information required to be disclosed by the Company 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 included in the reports filed or submitted under the Exchange Act is accumulated and communicated to Management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Under the supervision, and with the participation of Management, including the Company’s Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of the design and operation of the disclosure controls and procedures as of June 30, 2007, and, based upon this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that these controls and procedures are effective 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.

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Changes in Internal Control Over Financial Reporting

There was no change in the Company’s internal control over financial reporting that occurred in the last fiscal quarter that has materially affected, or is reasonably likely to materially affect the Company’s internal control over financial reporting.

The Bank of Kentucky Financial Corporation

PART II OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, the Company and the Bank are involved in litigation incidental to the conduct of business, but neither the Company 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 the Company.

Item 1A. Risk Factors

There have been no material changes in the Company’s risk factors from those previously disclosed in the Company’s Form 10-K for the year ended December 31, 2006.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table shows information relating to the repurchase of shares by the Company during the three months ended June 30, 2007:

Period	Total number of shares purchased	Average price paid per share		Total number of shares purchased as part of publicly announced plans (1)	Maximum number of shares that may be purchased under the plans or programs
April 1-30, 2007	0	$	0	32,000	168,000
May 1-31, 2007	25,000	$	25.78	57,000	143,000
June 1-30, 2007	7,400	$	25.80	64,400	135,600

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(1) The Company currently maintains a share repurchase program that was approved by the Company’s board of directors in December of 2006. This repurchase program, which began on January 1, 2007 and will expire on December 31, 2007, authorizes the repurchase and retirement of 200,000 common shares of the Company in the over-the-counter market. As of the date of this report, 64,400 of the 200,000 shares authorized for repurchase have been repurchased. There were no share repurchase plans that expired during the quarter, and the Company did not terminate any plan prior to its expiration date.

Item 3. Defaults Upon Senior Securities

Not applicable

Item 4. Submission of Matters to a Vote of Security Holders

The Annual Meeting of Stockholders of the Company was held on April 20, 2007. The matters voted on at the meeting and the results of these votes are as follows.

(1) Election of three directors of BKFC for terms expiring in 2010:

	For	Against/Withheld	Abstentions
Rodney S. Cain	4,903,891	71,873	—
R.C. Durr	4,908,445	67,319	—
Ruth Seligman-Doering	4,960,345	15,419	—

(2) To approve The Bank of Kentucky Financial Corporation 2007 Stock Option and Incentive Plan

For	Against/Withheld	Abstentions
3,875,944	122,617	47,946

(3) Ratification of the selection of Crowe Chizek and Company LLC as the independent registered public accounting firm of BKFC for the current fiscal year:

For	Against/Withheld	Abstentions
4,945,371	24,308	6,085

Item 5. Other Information

None

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Item 6. Exhibits

Exhibit Number	Description
31.1	Rule 13a – 14(a) Certification of Robert W. Zapp
31.2	Rule 13a – 14(a) Certification of Martin J. Gerrety
32.1	Section 1350 Certification of Robert W. Zapp
32.2	Section 1350 Certification of Martin J. Gerrety

SIGNATURES

Pursuant to the requirements 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.

		The Bank of Kentucky Financial Corporation
Date:	August 9, 2007	/s/ Robert W. Zapp
		Robert W. Zapp
		President
Date:	August 9, 2007	/s/ Martin J. Gerrety
		Martin J. Gerrety
		Treasurer and Assistant Secretary

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