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.

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.

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 $13,788,000 or 1.24% of total loans was an appropriate estimate of losses within the loan portfolio as of September 30, 2009. This estimate resulted in a provision for loan losses on the income statement of $8,325,000 for the nine months ended September 30, 2009. 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.

The Company reported a decrease in diluted net income per share of 40% for the first nine months of 2009, and a decrease of 70% for the third quarter, as compared to the same periods in 2008. Highlighting third quarter 2009 results was an increase in total operating revenue of 1,065,000 (7%), an increase in loans of $110,809,000 (11%) and an increase in deposits of 158,272,000 (16%), as compared to the third quarter of 2008. Offsetting these increases was an additional $3,225,000 provision for loan losses and a $523,000 increase in losses on the sale of other real estate owned (OREO) as compared to the third quarter of 2008. Contributing to the revenue increase was the result of increases in net interest income of $873,000, or 8% in the third quarter of 2009, as compared to the same period in 2008. Contributing to the increase in the provision for loan losses were higher levels of charge-offs and non-performing loans in the third quarter of 2009 as compared to the same period in 2008, and management's continuing concerns over the effect of the declining housing market, falling real estate values and the overall deteriorating economic conditions will have on the Company's loan portfolio. The losses on the sale of OREO property included a loss of $462,000 on one property.

The third quarter and the first nine months of 2009 results also reflect the sale of 34,000 shares of the Company's Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the "Series A Preferred Stock") and the issuance of a warrant (the "Warrant") to the United States Department of the Treasury (the "Treasury Department") as part of the Troubled Asset Relief Program (TARP) Capital Purchase Program (the "CPP") for a total price of $34 million. The effect of the Treasury Department's investment on the Company's earnings per common share includes the accrual for the payment of dividends on the Series A Preferred Stock and related amortization expense of $506,000 and $1,283,000 for the third quarter and nine month period ended September 30, 2009, respectively. No comparable dividends and amortization were applicable during the comparable 2008 periods.

In the third quarter of 2009, the Bank announced plans to purchase three banking offices of Integra Bank Corporation's wholly-owned bank subsidiary, Integra Bank N.A. ("Integra Bank"), located in Crittenden, Dry Ridge and Warsaw, Kentucky and a portfolio of selected commercial loans originated by Integra Bank's Covington, Kentucky, loan production office. This transaction is expected to add $85,000,000 in deposits and at least $85,000,000 million in loans. As of September 30, 2009, the Bank has purchased $50,000,000 million of the loans from Integra Bank. The remainder of the transaction is expected to close in the fourth quarter of 2009.

Total assets at September 30, 2009 were $1,391,669,000 as compared to $1,255,382,000 at December 31, 2008, an increase of $136,287,000 (11%). Loans outstanding increased $83,645,000 (8%) from $1,026,557,000 at December 31, 2008 to $1,110,202,000 at September 30, 2009, while available-for-sale securities increased $32,374,000 (38%) for the same time period. As Table 1 illustrates, the growth in the loan portfolio in 2009 came from increases in commercial loans of $45,626,000 (26%) and nonresidential real estate loans of $28,279,000 (7%). Contributing to the increase in loans was the $50,0000,000 loans purchase from Integra, the majority of which were commercial loans. The increase in available-for-sale securities was due in part to the addition of short term investments purchased with the proceeds resulting from the sale of Series A Preferred Stock to the Treasury Department in connection with the CPP.

Deposits increased $79,611,000 (7%) to $1,150,764,000 at September 30, 2009, compared to $1,071,153,000 at December 31, 2008, while short-term borrowings increased $18,067,000 (64%) to $46,220,000 at September 30, 2009 from $28,153,000 at December 31, 2008. As Table 1 illustrates, the growth in deposits for the first nine months of 2009 came from increases in savings deposits of $12,714,000 (42%) and certificates of deposits of $45,496,000 (14%). The increase in short term borrowings included fed funds purchased of $24,306,000 on September 30, 2009, which were used to fund a portion of the loans purchased from Integra.

Table 1 The following table sets forth the composition of the Bank's loans and deposits at the dates indicated:

                                                       September 30, 2009            December 31, 2008
                                                         Amount          %            Amount         %
                                                                   (Dollars in thousands)
Type of Loan:
Nonresidential real estate loans                     $      457,138     41.1 %     $    428,859     41.7 %

One- to four-family residential real estate loans           243,303     21.9            239,729     23.3
Commercial loans                                            220,814     19.9            175,188     17.1
Consumer loans                                               18,057      1.6             17,693      1.7

Construction and land development loans                     153,131     13.8            150,754     14.7
Municipal obligations                                        18,960      1.7             14,983      1.5

Total loans                                          $    1,111,403    100.0 %     $  1,027,206    100.0 %

Less:
Deferred loan fees                                            1,201                         649
Allowance for loan losses                                    13,778                       9,910

Net loans                                            $    1,096,424                $  1,016,647


Type of Deposit:
Non interest bearing deposits                        $      175,877     15.3 %     $    157,082     14.7 %
Interest bearing transaction deposits                       249,984     21.7            266,704     24.9
Money market deposits                                       253,119     22.0            220,704     20.6
Savings deposits                                             43,244      3.8             35,355      3.3
Certificates of deposits                                    365,073     31.7            334,312     31.2
Individual Retirement accounts                               63,467      5.5             56,996      5.3

Total Deposits                                       $    1,150,764    100.0 %     $  1,071,153    100.0 %

GENERAL

Net income available to common stockholders year to date decreased from $8,550,000 ($1.52 diluted earnings per share) in 2008 to $5,149,000 ($.91 diluted earnings per share) in 2009, a decrease of $3,401,000 (40%). Net income available to common stockholders for the quarter ended September 30, 2009 was $1,039,000 ($.18 diluted earnings per share) as compared to $3,419,000 ($.61 diluted earnings per share) during the same period of 2008, a decrease of $2,380,000 (70%). The year to date and third quarter figures

included $1,283,000 and $506,000 respectively in accrued preferred stock dividends and amortization. No comparable dividends and amortization were applicable for the 2008 periods. Other factors contributing to the decrease in earnings during the first nine months of 2009 were a $5,150,000 (162%) increase in provision expense, and increase of Federal Deposit Insurance Corporation ("FDIC") expense of $1,284,000, which were partially offset by a $3,138,000 (8%) increase in revenue. The increase in FDIC insurance included a $600,000 special assessment that was accrued in the second quarter of 2009 and paid in the third quarter of 2009. Contributing to the increase in the provision for loan losses was higher levels of net charge-offs and non-performing loans in the third quarter of 2009 versus the same period in 2008 and management's concerns over the declining housing market, falling real estate values and the overall deteriorating economic conditions. Contributing to the increase in revenue was a $2,363,000 (8%) increase in net interest income and an increase of sold loan income of $510,000 (71%).

NET INTEREST INCOME

Net interest income increased $873,000 (8%) in the third quarter of 2009 as compared to the same period in 2008, while the year to date total increased $2,363,000 (8%) from $30,268,000 in 2008 to $32,631,000 in 2009. As illustrated in Table 4, relatively all of the growth in net interest income was the result of growth in the balance sheet. The table shows the net interest income on a fully tax equivalent basis was positively impacted by the volume additions to the balance sheet by $1,095,000. Contributing to the favorable volume variance, as illustrated in Table 2, was average earning assets increasing $148,317,000 or 14% from the third quarter of 2008 to the third quarter of 2009, while average interest bearing liabilities only increased $103,895,000 or 11% to $1,035,521,000 from the third quarter of 2008 to the third quarter of 2009.

As illustrated in Table 2, the net interest margin of 3.72% for the third quarter of 2009 was 14 basis points lower than the 3.86% net interest margin for the third quarter of 2008, while the net interest margin decreased, the net interest spread, the difference between the Bank's yield on earning assets and the cost of interest bearing liabilities, decreased by only 1 basis point from the third quarter of 2008. The difference between the net interest margin and net interest spread is accounted for by the diminishing impact that net non interest bearing funding, net free funds, has on the margin as over all funding cost decrease. Table 3 shows that the net interest margin of 3.65% for the first nine months of 2009 was 4 basis points lower than the 3.69% the first nine months of 2008. On a linked quarter basis, the net interest margin increased 11 basis points from the 3.61% net interest margin in the second quarter of 2009. Contributing to the increase in the net interest margin from the second quarter of 2009 was the decreasing cost of interest bearing liabilities, which decreased 9 basis points in the third quarter.

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 September 30, 2009 simulation analysis indicates that the Company is in a slightly liability interest rate sensitive position with the net interest income less negatively impacted from declining rates than by rising rates. As a result of the current historically low rate environment the effects of a 100 or 200 basis point decrease in rates would be negative to the net interest income. This is the result of a significant portion of the interest bearing liabilities already having a cost below 1.00%.

Net interest income estimates are summarized below.

Net Interest Income Change

                      Increase 200 bp              (3.84 )%
                      Increase 100 bp              (1.87 )
                      Decrease 100 bp              (0.97 )

Tables 2 and 3 set 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 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 September 30, 2009 and 2008 (presented on a tax equivalent basis in thousands)

                                                Three Months ended September 30,              Three Months ended September 30,
                                                              2009                                          2008
                                               Average            Interest                   Average            Interest
                                             outstanding           earned/    Yield/       outstanding           earned/    Yield/
                                               balance              paid       rate          balance              paid       rate
Interest-earning assets:
Loans receivable (1)(2)                     $    1,065,031           14,650     5.46 %    $      991,206           15,784     6.32 %
Securities (2)                                     161,026            1,327     3.27              99,185            1,145     4.58
Other interest-earning assets                       20,516               73     1.41               7,865               81     4.14


Total interest-earning assets                    1,246,573           16,050     5.11           1,098,256           17,010     6.14


Non-interest-earning assets                        100,101                                        97,033

Total assets                                $    1,346,674                                $    1,195,289


Interest-bearing liabilities:
Transaction accounts                               546,114              944     0.69             492,501            2,013     1.62
Time deposits                                      421,854            3,075     2.89             359,898            3,594     3.96
Borrowings                                          67,553              351     2.06              79,227              712     3.57

Total interest-bearing liabilities               1,035,521            4,370     1.67             931,626            6,319     2.69


Non-interest-bearing liabilities                   172,547                                       167,045


Total liabilities                                1,208,068                                     1,098,671

Shareholders' equity                               138,606                                        96,618


Total liabilities and shareholders'
equity                                      $    1,346,674                                $    1,195,289


Net interest income                                               $  11,680                                     $  10,691

Interest rate spread                                                            3.44 %                                        3.45 %

Net interest margin (net interest income
as a percent of average interest-earning
assets)                                                                         3.72 %                                        3.86 %

Effect of net free funds (earning assets
funded by non interest bearing
liabilities)                                                                     .28 %                                         .41 %

Average interest-earning assets to
interest-bearing liabilities                        120.38 %                                      117.89 %

(1) Includes non-accrual loans.

(2) Income presented on a tax equivalent basis using a 34.7% and 34.4% tax rate in 2009 and 2008, respectively. The tax equivalent adjustment was $263,000 and $147,000 in 2009 and 2008 respectively.

Table 3- Average Balance Sheet Rates for Nine Months Ended September 30, 2009 and 2008 (presented on a tax equivalent basis in thousands)

                                               Nine Months ended September 30,              Nine Months ended September 30,
                                                            2009                                         2008
                                              Average           Interest                   Average           Interest
                                            outstanding          earned/    Yield/       outstanding          earned/    Yield/
                                              balance             paid       rate          balance             paid       rate

Interest-earning assets:
Loans receivable (1)(2)                    $    1,047,862       $  42,992     5.50 %    $      972,194       $  48,448     6.68 %
Securities (2)                                    148,111           3,972     3.60             111,063           3,656     4.41
Other interest-earning assets                      30,457             213     0.94              31,004             721     3.11


Total interest-earning assets                   1,226,430          47,177     5.14           1,114,261          52,825     6.33


Non-interest-earning assets                        98,069                                       94,992

Total assets                               $    1,324,499                               $    1,209,253


Interest-bearing liabilities:
Transaction accounts                              547,619           2,856     0.70             517,710           7,734     2.00
Time deposits                                     409,725           9,730     3.18             365,540          12,129     4.45
Borrowings                                         66,729           1,211     2.43              72,643           2,283     4.21

Total interest-bearing liabilities              1,024,073          13,797     1.81             955,893          22,146     3.11


Non-interest-bearing liabilities                  168,680                                      158,455


Total liabilities                               1,192,753                                    1,114,348

Shareholders' equity                              131,746                                       94,905


Total liabilities and shareholders'
equity                                     $    1,324,499                               $    1,209,253


Net interest income                                             $  33,380                                    $  30,679

Interest rate spread                                                          3.33 %                                       3.22 %

Net interest margin (net interest income
as a percent of average interest-earning
assets)                                                                       3.65 %                                       3.69 %

Effect of Net Free Funds (earning assets
funded by non interest bearing
liabilities)                                                                   .32 %                                        .47 %

Average interest-earning assets to
interest-bearing liabilities                       119.76 %                                     116.57 %

(1) Includes non-accrual loans.

(2) Income presented on a tax equivalent basis using a 34.7% and 34.4% tax rate in 2009 and 2008, respectively. The tax equivalent adjustment was $749,000 and $411,000, in 2009 and 2008 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.

Table 4-Volume/Rate Analysis (in thousands)



                                                  Three months ended September 30,2009               Nine months ended September 30, 2009
                                                              Compared to                                         Compared to
                                                 Three months ended September 30, 2008               Nine months ended September 30, 2008
                                                          Increase (Decrease)                                 Increase (Decrease)
                                                                   Due to                                             Due to
                                               Volume               Rate            Total          Volume              Rate            Total
Interest income attributable to:
Loans receivable                             $     1,110        $     (2,243 )     $ (1,133 )    $    3,586        $      (9,042 )    $ (5,456 )

Securities                                           569                (387 )          182           1,080                 (764 )         316
Other interest-earning assets(1)                      70                 (79 )           (9 )           (13 )               (495 )        (508 )


Total interest-earning assets                      1,749              (2,709 )         (960 )         4,653              (10,301 )      (5,648 )


Interest expense attributable to:
Transactions accounts                                198              (1,267 )       (1,069 )           425               (5,303 )      (4,878 )
Time deposits                                        549              (1,068 )         (519 )         1,349               (3,748 )      (2,399 )
Borrowings                                           (93 )              (268 )         (361 )          (174 )               (898 )      (1,072 )


Total interest-bearing liabilities                   654              (2,603 )       (1,949 )         1,600               (9,949 )      (8,349 )


Increase (decrease) in net interest income   $     1,095        $       (106 )     $    989      $    3,053        $        (352 )    $  2,701

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

PROVISION FOR LOAN LOSSES

The provision for loan losses was $8,325,000 for the nine months ended September 30, 2009, an increase of $5,150,000 (162%) compared to the $3,175,000 provision recorded during the same period in 2008. For the third quarter of 2009 the provision for loan losses was $4,000,000, an increase of $3,225,000 (416%) compared to the $775,000 provision for the third quarter of 2008. Contributing to this increase were higher levels of charge-offs, non-performing loans and higher specific reserves for impaired loans in the third quarter of 2009 versus the same period in 2008 and management's continuing concerns over the effect of the declining housing market, falling real estate values and overall deteriorating economic conditions will have on the Company's loan portfolio. While the Company does not have higher risk loans such as subprime . . .