UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

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

       For the Fiscal Year Ended December 31, 2014

OR

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

For the transition period from______________to___________________.

Commission File Number: 001-34214

THE BANK OF KENTUCKY FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

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

111 Lookout Farm Drive, Crestview Hills, Kentucky 41017

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (859) 371-2340

Securities registered pursuant to Section 12(b) of the Exchange Act:

Common Stock, without par value	The Nasdaq Stock Market LLC
(Title of each class)	(Name of each exchange on which registered)

Securities registered pursuant to Section 12(g) of the Exchange Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes ¨   No x

Indicate by check mark whether the registrant has (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x        No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨ Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

The aggregate market value of the voting Common Stock held by non-affiliates of the registrant as of June 30, 2014 (the last business day of the registrant’s most recently completed second fiscal quarter) was approximately $239,876,000.

At March 9, 2015, there were 7,737,398 shares of the registrant’s Common Stock issued and outstanding.

TABLE OF CONTENTS

PART I			2
	Item 1.	Business	2
	Item 1A.	Risk Factors	24
	Item 1B.	Unresolved Staff Comments	33
	Item 2.	Properties	33
	Item 3.	Legal Proceedings	33
	Item 4.	Mine Safety Disclosures	34
PART II			34
	Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	34
	Item 6.	Selected Financial Data	36
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operation	37
	Item 7A.	Quantitative and Qualitative Disclosure about Market Risk	54
	Item 8.	Financial Statements and Supplementary Data	57
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	58
	Item 9A.	Controls and Procedures	58
	Item 9B.	Other Information	59
PART III			59
	Item 10.	Directors, Executive Officers and Corporate Governance	59
	Item 11.	Executive Compensation	63
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	78
	Item 13.	Certain Relationships and Related Transactions, and Director Independence	79
	Item 14.	Principal Accountant Fees and Services	81
PART IV			81
	Item 15.	Exhibits and Financial Statement Schedules	81
SIGNATURES
INDEX TO EXHIBITS

PART I

Item 1. Business

General

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

Formed in 1990, the Bank provides financial services and other financial solutions through 32 offices located in northern Kentucky, which includes Boone, Kenton and Campbell counties and parts of Grant, Pendleton and Gallatin counties in northern Kentucky, and Hamilton county in Ohio. The principal products produced and services rendered by the Bank are as follows:

· Commercial Banking – The Bank provides a full range of commercial banking services to corporations and other business clients. Loans are provided for a variety of general corporate purposes, including financing for commercial and industrial projects, income producing commercial real estate, owner-occupied real estate and construction and land development. The Bank also provides a wide range of deposit services, including checking, lockbox services and other treasury management services.

· Consumer Banking – The Bank provides banking services to consumers, including checking, savings and money market accounts as well as certificates of deposits and individual retirement accounts. The Bank also provides consumers with electronic banking products like internet banking, debit cards and 56 ATMs. In addition, the Bank provides consumer clients with installment and real estate loans and home equity lines of credit.

· Trust Services – The Bank offers specialized services and expertise in the areas of fiduciary services and wealth management. The fiduciary services include administration of personal trusts and estates. Wealth management services include investment management of accounts for individuals, institutions and not-for-profit entities. Also, brokerage and insurance products are offered through the Bank’s broker-dealer relationship with Cetera, Inc.

The majority of the Bank’s loan portfolio, approximately 77%, consists of loans secured with or by real estate. Loans secured with real estate are further broken down by loan type and borrower. Included in loans secured with or by real estate as of December 31, 2014 are:

· Residential real estate loans - $273 million or 22% of loans. These loans are secured by residential properties, where the repayment comes from the borrower’s personal cash flows and liquidity, and collateral values are a function of residential real estate values in the markets we serve.

· Commercial real estate loans - $400 million or 32% of loans. This loan type includes non-owner-occupied commercial real estate loans and construction and land development loans. These loans are made to borrowers where the primary source of repayment is derived from the cash flows generated by the real estate collateral. These loans are secured by property such as apartment complexes, retail centers and land which is being developed and sold.

· Owner-occupied commercial real estate loans - $296 million or 23% of loans. These are loans secured by real estate where the operating business is the source of repayment. These properties serving as collateral are characterized as industrial, warehouse or office.

BKFC’s senior management monitors and evaluates financial performance on a company-wide basis. All of BKFC’s financial service operations are similar, and considered by management to be aggregated into one reportable operating segment for purposes of generally accepted accounting principles, although certain management responsibilities are assigned by business line. Accordingly, all of BKFC’s operations are aggregated in one reportable operating segment in this Annual Report on Form 10-K (this “Annual Report”). Revenue, net income and total assets for the years ended December 31, 2014, 2013 and 2012 are presented below:

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	For the year ended December 31,
	2014		2013		2012
	(Dollars in thousands)
Revenue:
Net Interest Income	$	55,860	$	55,254	$	56,185
Non-interest Income		23,154		24,011		22,421
Total Revenue		79,014		79,265		78,606
Net Income	$	18,316	$	19,765	$	18,145
Total Assets	$	1,931,656	$	1,857,492	$	1,844,104

As described in more detail in this Annual Report, the recent economic recession and ongoing economic recovery have had a substantial effect on the operations of BKFC and the Bank. In an effort to stabilize and strengthen the financial markets and the banking industry, the United States Congress and various federal agencies have taken a number of significant actions over the past several years, including the passage of legislation and the implementation of a number of programs. The most recent of these actions was the passage into law, on July 21, 2010, of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). See below under “Regulation and Supervision” for further discussion of the Dodd-Frank Act.

BKFC and the Bank participated in two government programs enacted in response to the recession. First, in October 2008 the Bank participated in the transaction account guarantee component of the Federal Deposit Insurance Corporation’s (the “FDIC”) Temporary Liquidity Guarantee Program (the “TLGP”), whereby the FDIC would temporarily guarantee all depositor funds in qualifying non-interest-bearing transaction accounts. Second, in February 2009 BKFC participated in the Capital Purchase Program (“CPP”) as part of the Troubled Asset Relief Program (“TARP”) sponsored by the United States Department of the Treasury (the “Treasury Department”), in order to enhance BKFC’s liquidity and capital position. BKFC received $34.0 million under the CPP in exchange for issuing 34,000 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Series A Preferred Stock”), and a warrant (the “Warrant”) to purchase approximately 274,784 shares of BKFC common stock (“Common Stock”). The Treasury Department’s authority to make new investments under the CPP expired in October 2010. On December 22, 2010, BKFC effected the repurchase of one-half of the outstanding $34 million of Series A Preferred Stock held by the Treasury Department. On November 23, 2011, BKFC effected the repurchase of the final $17 million of Series A Preferred Stock held by the Treasury Department. In the second quarter of 2013, the Company completed the repurchase of the Warrant for an aggregate repurchase price of $2,150,649. Prior to the repurchase transaction, the Warrant permitted the Treasury Department to purchase 276,078.12 shares of the Company’s common stock at an exercise price of $18.473 per share. Neither BKFC nor the Bank has actively participated in any of the other wide-ranging programs that were instituted by the federal government in response to the economic recession. For a discussion of the impact of the current economic conditions on the financial condition and results of operations of BKFC and its subsidiaries, see below under “The Current Economic Environment,” as well as “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report.

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

Acquisition Activities

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

3

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

On May 18, 2007, BKFC consummated the acquisition of FNB Bancorporation, Inc. and its subsidiary, First Bank of Northern Kentucky, Inc. (“First Bank”). This acquisition was accounted for under the purchase method of accounting and, accordingly, the tangible and identifiable intangible assets and liabilities of the purchase were recorded at estimated fair values. The excess of the purchase price over the net tangible and identifiable intangible assets was recorded as goodwill. The adjustments necessary to record tangible and identifiable intangible assets and liabilities at fair value are amortized to income and expensed over the estimated remaining lives of the related assets and liabilities.

On December 11, 2009, the Bank completed the purchase of 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 also included the deposits of two additional branches in northern Kentucky where the banking offices were excluded. This transaction added $76 million in deposits and $51 million in loans. The deposits were purchased at a premium of 6.50%, while the loans were purchased at an approximate 1% discount. The acquisition included a core deposit intangible asset of $1.579 million and goodwill of $5.31 million. In a separate transaction, the Bank also bought an additional $49 million in loans from Integra Bank in the third quarter and $7 million in the fourth quarter of 2009 at an approximate 1% discount. None of these purchased loans had shown evidence of credit deterioration at the time of the acquisition.

On December 31, 2009, the Bank completed the purchase of Tapke Asset Management, LLC (“TAM”). TAM was an independent investment advisory firm, headquartered in Fort Wright, Kentucky, and one of northern Kentucky’s largest independent investment advisory firms. As a result of this transaction, the Bank’s client assets increased to over $650 million at December 31, 2009. TAM was purchased for $3 million, consisting of $2 million in cash and $1 million in Common Stock, with an additional $500,000 in contingent consideration payable in three years based on revenue retention, which had a fair value of $395,000 and was paid out in 2012. The acquisition included a customer relationship intangible of $1,525,000, a non-compete agreement intangible of $320,000, a trade name intangible of $165,000 and goodwill of $1,370,000.

On October 28, 2011, the Bank completed the purchase of one banking office of the United Kentucky Bank of Pendleton County, Inc. (“United Kentucky Bank”), located in Falmouth, Kentucky and a portfolio of selected loans. This acquisition was consistent with the Bank’s strategy to strengthen and expand its northern Kentucky market share. This transaction added $28 million in deposits and $14 million in loans. The deposits were purchased at a $300,000 premium, while the loans were purchased at an approximate 1.58% discount. The acquisition included a core deposit intangible asset of $511,000 and goodwill of $134,000. The results of operations for this acquisition have been included since the transaction date of October 28, 2011.

Pending Merger

On September 8, 2014, BKFC and BB&T Corporation (NYSE: BBT) (“BB&T”) announced the signing of a definitive agreement under which BB&T will acquire BKFC in a cash and stock merger for total consideration valued at approximately $363 million. Under the terms of the agreement, which was approved by the shareholders of BKFC and the Board of Directors of each company, shareholders of BKFC will receive 1.0126 shares of BB&T common stock and $9.40 of cash for each share of BKFC common stock. Based on BB&T’s 14-day average closing price of $37.13 as of September 4, 2014, shareholders of BKFC will receive $47.00 for each share of BKFC common stock. The merger is subject to customary closing conditions, including receipt of regulatory approvals, and is expected to close in the first half of 2015.

4

The Current Economic Environment

The year ended December 31, 2014 saw slow growth both nationally and in the geographic markets where we operate.  The United States’ gross domestic product (GDP)  rebounded  strongly from a difficult first quarter in 2014.  For the full year 2014, the economy experienced year-over-year growth of 2.4%.  While the economy continues to show improvement, the rate of growth remains below a historical normalized rate of 3%.

Overall economic growth was further sustained by falling energy prices which help spur consumer spending.  Personal consumption grew at rate of 3.6% for 2014.   Unemployment declined, beginning at 6.7% and ending at 5.6% in 2014.  However, the percent of eligible workforce employed is well below historical averages.  Home values rose slightly and equities, despite much uncertainty, finished the year with substantial gains. 

For additional discussion of the impact of the current economic recession on the financial condition and results of operations of BKFC and its subsidiaries, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report.

Available Information

BKFC maintains an internet website at the following internet address: www.bankofky.com. BKFC makes available free of charge through its website, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after such material was electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”). Materials that BKFC files with the SEC may be read and copied at the SEC Public Reference Room at 100 F Street, N.E., Washington, DC 20549. This information may also be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains an internet website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at the SEC’s website, www.sec.gov. BKFC will provide a copy of any of the foregoing documents to shareholders free of charge upon request.

5

Lending Activities

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

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

	As of December 31,
	2014					2013					2012					2011					2010
	Amount		%			Amount		%			Amount		%			Amount		%			Amount		%
	(Dollars in thousands)
Type of Loan:
Nonresidential real estate loans	$	592,642		47.0	%	$	571,221		45.6	%	$	573,101		47.9	%	$	523,485		46.2	%	$	482,173		43.5	%
Residential real estate loans		272,531		21.6			283,356		22.7			278,286		23.3			266,268		23.5			260,625		23.5
Commercial loans		233,522		18.5			241,794		19.3			201,384		16.8			193,176		17.1			216,660		19.6
Consumer loans		15,080		1.2			15,806		1.3			16,447		1.4			16,618		1.5			16,546		1.5
Construction and land development loans		104,299		8.3			103,019		8.2			104,498		8.7			104,788		9.3			107,611		9.8
Municipal obligations		42,347		3.4			36,058		2.9			23,128		1.9			27,066		2.4			23,573		2.1
Total loans	$	1,260,421		100.0	%	$	1,251,254		100.0	%	$	1,196,844		100.0	%	$	1,131,401		100.0	%	$	1,107,188		100.0	%
Less:
Deferred loan fees		1,516					1,609					1,435					1,447					1,179
Allowance for loan losses		14,639					16,306					16,568					18,288					17,368
Net loans	$	1,244,266				$	1,233,339				$	1,178,841				$	1,111,666				$	1,088,641

6

Loan Maturity Schedule. The following table sets forth certain information, as of December 31, 2014, regarding the dollar amount of certain loans maturing in the Bank’s portfolio based on their contractual terms to maturity and the dollar amount of such loans that have fixed or variable rates within certain maturity ranges ending after 2014:

			Due after 1 year to 5		Due after 5
	Due within one year		years		years		Total
	(Dollars in thousands)
Commercial loans	$	119,899	$	102,919	$	10,704	$	233,522
Construction and land development loans		104,299		-		-		104,299
Total	$	224,198	$	102,919	$	10,704	$	337,821
Interest sensitivity:
With fixed rates			$	47,771	$	5,606
With variable rates				55,148		5,098
Total			$	102,919	$	10,704

Nonresidential Real Estate Loans. The Bank makes loans secured by first mortgages on nonresidential real estate, including retail stores, office buildings, warehouses, apartment buildings and recreational facilities. Such mortgage loans generally have maturities between 5 and 10 years with amortization periods of 10 to 20 years and are made with adjustable interest rates tied to a spread over LIBOR or a comparable U.S. Treasury index (“ARMs”). Interest rates on LIBOR based loans typically adjust every 30 days, while the ARMs adjust every one-, three- or five-years based upon the interest rates of the applicable one-, three- or five- year U.S. Treasury security then offered.

The Bank limits the amount of each loan in relationship, in accordance with the Bank’s policy, to the appraised value of the real estate and improvements at the time of origination of a nonresidential real estate loan. In accordance with regulations, the maximum loan-to-value ratio (the “LTV”) on nonresidential real estate loans made by the Bank ranges from 65% to 85%, depending on property type.

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

At December 31, 2014, the Bank had a total of $593 million in nonresidential real estate loans, the vast majority of which were secured by property located in the northern Kentucky and the Greater Cincinnati metropolitan area. Owner-occupied nonresidential real estate was $296 million of the total nonresidential real estate loans. Total nonresidential real estate loans comprised approximately 47% of the Bank’s total loans at such date, $4.46 million of which were classified as non-performing.

Residential Real Estate Loans. The Bank originates permanent conventional loans secured by first mortgages on single-family and 1-4 family residential properties located in the northern Kentucky area. The Bank also originates loans for the construction of residential properties and home equity loans secured by second mortgages on residential real estate. Each such loan is secured by a mortgage on the underlying real estate and any improvements thereon.

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

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While in a rising interest rate environment the delinquency and foreclosure rates associated with interest rate resets on residential real estate loans could increase, this risk is somewhat mitigated by the 2% period cap and the 6% lifetime cap on the typical loan in the Bank’s residential real estate portfolio. Furthermore, the aggregate amount of residential real estate loans held by the Bank does not represent a significant portion of the Bank’s overall loan portfolio. Accordingly, the risks associated with a material increase in delinquencies and foreclosures resulting upon the occurrence of any interest rate reset are minimal.

BKFC does not have higher risk loans such as subprime loans, “alt A” loans, no or little documentation loans, interest-only or option adjustable rate mortgage products in its portfolio. The majority of the Bank’s residential portfolio would be considered conforming loans in accordance with standards of governmental agencies.

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

The aggregate amount of the Bank’s residential real estate loans equaled approximately $273 million at December 31, 2014 and represented 22% of total loans at such date. At December 31, 2014, the Bank had $2.96 million of non-performing loans of this type.

Loans Held for Sale. The Bank originates residential real estate loans to be sold, service released, subject to commitment to purchase in the secondary market. These loans are fixed rate with terms ranging from fifteen to thirty years. At December 31, 2014, these loans totaled $2.3 million.

Commercial Loans. The Bank offers commercial loans to individuals and businesses located throughout northern Kentucky and the Greater Cincinnati metropolitan area. The typical commercial borrower is a small to mid-sized company with annual sales under $20 million. The majority of commercial loans are made with adjustable rates of interest tied to the Bank’s prime interest rate. Commercial loans typically have terms of one to five years. In general, commercial lending entails significant risks. Such loans are subject to greater risk of default during periods of adverse economic conditions. Because such loans are secured by equipment, inventory, accounts receivable and other non-real estate assets, the collateral may not be sufficient to ensure full payment of the loan in the event of a default. To reduce such risk, the Bank generally obtains personal guarantees from one or more of the principals backing the borrower. At December 31, 2014, the Bank had $234 million, or 19% of total loans, in commercial loans, $687,000 of which were classified as non-performing.

Consumer Loans. The Bank makes a variety of consumer loans, including automobile loans, recreational vehicle loans and personal loans. Such loans generally have fixed rates with terms from three to five years. Consumer loans involve a higher risk of default than residential real estate loans, particularly in the case of consumer loans that are unsecured or secured by depreciating assets, such as automobiles. Repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation, and the remaining deficiency may not warrant further substantial collection efforts against the borrower. In addition, consumer loan collections depend on the borrower’s continuing financial stability, and thus are more likely to be adversely affected by job loss, illness or personal bankruptcy. Various federal and state laws, including federal and state bankruptcy and insolvency laws, may also limit the amount that can be recovered on such loans. At December 31, 2014, the Bank had $15 million, or 1% of total loans, in consumer loans, $37,000 of which were classified as non-performing.

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

Construction and land development loans involve greater underwriting and default risks than do loans secured by mortgages on improved and developed properties, due to the effects of general economic conditions on real estate developments, developers, managers and builders. In addition, such loans are more challenging to evaluate and monitor. Loan funds are advanced upon the security of the project under construction, which is more challenging to value before the completion of construction. Moreover, because of the uncertainties inherent in estimating construction costs, it is challenging to evaluate accurately the value upon completion and the total loan funds required to complete a project. In the event a default on a construction or land development loan, it may be necessary for the Bank to take control of the project and attempt either to arrange for completion of construction or dispose of the unfinished project. At December 31, 2014, a total of $104 million, or approximately 8% of the Bank’s total loans, consisted of construction and land development loans, $1.68 million of which were classified as non-performing.

8

Municipal Obligations. The Bank makes loans to various Kentucky municipalities for various purposes, including the construction of municipal buildings and equipment purchases. Loans made to municipalities are usually secured by mortgages on the properties or financed by a lien on equipment purchased or by the general taxing authority of the municipality and provide certain tax benefits for the Bank. At December 31, 2014, the Bank had $42 million, or 3% of total loans, invested in municipal obligation loans, none of which were classified as non-performing.

Loan Solicitation and Processing. The Bank’s loan originations are developed from a number of sources, including its existing customer base, periodic newspaper and radio advertisements, solicitations by the Bank’s lending staff, walk-in customers, director referrals and an officer call program. For nonresidential real estate loans, the Bank obtains information with respect to the credit, business and financial history of the borrower and its current and prior real estate projects. Personal guarantees of one or more principals of the borrower are generally obtained. For loans that meet or exceed a certain dollar threshold, an environmental study of such real estate is normally conducted. Upon the completion of the appraisal of the nonresidential real estate and the receipt of information on the borrower, the loan package is submitted to the Bank’s Loan Committee if the amount and/or relationship exceed the officer’s lending authority for approval or rejection. If, however, the loan relationship is in excess of $2.50 million, the loan will be submitted to the Bank’s Executive Loan Committee for approval or rejection.

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

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

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

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

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

Loans that are 90 days past due or more that are not considered well secured and in the process of collection are placed on non-accrual status. Under-collateralized loans that are 90 days past due or more in which the Bank does not expect to be repaid by the borrower’s or guarantor’s financial wherewithal after an extensive collection effort, shall be reviewed for full or partial charge-off. The amount charged-off will be charged against the allowance for loan losses.

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

9

The Bank’s risk rating system was developed in a manner that is consistent with the regulatory guidance. Problem assets are classified as “special mention” (risk rating 6), “substandard” (risk rating 7), “substandard non-accrual” (risk rating 8), or “doubtful” (risk rating 9). “Substandard” assets have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. “Doubtful” assets have the same weaknesses as “substandard” assets, with the additional characteristics that (i) the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable and (ii) there is a high possibility of loss. The regulations also contain a “special mention” or also known as “criticized assets” category, consisting of assets which do not currently expose an institution to a sufficient degree of risk to warrant classification but which possess credit deficiencies or potential weaknesses deserving management’s close attention.

The aggregate amounts of the Bank’s classified assets at December 31, 2014 and 2013 were as follows:

	12/31/14		12/31/13
	(Dollars in thousands)
Special mention (risk rating 6)	$	22,768	$	27,590
Substandard (risk rating 7 & 8)		41,579		56,027
Doubtful (risk rating 9)		0		0
Total classified assets	$	64,347	$	83,617

The following table reflects the amount of loans that are in delinquent status of 30 to 89 days as of December 31, 2014 and 2013. Loans that are delinquent 90 days or more are included in the non-accrual loans noted below.

	12/31/14			12/31/13
	(Dollars in thousands)
Loans delinquent
30 to 59 days	$	3,760		$	4,271
60 to 89 days		268			1,543
Total delinquent loans	$	4,028		$	5,814
Ratio of total delinquent loans 30 to 89 days to total loans		0.31	%		0.46	%

The following table sets forth information with respect to the Bank’s non-performing assets for the periods indicated. In addition, the Bank evaluates loans to identify those that are “impaired.” Impaired loans are those for which management has determined that it is probable that the customer will be unable to comply with the contractual terms of the loan. Loans so identified are reduced (i) to the fair value of the collateral securing the loan, (ii) to the present value of expected future cash flows, or (iii) to the market price of the loan based upon readily available information for that type of loan, by the allocation of a portion of the allowance for loan losses to the loan. As of December 31, 2014, the Bank had designated $17 million as impaired loans, and a portion of these loans were included in the non-accrual and 90 days past due and troubled debt restructurings totals below. Management evaluates for impairment all loans selected for specific review during its quarterly allowance for loan losses analysis. Generally, the impairment analysis does not address smaller balance consumer credits.

10

	At December 31,
	2014			2013			2012			2011			2010
	(Dollars in thousands)
Loans accounted for on a non-accrual basis:(1)
Nonresidential real estate	$	4,458		$	9,156		$	12,138		$	6,628		$	6,311
Residential real estate		2,950			5,360			5,243			5,325			4,208
Construction		1,678			510			1,075			1,897			5,329
Commercial		687			385			740			1,175			4,749
Consumer and other		9			6			48			626			51
Total		9,782			15,417			19,244			15,651			20,648
Accruing loans which are contractually past due 90 days or more:
Nonresidential real estate	$	0		$	0		$	0		$	0		$	68
Residential real estate		7			0			17			112			263
Construction		0			0			0			0			0
Commercial		0			0			0			74			0
Consumer and other loans		28			21			22			33			83
Total		35			21			39			219			414
Total non-performing loans	$	9,817		$	15,438		$	19,283		$	15,870		$	21,062
Percentage of total loans		.78	%		1.24	%		1.61	%		1.40	%		1.90	%
Other real estate owned(2)	$	6,670		$	5,305		$	5,396		$	5,844		$	795
Troubled debt restructured (TDR) loans:
Performing troubled debt restructured (TDR) loans(3)	$	6,099		$	8,816		$	6,046		$	13,306		$	6,135
Nonperforming trouble debt restructured (TDR) loans (included in nonaccrual loans)	$	4,222		$	8,246		$	11,095		$	1,923		$	2,186
Total troubled debt restructured loans	$	10,321		$	17,062		$	17,141		$	15,229		$	8,321

(1) A loan is generally placed on non-accrual status if: (i) the loan becomes 90 days or more past due or (ii) payment in full of both principal and interest for the loan cannot be reasonably expected. Payments received on a non-accrual loan are applied to principal, until qualifying for return to accrual method.

(2) Consists of real estate acquired through foreclosure, which is carried at fair value less estimated selling expenses.

(3) Consists of accruing TDR loans to borrowers experiencing financial difficulties where the Bank made certain concessionary modifications to the loan’s contractual terms such as interest rate reductions, principal forgiveness and other actions intended to minimize or eliminate the economic loss and to avoid foreclosure or repossession of collateral. TDRs accrue interest as long as the borrower complies with the modified terms.

The amount of gross interest income that would have been recorded for nonaccrual loans in 2014 if loans had been current in accordance with their original terms was $609,000 and $789,000 for 2013.

The credit quality table detailing loans by grade, the non-performing loan table and the aging of past due table include measurements which management believes are the best indicators of potential problem loans and there were no other known potential problem loans beyond what is disclosed in these tables at December 31, 2014.

Allowance for Loan Losses. While management believes that it uses the best information available to determine the allowance for loan losses, unforeseen market conditions could result in adjustments, and net earnings could be significantly affected if circumstances differ substantially from the assumptions used in making the final determination. At December 31, 2014, the Bank’s allowance for loan losses totaled $14.6 million.

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

The analysis of the allowance for loan losses includes the allocation of specific amounts of the allowance to individual problem loans, generally based on an analysis of the collateral securing those loans. Portions of the allowance are also allocated to loans based on their risk rating with the higher the risk rating, the higher the allowance allocated to that loan. These components are added together and compared to the balance of our allowance at the evaluation date.

11

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

At December 31,
	2014					2013					2012					2011					2010
Need header for each Column, wouldn’t fit Loan type:	Amount		Percentage of Loans in each Category to Total Loans			Amount		Percentage of Loans in each Category to Total Loans			Amount		Percentage of Loans in each Category to Total Loans			Amount		Percentage of Loans in each Category to Total Loans			Amount		Percentage of Loans in each Category to Total Loans
	(Dollars in thousands)
Commercial	$	3,297		22	%	$	3,247		19	%	$	2,716		17	%	$	3,207		17	%	$	3,440		20	%
Residential real estate		3,519		24			4,554		23			4,272		23			2,591		24			2,431		23
Nonresidential real estate		6,388		44			6,502		46			6,991		48			7,614		46			8,126		44
Construction		998		7			1,538		8			1,964		9			4,701		9			3,150		10
Consumer		312		2			373		1			584		1			162		2			166		1
Municipal obligations		125		1			92		3			41		2			13		2			55		2
Total allowance for loan losses	$	14,639		100	%	$	16,306		100	%	$	16,568		100	%	$	18,288		100	%	$	17,368		100	%

The Bank’s allowance for loan losses decreased from $16.3 million at December 31, 2013, to $14.6 million at December 31, 2014. Because the loan loss allowance is based on estimates, it is monitored on an ongoing basis and adjusted as necessary to provide an adequate allowance. For further discussion on the allowance for loan losses see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report.

Investment Activities

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

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

	At December 31,
	2014				2013				2012
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(Dollars in thousands)
Held-to-maturity securities:
Municipal and other obligations	$	73,629	$	73,934	$	77,010	$	76,457	$	66,843	$	68,504
Total held-to-maturity securities	$	73,629	$	73,934	$	77,010	$	76,457	$	66,843	$	68,504
Available-for-sale securities:
U.S. Government, Federal Agency and Government Sponsored Enterprises	$	90,439	$	89,684	$	122,905	$	120,139	$	127,416	$	128,477
U.S. Government Mortgage-Backed		206,786		210,604		219,986		220,059		180,019		184,907
Corporate obligations		850		850		925		925		1,060		1,060
Total available-for-sale securities	$	298,075	$	301,138	$	343,816	$	341,123	$	308,495	$	314,444

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The following table sets forth the amortized cost of the Bank’s securities portfolio at December 31, 2014 by contractual or expected maturity. Securities with call features are presented at call date if management expects that option to be exercised.

	Maturing within one year					Maturing after one and within five years					Maturing after five and within ten years					Maturing after ten years				Total
	Amortized Cost		Average Yield			Amortized Cost		Average Yield			Amortized Cost		Average Yield			Amortized Cost		Average Yield		Amortized Cost		Average Yield
(Dollars in thousands)
Held-to-maturity:
Municipal and other obligations (1)	$	5,862		2.90	%	$	32,851		2.78	%	$	34,916		2.95	%	$	-		-%	$	73,629		2.87	%
Available- for- sale:
Corporate obligations		-		0.00	%		-		0.00	%		850		0.28	%		-		-		850		0.28	%
U.S. Government, Federal Agency and Government Sponsored Enterprises		14,591		.83	%		70,541		1.46	%		5,307		1.96	%		-		-		90,439		1.39	%
U.S. Government Mortgage-Backed		48,543		2.00	%		89,416		2.37	%		68,827		2.35	%		-		-		206,786		2.28	%
Totals	$	68,996		1.83	%	$	192,808		2.11	%	$	109,900		2.41	%	$	-		-%	$	371,704		2.17	%

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

Deposits and Borrowings

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

The Bank also uses retail repurchase agreements as a source of funds. These agreements essentially represent borrowings by the Bank from customers with maturities of three months or less. Certain securities are pledged as collateral for these agreements. At December 31, 2014, the Bank had $25.7 million in retail repurchase agreements.

The Bank also entered into a capital lease obligation for a branch in 1997 with a term of 20 years and a monthly payment of $4,000.

Deposits. Deposits are attracted principally from within the Bank’s designated lending area through the offering of numerous deposit instruments, including regular passbook savings accounts, negotiable order of withdrawal (“NOW”) accounts, money market deposit accounts, term certificate accounts and individual retirement accounts (“IRAs”). Interest rates paid, maturity terms, service fees and withdrawal penalties for the various types of accounts are established periodically by the Bank’s Board of Directors based on the Bank’s liquidity requirements, growth goals and market trends. The Bank may on occasion use brokers to attract deposits. The Bank did not have brokered deposits as of December 31, 2014.

The following table presents the amount of the Bank’s jumbo certificates of deposit with principal balances greater than $100,000 by the time remaining until maturity as of December 31, 2014:

Maturity	At December 31, 2014
	(In thousands)
Three months or less	$	21,451
Over 3 months to 6 months		29,380
Over 6 months to 12 months		30,029
Over 12 months		33,462
Total	$	114,322

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The following table presents the average daily deposits for the years ended December 31, 2014, 2013 and 2012, and the average rates paid on those deposits are summarized in the following table:

	At December 31,
	2014					2013					2012
	Average Balance		Average Rate paid			Average Balance		Average Rate paid			Average Balance		Average Rate paid
	(Dollars in thousands)
Demand deposits	$	337,657		0.00	%	$	328,998		0.00	%	$	290,654		0.00	%
Savings and transaction accounts:
Savings		365,284		0.14	%		386,995		0.15	%		372,201		0.20	%
Interest bearing checking		559,639		0.18	%		496,530		0.18	%		447,714		0.22	%
Time deposits:
Deposits of $100,000 or more		112,472		0.63	%		120,763		0.63	%		135,055		0.86	%
Other time deposits		186,738		0.69	%		205,664		0.71	%		243,056		0.98	%
Total deposits	$	1,561,790		0.23	%	$	1,538,950		0.24	%	$	1,488,680		0.35	%

Short-Term Borrowings. In addition to repurchase agreements, the Bank has agreements with correspondent banks to purchase federal funds on an as needed basis to meet liquidity needs.

The following table sets forth the maximum month-end balance amount of the Bank’s outstanding short-term borrowings during the years ended December 31, 2014, 2013 and 2012, along with the average aggregate balances of the Bank’s outstanding short-term borrowings for such periods:

	During year ended December 31,
	2014			2013			2012
	(Dollars in thousands)
Maximum balance at any month-end during the period	$	57,653		$	32,514		$	41,408
Average balance		32,785			27,947			26,060
Weighted average interest rate		0.20	%		0.22	%		0.30	%

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

	December 31,
	2014			2013			2012
Short-term borrowings outstanding	$	45,703		$	27,643		$	41,408
Weighted average interest rate		0.20	%		0.20	%		0.26	%

Long-Term Borrowings. Long-term borrowings consist of $10 million in advances from the Federal Home Loan Bank, $18.6 in trust preferred securities, $20 million in subordinate debentures issued by US Bank and a $1.7 note payable from US Bank. Further details of these borrowings can be found in note 8 of the accompanying financial statement.

14

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

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

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

In recognition of the foregoing factors, the management and the Board of Directors of the Bank have implemented an asset and liability management strategy directed toward maintaining a reasonable degree of interest rate sensitivity. The principal elements of such strategy include: (i) meeting the consumer preference for fixed-rate loans by establishing a correspondent lending program that has enabled the Bank to originate and sell fixed-rate mortgage loans; (ii) maintaining relatively short weighted-average terms to maturity in the securities portfolio as a hedge against rising interest rates; (iii) emphasizing the origination and retention of adjustable-rate loans; and (iv) utilizing longer term certificates of deposit as funding sources when available. Management and the Board of Directors monitor the Bank’s exposure to interest rate risk on a monthly basis to ensure the interest rate risk is maintained within an acceptable range. For more information on the Bank’s interest rate risk see the “Asset/Liability Management and Market Risk” section of “Item 7A. Quantitative and Qualitative Disclosure about Market Risk”.

The following table sets forth the amounts of the Bank’s interest-earning assets and interest-bearing liabilities outstanding at December 31, 2014, which are scheduled to re-price or mature in each of the time periods shown. The amounts of assets and liabilities shown which re-price or mature in a given period were determined in accordance with the contractual terms of the asset or liability. The table shows that the maturity or re-pricing of the Bank’s liabilities exceed the contractual terms to maturity or re-pricing of the Bank’s earning assets in a twelve-month period by $203 million.

15

	Within 3 months			4 - 12 months			1 through 5 years			Over 5 years			Total
	(Dollars in thousands)
Interest-earning assets:
Federal funds sold	$	106,142		$	-		$	-		$	-		$	106,142
Interest bearing deposits with banks		252			-			-			-			252
Securities		16,041			62,877			187,901			112,798			379,617
Loans receivable (1)		650,019			194,254			391,442			28,776			1,264,491
Total interest-earning assets		772,454			257,131			579,343			141,574			1,750,502
Interest-bearing liabilities:
Savings deposits		153,595			-			-			-			153,595
Money market deposit accounts		187,207			-			-			-			187,207
NOW accounts		605,686			-			-			-			605,686
Certificates of deposit		46,047			116,393			94,738			2			257,180
IRAs		14,113			14,308			12,905			16			41,342
Repurchase agreements		25,703			-			-			-			25,703
Other Borrowings		20,000			-			-			-			20,000
Notes payable		39,667			10,000			-			658			50,325
Total interest-bearing liabilities		1,092,018			140,701			107,643			676			1,341,038
Interest-earning assets less interest-bearing liabilities	$	(319,564	)	$	116,430		$	471,700		$	140,898		$	409,464
Cumulative interest-rate sensitivity gap	$	(319,564	)	$	(203,134	)	$	268,566		$	409,464
Cumulative interest-rate gap as a percentage of total interest earning assets		(18.26	)%		(11.60	)%		15.34	%		23.39	%

(1) Excludes the allowance for loan losses, in process accounts and purchase accounting adjustments.

Competition

There is significant competition within the banking and financial services industry in northern Kentucky, which is the primary market in which the Bank operates. Changes in regulation, technology and product delivery systems have resulted in an increasingly competitive environment. The Bank expects to continue to face increasing competition from online and traditional financial institutions seeking to attract customers by providing access to similar services and products.

Some of the institutions which compete with the Bank are among the largest financial institutions in the United States. Any actual intervention or assistance to these competitors made by the U.S. federal government, as well as the perception that such assistance would be forthcoming if needed, could have the effect of eroding any competitive advantages of the Bank in the markets in which it operates. Within the northern Kentucky and greater Cincinnati, Ohio markets, the Bank competes with approximately six financial institutions with over $50 billion in total assets, as well as numerous state chartered banking institutions of comparable or larger size and resources and smaller community banking organizations. The Bank also has numerous local, regional and national nonbank competitors, including savings and loan associations, credit unions, mortgage companies, insurance companies, finance companies, financial service operations of major retailers, investment brokerage and financial advisory firms and mutual fund companies. Because nonbank financial institutions are not subject to the same regulatory restrictions as banks and bank holding companies, they can often operate with greater flexibility and lower cost structures. Currently, the Bank does not face meaningful competition from international banks in its market, although that could change in the future.

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

Due to the Bank’s size relative to the many other financial institutions in its market, management believes that the Bank does not have a substantial share of the deposit and loan markets. The table below presents FDIC deposit data regarding the Bank’s deposit market share. The June 2014 data set forth below are the most current data available from the FDIC at this time and represents those counties in which the Bank has reported market share for deposits.

Bank Deposit Market Share

($ in thousands)

Market (1)	June 2014 Deposits		Deposit Market Share
Boone County, Kentucky	$	543,149		25.69	%
Campbell County, Kentucky		175,314		13.33	%
Gallatin County, Kentucky		28,191		60.54	%
Grant County, Kentucky		61,272		24.77	%
Kenton County, Kentucky		713,205		29.35	%
Pendleton County, Kentucky		23,785		17.43	%
Hamilton County, Ohio		30,528		0.05	%

_________________(1) Source: FDIC

16

Services provided by the Bank’s trust division face competition from many national, regional and local financial institutions. Companies that offer broad services similar to those provided by the Bank, such as other banks, trust companies and full service brokerage firms, as well as companies that specialize in particular services offered by the Bank, such as investment advisors and mutual fund providers, all compete with the Bank’s trust division.

The Bank’s ability to compete effectively is a result of being able to provide customers with desired products and services in a convenient and cost effective manner. Customers for commercial, consumer and mortgage banking as well as trust services are influenced by convenience, quality of service, personal contacts, availability of products and services and related pricing. The Bank continually reviews its products, locations, alternative delivery channels and pricing strategies to maintain and enhance its competitive position. Management believes it can compete effectively as a result of local market knowledge and awareness of, and attention to, customer needs.

Employees

As of December 31, 2014, the Bank had 282 full-time employees and 67 part-time employees. The Bank believes that relations with its employees are good. None of the employees of the Bank are represented by a labor union or subject to a collective bargaining agreement.

Regulation and Supervision

The following discussion describes elements of an extensive regulatory framework applicable to bank holding companies and banks and specific information about BKFC. Federal and state regulation of banks and their holding companies is intended primarily for the protection of depositors and the Deposit Insurance Fund (“DIF”), rather than for the protection of shareholders and creditors. A change in statutes, regulations or policies could have a material impact on the business of BKFC and its subsidiaries, including changes resulting from the passage of the Dodd-Frank Act in 2010 and the implementation of rulemaking under the Dodd-Frank Act that has continued through 2015, as described in more detail below. BKFC and its subsidiaries may also be affected by future legislation and rulemaking that can change banking statutes in substantial and unexpected ways and by the actions of the Board of Governors of the Federal Reserve System (the “FRB”) as it attempts to control the money supply and credit availability in order to influence the economy.

Regulation of BKFC. BKFC is a bank holding company subject to regulation by the FRB under the Bank Holding Company Act of 1956, as amended (“BHCA”). As a bank holding company, BKFC is required to file periodic reports with, and is subject to the regulation, supervision and examination by, the FRB. Such examination by the FRB determines whether BKFC is operating in accordance with various regulatory requirements and in a safe and sound manner. The FRB may initiate enforcement proceedings against BKFC for violations of laws or regulations or for engaging in unsafe and unsound practices, particularly if such conduct could or does adversely impact the Bank. BKFC is also subject to the disclosure and regulatory requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, as administered by the SEC.

Under the BHCA, the FRB’s prior approval is required in any case in which BKFC proposes to acquire all or substantially all of the assets of any bank, acquire direct or indirect ownership or control of more than 5% of the voting shares of any bank, or merge or consolidate with any other bank holding company. The BHCA also prohibits, with certain exceptions, BKFC from acquiring direct or indirect ownership or control of more than 5% of any class of voting shares of any non-banking company. Under the BHCA, BKFC may not engage in any business other than managing and controlling banks or furnishing certain specified services to subsidiaries and may not acquire voting control of non-banking companies unless the FRB determines such businesses and services to be closely related to banking. When reviewing bank acquisition applications for approval, the FRB considers, among other things, each subsidiary bank’s record in meeting the credit needs of the communities it serves in accordance with the Community Reinvestment Act of 1977, as amended (the “CRA”). The Bank has a current CRA rating of “satisfactory.” In addition, the FRB could require that BKFC terminate any activity, if the FRB deems the activity to constitute a serious risk to the financial soundness of the Bank.

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

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

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

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

The Bank is subject to the guidance on sound risk management practices for concentrations in commercial real estate lending set forth by the Office of the Comptroller of the Currency, the FRB and the FDIC. The guidance is intended to help ensure that institutions pursuing a significant commercial real estate lending strategy remain healthy and profitable while continuing to serve the credit needs of their communities. Also, this guidance directs institutions in developing risk management practices and levels of capital that are commensurate with the level and nature of their commercial real estate concentrations.

Kentucky law limits loans or other extensions of credit to any borrower to 20% of the Bank’s paid-in capital and actual surplus. Such limit is increased to 30% if the borrower provides good collateral security or executes to it a mortgage upon real or personal property with a cash value exceeding the amount of the loan. Loans or extensions of credit to certain borrowers are aggregated, and loans secured by certain government obligations are exempt from these limits. At December 31, 2014, the maximum the Bank could lend to any one borrower generally equaled $23 million and equaled $34 million if the borrower provided collateral with a cash value in excess of the amount of the loan. Federal banking laws and regulations also limit the transfer of funds or other items of value, including pursuant to the provision of loans, from banks to their affiliates.

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

The Dodd-Frank Act. The Dodd-Frank Act represents a significant overhaul of many aspects of the regulation of the financial-services industry. The Dodd-Frank Act implements numerous and far-reaching changes that affect financial companies, including banks and bank holding companies such as BKFC by, among other things:

· centralizing responsibility for consumer financial protection by creating a new independent agency, the Consumer Financial Protection Bureau, with responsibility for implementing, enforcing and examining for compliance with federal consumer financial laws;

· applying the same leverage and risk-based capital requirements that apply to insured depository institutions to bank holding companies;

· requiring the FDIC to seek to make its capital requirements for banks countercyclical so that the amount of capital required to be maintained increases in times of economic expansion and decreases in times of economic contraction;

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· changing the assessment base for federal deposit insurance from the amount of insured deposits to consolidated assets less tangible capital;

· implementing corporate governance revisions, including with regard to executive compensation and proxy access by shareholders, that apply to all public companies, not just financial institutions;

· making permanent the $250,000 limit for federal deposit insurance and increasing the cash limit of Securities Investor Protection Corporation protection from $100,000 to $250,000, and providing unlimited federal deposit insurance until December 31, 2012, for non-interest-bearing demand transaction accounts at all insured depository institutions;

· repealing the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts; and

· prohibiting banks and their affiliates from engaging in proprietary trading and investing in and sponsoring hedge funds and private equity funds.

The majority of the provisions in the Dodd-Frank Act are aimed at financial institutions that are significantly larger than BKFC or the Bank. Nonetheless, there are provisions with which we will have to comply now that the Dodd-Frank Act is signed into law. Many aspects of the Dodd-Frank Act are subject to further rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on BKFC and the Bank. However, compliance with this law and its implementing regulations has resulted, and will continue to result, in additional operating costs that could have a material adverse effect on our future financial condition and results of operations.

Emergency Economic Stabilization Act of 2008. The Emergency Economic Stabilization Act of 2008 (the “EESA”) was enacted on October 3, 2008. The EESA authorized the Secretary of the Treasury Department (the “Secretary”) to purchase or guarantee up to $700 billion in troubled assets from financial institutions under TARP. Pursuant to authority granted under the EESA, the Secretary created the TARP CPP under which the Treasury Department was authorized to invest up to $250 billion in senior preferred stock of U.S. banks and savings associations or their holding companies. The Treasury Department’s authority to make new investments under the CPP expired in October 2010.

CPP Participation. On February 13, 2009, BKFC issued 34,000 shares of Series A Preferred Stock for a total price of $34 million pursuant to a Letter Agreement with the Treasury Department (the “Purchase Agreement”). On November 23, 2011, BKFC repurchased the final $17 million outstanding Series A Preferred Stock held by the Treasury Department. Accordingly, BKFC no longer is subject to the restrictions applicable to CPP participants.

As part of its purchase of the Series A Preferred Stock, the Treasury Department received the Warrant to purchase 274,784 shares of Common Stock at an initial per share exercise price of $18.56, which was repurchased in the second quarter of 2013.

Both the Series A Preferred Stock and the Warrant were accounted for as components of Tier 1 capital.

Regulatory Capital Requirements.

BKFC and the Bank are each required to comply with applicable capital adequacy standards established by banking regulators. The current risk-based capital standards applicable to BKFC and the Bank, parts of which are currently in the process of being phased-in, are based on Basel III (as defined below).

The FRB has adopted risk-based capital guidelines for bank holding companies. Prior to January 1, 2015, such companies were required to maintain adequate consolidated capital to meet the minimum ratio of total capital to risk-weighted assets (including certain off-balance-sheet items, such as standby letters of credit) (the “Total Risk-Based Ratio”) of 8%. At least half of the minimum-required total capital of 8% was required to comprise Tier 1 Capital, which consists of common shareholders’ equity, minority interests in the equity of consolidated subsidiaries and a limited amount of perpetual preferred stock, less goodwill and certain other intangibles (“Tier 1 Risk-Based Ratio”). The remainder of total capital may consist of subordinated and qualifying convertible debt, other preferred stock and a limited amount of loan and lease loss allowances.

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The FRB also has established minimum leverage ratio guidelines for bank holding companies. Prior to January 1, 2015, the guidelines provided for a minimum ratio of Tier 1 Capital to average total assets (excluding the loan and lease loss allowance, goodwill and certain other intangibles, and portions of certain nonfinancial equity investments) (the “Leverage Ratio”) of 3% for bank holding companies that met specified criteria, including having the highest regulatory rating. All other bank holding companies were required to maintain a Leverage Ratio of 4% to 5%. The guidelines further provide that bank holding companies making acquisitions are expected to maintain strong capital positions substantially above the minimum supervisory levels.

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

As part of the Dodd-Frank Act, provisions were added that require federal banking agencies to develop capital requirements that address systemically risky activities. The effect of these capital rules are such that trust preferred securities issued by a company, such as BKFC, with total consolidated assets of less than $15 billion before May 19, 2010 and treated as regulatory capital are grandfathered, but any such securities issued later are not eligible as regulatory capital.  The banking regulators must develop regulations setting minimum risk-based and leverage capital requirements for holding companies and banks on a consolidated basis that are no less stringent than the generally applicable requirements in effect for depository institutions under the prompt corrective action regulations discussed below.  The banking regulators also must seek to make capital standards countercyclical so that the required levels of capital increase in times of economic expansion and decrease in times of economic contraction. 

Basel III. In 2010, the Group of Governors and Heads of Supervisors of the Basel Committee on Banking Supervision, the oversight body of the Basel Committee, published its “calibrated” capital standards for major banking institutions (“Basel III”). Under these standards, when fully phased in, banking institutions will be required to maintain heightened Tier 1 common equity, Tier 1 capital and total capital ratios, as well as maintaining a “capital conservation buffer.” As proposed, Basel III provides for the Tier 1 common equity and Tier 1 capital ratio requirements to be phased in incrementally between January 1, 2014 and January 1, 2015; the deductions from common equity made in calculating Tier 1 common equity (for example, for mortgage servicing assets, deferred tax assets and investments in unconsolidated financial institutions) to be phased in incrementally over a four-year period commencing on January 1, 2014; and the capital conservation buffer to be phased in incrementally between January 1, 2016 and January 1, 2019. The Basel Committee also announced that a “countercyclical buffer” of 0% to 2.5% of common equity or other fully loss-absorbing capital “will be implemented according to national circumstances” as an “extension” of the conservation buffer. The final package of Basel III reforms was approved by the G20 leaders in November 2010 and is subject to individual adoption by member nations. The U.S. banking regulators adopted the final rules for U.S. banking organizations implementing Basel III requirements (the “Final Rules”) in July 2013.

U.S. Implementation of Basel III. The Final Rules establish a comprehensive capital framework and implement the Basel III reforms and certain changes required by the Dodd-Frank Act. Under the Final Rules, minimum requirements will increase for both the quantity and quality of capital held by banking organizations. Consistent with the international Basel III framework, the Final Rules include a new minimum ratio of common equity tier 1 capital (Tier 1 Common) to risk-weighted assets and a Tier 1 Common capital conservation buffer of 2.5% of risk-weighted assets that will apply to all supervised financial institutions. The Final Rules also raise the minimum ratio of tier 1 capital to risk-weighted assets and includes a minimum leverage ratio of 4% for all banking organizations. These new minimum capital ratios have become effective for us on January 1, 2015, and will be fully phased-in on January 1, 2019.

Following are the Basel III regulatory capital levels that we must satisfy to avoid limitations on capital distributions and discretionary bonus payments during the applicable transition period, from January 1, 2015 until January 1, 2019:

	January 1, 2015			January 1, 2016			January 1, 2017			January 1, 2018			January 1, 2019
Tier 1 Common capital ratio plus capital conservation buffer		4.5	%		5.125	%		5.75	%		6.375	%		7.0	%
Tier 1 risk-based capital ratio plus capital conservation buffer		6.0	%		6.625	%		7.25	%		7.875	%		8.5	%
Total risk-based capital ratio plus capital conservation buffer		8.0	%		8.625	%		9.25	%		9.875	%		10.5	%

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The Final Rules emphasize Tier 1 Common capital, the most loss absorbing form of capital, and implements strict eligibility criteria for regulatory capital instruments. The Final Rules also improve the methodology for calculating risk weighted assets to enhance risk sensitivity. Banks and regulators use risk weighting to assign different levels of risk to different classes of assets.

The following table sets forth the Tier 1 Risk-Based Ratio, Total Risk-Based Ratio and Leverage Ratio for BKFC and the Bank at December 31, 2014:

	At December 31, 2014
	BKFC					Bank
	Amount		Percent			Amount		Percent
	(Dollars in thousands)
Tier 1 risk-based	$	190,814		12.13	%	$	190,807		12.13	%
Requirement		62,908		4.00			62,931		4.00
Excess	$	127,906		8.13	%	$	127,876		8.13	%
Total risk-based	$	217,453		13.83	%	$	217,446		13.82	%
Requirement		125,816		8.00			125,863		8.00
Excess	$	91,637		5.83	%	$	91,583		5.82	%
Leverage ratio	$	190,814		10.30	%	$	190,807		10.34	%
Requirement		74,122		4.00			73,807		4.00
Excess	$	116,692		6.30	%	$	117,000		6.34	%

The FDIC may require an increase in a bank’s risk-based capital requirements on an individualized basis to address the bank’s exposure to a decline in the economic value of its capital due to a change in interest rates, among other things.

Prompt Corrective Regulatory Action. The FDIC has adopted regulations governing prompt corrective action to resolve the problems of capital deficient and otherwise troubled banks under its regulation. For these purposes, the law establishes three categories of capital deficient institutions: undercapitalized, significantly undercapitalized and critically undercapitalized. At each successively lower defined capital category, an institution is subject to more restrictive and numerous mandatory or discretionary regulatory actions or limits, and the FDIC has less flexibility in determining how to resolve the problems of the institution. The FDIC generally can downgrade an institution’s capital category, notwithstanding its capital level, if, after notice and opportunity for hearing, the institution is deemed to be engaging in an unsafe or unsound practice because it has not corrected deficiencies that resulted in it receiving a less than satisfactory examination rating on matters other than capital or it is deemed to be in an unsafe or unsound condition. An undercapitalized institution must submit a capital restoration plan to the FDIC within 45 days after it becomes undercapitalized. Such institution will be subject to increased monitoring and asset growth restrictions and will be required to obtain prior approval for acquisitions, branching and engaging in new lines of business. Furthermore, critically undercapitalized institutions must be placed in conservatorship or receivership within 270 days of reaching that capitalization level, except under limited circumstances. At year-end 2014, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution's category.

The FDIC has adopted regulations to implement the prompt corrective action legislation. Prior to January, 2015, an institution was deemed to be “well capitalized” if it had a Total Risk-Based Ratio of 10% or greater, a Tier 1 Risk-Based Ratio of 6% or greater, and a Leverage Ratio of 5% or greater. An institution was “adequately capitalized” if it had a Total Risk-Based Ratio of 8% or greater, a Tier 1 Risk-Based Ratio of 4% or greater and generally a Leverage Ratio of 4% or greater. An institution was “undercapitalized” if it had a Total Risk-Based Ratio of less than 8%, a Tier 1 Risk-Based Ratio of less than 4%, or generally a Leverage Ratio of less than 4% (3% or less for institutions with the highest examination rating). An institution was deemed to be “significantly undercapitalized” if it had a Total Risk-Based Ratio of less than 6%, a Tier 1 Risk-Based Ratio of less than 3%, or a Leverage Ratio of less than 3%. An institution was considered to be “critically undercapitalized” if it had a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2%.

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Effective January 1, 2015, the Basel III capital rules have revised the “prompt corrective action” directives by (i) introducing a Tier 1 common equity ratio requirement at each level (other than critically undercapitalized), with the required Tier 1 common equity ratio being 6.5% for well-capitalized status; (ii) increasing the minimum Tier 1 capital ratio requirement for each category, with the minimum Tier 1 capital ratio for well-capitalized status being 8% (compared with the current 6%); and (iii) eliminating the current provision that provides that a bank with a composite supervisory rating of 1 may have a 3% leverage ratio and still be adequately capitalized. The Basel III Capital Rules do not change the total risk-based capital requirement for any “prompt corrective action” category. The Bank expects to meet all the well capitalized levels of the Basel III Capital Rules.

The Bank’s capital levels at December 31, 2014 met the standards for the highest level, a “well-capitalized” institution.

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

Dividend Restrictions. There are a number of statutory and regulatory requirements applicable to the payment of dividends by banks and bank holding companies. Please see Note 16 of the financial statements for a discussion on the Bank’s current dividend restrictions.

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

In 2014, BKFC paid a cash dividend of $0.72 per share totaling approximately $5.5 million on common stock.

FDIC Deposit Insurance and Assessments. The FDIC is an independent federal agency that insures deposits, up to prescribed statutory limits, of federally insured banks and thrifts and safeguards the safety and soundness of the banking and thrift industries. The Bank’s deposits are insured by the DIF. The DIF is the successor to the Bank Insurance Fund and the Savings Association Insurance Fund, which were merged in 2006. The FDIC amended its risk-based assessment system to implement authority granted by the Federal Deposit Insurance Reform Act of 2005. Under the revised system, insured institutions are assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels and certain other factors. An institution’s assessment rate depends upon the category to which it is assigned. Risk Category I, which contains the least risky depository institutions, is expected to include 90% of all institutions. Unlike the other categories, Risk Category I contains further risk differentiation based on the FDIC’s analysis of financial ratios, examination component ratings and other information.

In October 2008, the basic limit on federal deposit insurance coverage of interest bearing transaction accounts was temporarily increased from $100,000 to $250,000 per depositor under the EESA, which was subsequently made permanent under the Dodd-Frank Act. In October 2008, the FDIC announced TLGP which provided full coverage for noninterest-bearing transaction accounts at FDIC-insured institutions that agreed to participate in the program through December 31, 2010. The Bank participated in this program. In July 2010, the Dodd-Frank Act extended unlimited FDIC insurance coverage for non-interest-bearing transaction deposit accounts for an additional two years. This unlimited insurance coverage for noninterest-bearing transaction accounts expired on December 31, 2012.

On November 12, 2009, the FDIC adopted regulations that require all depository institutions to prepay on December 30, 2009 their estimated risk-based insurance assessments for the fourth quarter of 2009, and for all of 2010, 2011 and 2013. At that same time, institutions were also required to pay their regular quarterly assessments for the third quarter of 2009. An institution’s quarterly risk-based deposit insurance assessments thereafter would be paid from the amount the institution prepaid until that amount was exhausted or until June 30, 2014, when any amount remaining would be returned to the institution. The prepaid assessment amount was $0 and $0 on December 30, 2014 and 2013, respectively. On July 1, 2013, the FDIC returned $1,159,000 to the Bank as the restoration plan came to an end.

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Pursuant to the Dodd-Frank Act, the FDIC has established 2.0% as the designated reserve ratio (“DRR”), that is, the ratio of the DIF to insured deposits. The FDIC has adopted a plan under which it will meet the statutory minimum DRR of 1.35% by September 30, 2020, the deadline imposed by the Dodd-Frank Act. The Dodd-Frank Act requires the FDIC to offset the effect on institutions with assets less than $10 billion of the increase in the statutory minimum DRR to 1.35% from the former statutory minimum of 1.15%. The FDIC has not yet announced how it will implement this offset.

As required by the Dodd-Frank Act, the FDIC has adopted rules which were effective April 1, 2011, under which insurance premium assessments are based on an institution’s total assets minus its tangible equity (defined as Tier 1 capital) instead of its deposits.  Under these rules, an institution with total assets of less than $10 billion, such as the Bank, will be assigned to a risk category as described above and a range of initial base assessment rates will apply to each category, subject to adjustment downward based on unsecured debt issued by the institution and, except for an institution in Risk Category I, adjustment upward if the institution’s brokered deposits exceed 10% of its domestic deposits, to produce total base assessment rates. The FDIC may increase or decrease its rates by 2.0 basis points without further rulemaking. In an emergency, the FDIC may also impose a special assessment.

The FDIC may increase or decrease the assessment rate schedule from one quarter to the next. An increase in the assessment rate could have a material adverse effect on BKFC’s earnings, depending on the amount of the increase. The FDIC is authorized to terminate a depository institution’s deposit insurance upon a finding by the FDIC that the institution’s financial condition is unsafe or unsound, or that the institution has engaged in unsafe or unsound practices, or has violated any applicable rule, regulation, order or condition enacted or imposed by the institution’s regulatory agency. The termination of deposit insurance for the Bank could have a material adverse effect on BKFC’s earnings.

FRB Reserve Requirements. FRB regulations currently require banks to maintain reserves of 3% of net transaction accounts (primarily demand and NOW accounts) up to $75.7 million of such accounts (subject to an exemption of up to $13.3 million), and of 10% of net transaction accounts in excess of $75.7 million. At December 31, 2014, the Bank was in compliance with this reserve requirement, which was $11,434,000.

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

Federal Home Loan Banks. The FHLBs provide credit to their members in the form of advances. The Bank is a member of the FHLB of Cincinnati and must maintain an investment in the capital stock of the FHLB of Cincinnati that consists of two components, the first is the membership component which is equal to 0.15% of the Bank’s total assets, and the second is an activity component that is equal to 2% to 4% of the Bank’s outstanding advances. The Bank is in compliance with this requirement with an investment in stock of the FHLB of Cincinnati of $4,850,000 and,$5,099,000 at December 31, 2014 and 2013 respectively. Generally, FHLBs are not permitted to make new advances to a member without positive tangible capital.

Federal Taxation

BKFC. BKFC and the Bank file a consolidated federal income tax return on a calendar year basis. BKFC is subject to the federal tax laws and regulations that apply to corporations generally.

The Bank. In 2000, the Bank acquired the stock of FTFC. FTFC’s wholly owned subsidiary was FTSB. Federal income tax laws provided savings banks with additional bad debt deductions through 1987, totaling $1,255,000 for FTFC. Accounting standards do not require a deferred tax liability to be recorded on this amount, which would otherwise total $427,000. Upon acquisition, this unrecorded liability was transferred to the Bank. If the Bank was liquidated or otherwise ceased to be a bank or if tax laws were to change, the $427,000 would be recorded as a liability with an offset to income tax expense.

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In 2007, BKFC consummated the acquisition of FNB Bancorporation, Inc. and its subsidiary, First Bank. The First Bank acquisition included a $13,748,000 net operating loss (“NOL”) carryforward which was set up as a $4,700,000 deferred tax asset. The NOL carryforward will be deducted from income over the next 18 years in accordance to section 382 of the Internal Revenue Code.

Kentucky Taxation

BKFC. Kentucky corporations, such as BKFC, are subject to the Kentucky corporation income tax and the Kentucky corporation license (franchise) tax. The income tax is imposed based on the following rates: 4% of the first $50,000 of taxable net income allocated or apportioned to Kentucky; 5% of the next $50,000; and 6% of taxable net income over $100,000. All dividend income received by a corporation is excluded for purposes of arriving at taxable net income.

Domestic corporations are subject to state and local ad valorem taxes on tangible personal property and real property that is not otherwise exempt from taxation. The rates of taxation for tangible personal property vary depending on the character of the property. The state rate of taxation on real property equals $0.122 per $100 of value as of January 1 each year. Thus, BKFC is subject to ad valorem taxation on its taxable tangible personal property and real property.

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

The Commonwealth of Kentucky imposes both a “Kentucky Bank Franchise Tax” and “Local Deposits Franchise Tax”. The “Kentucky Bank Franchise Tax” is an annual tax equal to 1.1% of net capital after apportionment, if applicable. The value of net capital is calculated annually by deducting from total capital an amount equal to the same percentage of the total as the book value of United States obligations bears to the book value of the total assets of the financial institution. The Bank pays a portion of its franchise tax to the state of Ohio based on revenue apportioned to that state. The “Local Deposits Franchise Tax” is an annual tax of up to 0.025% imposed by each city and county on bank deposits within their jurisdictions.

The Kentucky property tax extends to bank deposits (the“Deposits Tax”). The tax is levied at a rate of 0.00001% of the amount of the deposits. It is the responsibility of the bank, not the depositor, to report and pay the Deposits Tax.

State banks are subject to state and local ad valorem taxes on tangible personal property and real property that is not otherwise exempt from taxation. The rates of taxation for tangible personal property vary depending on the character of the property. The state rate of taxation on real property equals $0.122 per $100 of value as of January 1 each year.

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

Item 1A. Risk Factors

An investment in the Common Stock of BKFC is subject to certain risks inherent in the business of BKFC and the Bank. The material risks and uncertainties that management believes affect BKFC and the Bank are described below. Before making an investment decision, you should carefully consider the risks and uncertainties described below, together with all of the other information included or incorporated by reference into this Annual Report. The risks and uncertainties described below are not the only ones facing BKFC or the Bank. Additional risks and uncertainties that management is not aware of or focused on or that management currently deems immaterial may also impair the business operations of BKFC or the Bank. This Annual Report is qualified in its entirety by these risk factors.

If any of the following risks occur, or if any combination of the following risks occur, the financial condition and results of operations of BKFC or the Bank could be materially and adversely affected. If this were to happen, the value of Common Stock could decline significantly.

References to “we,” “us,” and “our” in this “Risk Factors” section refer to BKFC and its subsidiaries, including the Bank, unless otherwise specified or unless the context otherwise requires.

Risks Related to Our Business

Our business depends upon the general economic conditions of the northern Kentucky and greater Cincinnati, Ohio area, and may continue to be adversely affected by downturns in the local economies in which we operate.

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Our business operations are limited almost exclusively to the northern Kentucky and the greater Cincinnati, Ohio area, which is a small geographic area. As such, our business is closely tied to the general economic conditions of this area. Local economic conditions in this area have a significant impact on the demand for our products and services, as well as the ability of our customers to repay loans, the value of the collateral securing loans and the stability of the Bank’s deposit funding sources.

A significant decline in general economic conditions could increase loan delinquencies, increase problem assets and foreclosure, increase claims and lawsuits, decrease the demand for the Bank’s products and services, or decrease the value of collateral for loans, especially real estate, in turn reducing customers’ borrowing power and the value of assets associated with problem loans and collateral coverage, thereby having a material adverse effect on our financial condition and results of operations.

A significant portion of our loans are secured by real estate and concentrated in the northern Kentucky and greater Cincinnati area, which may adversely affect our earnings and capital if real estate values decline.

Nearly 80% of our total loans are real estate interests (residential, nonresidential including both owner-occupied and investment real estate, and construction and land development) concentrated in the northern Kentucky area and neighboring areas in greater Cincinnati, Ohio, a small geographic area. As a result, declining real estate values in the northern Kentucky and greater Cincinnati, Ohio markets as a result of the ongoing national economic recession could negatively impact the value of the real estate collateral securing such loans. If we are required to liquidate a significant amount of collateral during a period of reduced real estate values in satisfaction of any non-performing or defaulted loans, our earnings and capital could be adversely affected.

We are subject to intense competition in our market area, and our business will be adversely affected if we are unable to compete effectively.

BKFC and the Bank compete with national financial institutions, as well as numerous state chartered banking institutions of comparable or larger size and resources, smaller community banking organizations and a variety of nonbank competitors. The Bank competes for deposits with other commercial banks, savings associations and credit unions and with the issuers of commercial paper and other securities, such as shares in money market mutual funds. In making loans, the Bank competes with other banks, savings associations, consumer finance companies, credit unions, leasing companies and other lenders. Many of the institutions against whom we compete are national and regional banks that are significantly larger than us and, therefore, have significantly greater resources and the ability to achieve economies of scale by offering a broader range of products and services at more competitive prices than we can offer. We expect competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry.

Our ability to compete successfully and to maintain and grow our profitability depends upon a number of factors, including: the ability to develop, maintain and build upon long-term customer relationships based on top-quality service, high ethical standards and safe, sound assets; the ability to continue to expand BKFC’s market position through organic growth and strategic acquisitions; the scope, relevance and pricing of products and services offered to meet customer needs and demands; the rate at which BKFC introduces new products and services relative to our competitors; and industry and general economic trends. Failure to perform in any of these areas could significantly weaken our competitive position, which could adversely impact our financial condition and results of operations.

Our nonresidential real estate loans expose us to greater risks of nonpayment and loss than residential mortgage loans, which may cause us to increase our allowance for loan losses which would reduce our net income.

At December 31, 2014, $593 million, or 47%, of our loan portfolio consisted of nonresidential real estate loans. Nonresidential real estate loans generally expose a lender to greater risk of non-payment and loss than residential mortgage loans because repayment of the loans often depends on the successful operation of the property and the income stream of the borrowers. Such loans expose us to additional risks because they typically are made on the basis of the borrower’s ability to make repayments from the cash flow of the borrower’s business and are secured by collateral that may depreciate over time. These loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to residential mortgage loans. Because such loans generally entail greater risk than residential mortgage loans, we may need to increase our allowance for loan losses in the future to account for the likely increase in probable incurred credit losses associated with the growth of such loans, which would reduce our net income. Also, many of our nonresidential real estate borrowers have more than one loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss compared to an adverse development with respect to a residential mortgage loan.

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A decline in general economic conditions could require additions to our allowance for loan losses, which would reduce our net income.

If our borrowers do not repay their loans or if the collateral securing their loans is insufficient to provide for the full repayment, we may suffer credit losses. Credit losses are inherent in the lending business and could have a material adverse effect on our operating results. We make various assumptions and judgments about the collectability of our loan portfolio and provide an allowance for loan losses based on a number of factors. If our assumptions and judgments are wrong, our allowance for loan losses may not be sufficient to cover our losses. If we determine that our allowance for loan losses is insufficient, we would be required to take additional provisions for loan losses, which would reduce net income during the period those provisions are taken. In addition, our regulators periodically review our allowance for loan losses and may require us to increase our allowance for loan losses or to charge off particular loans. If current economic trends change, we may experience higher than normal delinquencies and credit losses, resulting in increases to our provisions for loan losses again in the future and reduced net income. Not all TDR’s are successful and may result in a higher allowance if they are evaluated on a collateral dependency basis.

Our accounting policies and estimates are critical to how we report our financial condition and results of operations, and any changes to such accounting policies and estimates could materially affect how we report our financial condition and results of operations.

Accounting policies and estimates are fundamental to how we record and report our financial condition and results of operations. Our management makes judgments and assumptions in selecting and adopting various accounting policies and in applying estimates so that such policies and estimates comply with U.S. generally accepted accounting principles (“GAAP”).

Management has identified certain accounting policies as being critical because they require management’s judgment to ascertain the valuations of assets, liabilities, commitments and contingencies. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset, valuing an asset or liability or reducing a liability. We have established detailed policies and control procedures that are intended to ensure that these critical accounting estimates and judgments are well controlled and applied consistently. In addition, these policies and procedures are intended to ensure that the process for changing methodologies occurs in an appropriate manner. Because of the uncertainty surrounding our judgments and the estimates pertaining to these matters, actual outcomes may be materially different from amounts previously estimated. For example, because of the inherent uncertainty of estimates, management cannot provide any assurance that the Bank will not significantly increase its allowance for loan losses if actual losses are more than the amount reserved. Any increase in its allowance for loan losses or loan charge-offs could have a material adverse effect on our financial condition and results of operations. In addition, we cannot guarantee that we will not be required to adjust accounting policies or restate prior financial statements. See “Allowance for Loan Losses” under “Item 1. Business” and “Critical Accounting Policies” under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional discussion regarding these critical accounting policies.

Further, from time to time, the Financial Accounting Standards Board and SEC change the financial accounting and reporting standards that govern the preparation of our financial statements. The ongoing economic recession has resulted in increased scrutiny of accounting standards by legislators and our regulators, particularly as they relate to fair value accounting principles. In addition, ongoing efforts to achieve convergence between GAAP and International Financial Reporting Standards may result in changes to GAAP. These changes can be hard to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in our restating prior period financial statements or otherwise adversely affecting our financial condition or results of operations.

Our largest source of revenue (net interest income) is subject to interest rate risk.

The Bank’s financial condition and results of operations are significantly affected by changes in interest rates. The Bank’s earnings depend primarily upon its net interest income, which is the difference between its interest income earned on its interest-earning assets, such as loans and investment securities, and its interest expense paid on its interest-bearing liabilities, consisting of deposits and borrowings. Moreover, the loans included in our interest-earning assets are primarily comprised of variable and adjustable rate loans. Net interest income is subject to interest rate risk in the following ways:

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· In general, for a given change in interest rates, the amount of change in value (positive or negative) is larger for assets and liabilities with longer remaining maturities. The shape of the yield curve may affect new loan yields, funding costs and investment income differently.

· The remaining maturity of various assets or liabilities may shorten or lengthen as payment behavior changes in response to changes in interest rates. For example, if interest rates decline sharply, loans may pre-pay, or pay down, faster than anticipated, thus reducing future cash flows and interest income. Conversely, if interest rates increase, depositors may cash in their certificates of deposit prior to maturity (notwithstanding any applicable early withdrawal penalties) or otherwise reduce their deposits to pursue higher yielding investment alternatives.

· Re-pricing frequencies and maturity profiles for assets and liabilities may occur at different times. For example, in a falling rate environment, if assets re-price faster than liabilities, there will be an initial decline in earnings. Moreover, if assets and liabilities re-price at the same time, they may not be by the same increment. For instance, if the Federal Funds Rate increased 50 basis points, rates on demand deposits may rise by 10 basis points; whereas rates on prime-based loans will instantly rise 50 basis points.

Financial instruments do not respond in a parallel fashion to rising or falling interest rates. This causes asymmetry in the magnitude of changes to net interest income, net economic value and investment income resulting from the hypothetical increases and decreases in interest rates. Therefore, BKFC’s management monitors interest rate risk and adjusts BKFC’s funding strategies to mitigate adverse effects of interest rate shifts on BKFC’s balance sheet. The Bank’s asset and liability management strategies designed to maintain a reasonable degree of interest rate sensitivity are more fully described in “Asset/Liability Management” under “Item 1. Business” and “Asset/Liability Management and Market Risk” under “Item 7A. Quantitative and Qualitative Disclosure About Market Risk”.

Legislative and regulatory actions taken now or in the future may significantly affect BKFC’s financial condition, results of operations, liquidity or stock price.

There have been numerous actions undertaken in Congress, the Treasury Department, the FRB, the FDIC, the SEC and others in an effort to address the liquidity and credit crisis in the financial industry that followed the sub-prime mortgage market meltdown, which began in late 2007. These measures include the TARP CPP (under which the Treasury Department’s authority to make new investments expired on October 3, 2010); homeowner relief that encourages loan restructuring and modification; the establishment of significant liquidity and credit facilities for financial institutions and investment banks; the lowering of the federal funds rate; emergency action against short selling practices; a temporary guaranty program for money market funds; the establishment of a commercial paper funding facility to provide back-stop liquidity to commercial paper issuers; a mandatory “stress test” requirement for banking institutions with assets in excess of $100 billion to analyze capital sufficiency and risk exposure; and coordinated international efforts to address illiquidity and other weaknesses in the banking sector. The purpose of these legislative and regulatory actions was to help stabilize the U.S. banking system. However, these and any current or future legislative or regulatory initiatives may not have their desired effect, or may have an adverse effect when applied to BKFC.

The most recent of these actions was the passage into law on July 21, 2010 of the Dodd-Frank Act. The Dodd-Frank Act represents a significant overhaul of many aspects of the regulation of the financial-services industry, addressing, among other things, systemic risk, capital adequacy, deposit insurance assessments, consumer financial protection, interchange fees, derivatives, lending limits, and changes among the bank regulatory agencies. Many of these provisions are subject to further study, rulemaking and to the discretion of regulatory bodies.

While many of the provisions in the Dodd-Frank Act are aimed at financial institutions that are significantly larger than BKFC or the Bank, there are provisions with which we will have to comply now that the Dodd-Frank Act has become law. For instance, we will be subject to a new assessment model from the FDIC based on assets, not deposits, and be subject to enhanced executive compensation and corporate governance requirements. Because many aspects of this legislation remain subject to ongoing agency rulemaking, including public comment periods prior to implementation, it is difficult to predict at this time the complete extent of the effects that the Dodd-Frank Act will have on us. As rules and regulations are promulgated by the federal agencies responsible for implementing and enforcing the provisions in the Dodd-Frank Act, we will have to work to apply resources to ensure that we are in compliance with all applicable provisions, which may adversely impact our earnings. Furthermore, any current or future legislative or regulatory initiatives may not have their desired effect, or may have an adverse effect when applied to us.

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Failure to meet any of the various capital adequacy guidelines which we are subject to could adversely affect our operations and could compromise the status of BKFC as a bank holding company.

BKFC and the Bank are required to meet certain regulatory capital adequacy guidelines and other regulatory requirements imposed by the FRB, the FDIC and the Department. If BKFC or the Bank fails to meet these minimum capital guidelines and other regulatory requirements, our financial condition and results of operations would be materially and adversely affected and could compromise the status of BKFC as a banking holding company. See “Regulatory Capital Requirements” under “Item 1. Business” for detailed capital guidelines for bank holding companies and banks.

Non-compliance with applicable laws and/or regulations, including the Bank Secrecy Act and USA Patriot Act, may adversely affect BKFC’s operations and financial results and could result in significant fines or sanctions.

Federal and state regulators have the ability to impose substantial sanctions, restrictions and requirements on the Bank if they determine, upon examination or otherwise, that we have violated laws or regulations with which we must comply, or that weaknesses or failures exist with respect to general standards of safety and soundness. Such enforcement may be formal or informal and can include, among other things, orders to take certain actions or to refrain from certain actions. The imposition of regulatory sanctions may have adverse effects on BKFC, including a material impact on its financial condition. In addition, compliance with any such action could distract management’s attention from operations, cause significant expenses, restrict BKFC from engaging in potentially profitable activities, and limit BKFC’s ability to raise capital.

The USA Patriot and Bank Secrecy Acts require financial institutions to develop programs to prevent the institutions from being used for money laundering and terrorist activities. If certain activities are detected, financial institutions are obligated to file suspicious activity reports with the Treasury Department’s Financial Crimes Enforcement Network. These rules also require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts or conduct transactions, and require the filing of certain reports, such as those for cash transactions above a certain threshold. Financial institutions must also refrain from transacting business with certain countries or persons designated by the Office of Foreign Assets Control.

Non-compliance with laws and regulations such as these could result in significant fines or sanctions. These particular laws and regulations have significant implications for all financial institutions, establish new crimes and penalties, and require the federal banking agencies, in reviewing merger and acquisition transactions, to consider the effectiveness of the parties to such transactions in combating money laundering and terrorist activities. Even inadvertent non-compliance and technical failure to follow the regulations may result in significant fines or other penalties, which could have a material adverse impact on BKFC’s business, financial condition, results of operations or liquidity.

The value of the securities in our investment securities portfolio may be negatively affected by continued disruptions in securities markets.

Due to heightened credit and liquidity risks and the volatile economy, making the determination of the value of a securities portfolio is less certain.  There can be no assurance that decline in market value associated with these disruptions will not result in other-than-temporary or permanent impairments of these assets, which would lead to accounting charges which could have a material negative effect on our financial condition and results of operations.

The Bank could be held responsible for environmental liabilities relating to properties acquired through foreclosure, resulting in significant financial loss.

In the event the Bank forecloses on a defaulted commercial or residential mortgage loan to recover its investment, it may be subject to environmental liabilities in connection with the underlying real property, which could significantly exceed the value of the real property. Although the Bank exercises due diligence to discover potential environmental liabilities prior to acquiring any property through foreclosure, hazardous substances or wastes, contaminants, pollutants or their sources may be discovered on properties during its ownership or after a sale to a third party. BKFC cannot assure you that the Bank would not incur full recourse liability for the entire cost of any removal and cleanup on an acquired property, that the cost of removal and cleanup would not exceed the value of the property or that the Bank could recover any of the costs from any third party. Losses arising from environmental liabilities could have a material adverse impact on BKFC’s business, financial condition, results of operations or liquidity.

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BKFC is subject to liquidity risk, which could disrupt our ability to meet our financial obligations.

Liquidity refers to the ability of BKFC to ensure sufficient levels of cash to fund operations, such as meeting deposit withdrawals, funding loan commitments, paying expenses and meeting quarterly payment obligations under certain subordinated debentures issued by BKFC in connection with the issuance of floating rate redeemable trust preferred securities issued by BKFC’s unconsolidated trust subsidiary. The source of the funds for BKFC’s debt obligations is dependent on the Bank. If needed, the Bank has the ability to borrow term and overnight funds from the FHLB or other financial intermediaries. The Bank also has $341 million of securities designated as available-for-sale that can serve as sources of funds as of December 31, 2014.

While management is satisfied that BKFC’s liquidity is sufficient at December 31, 2014 to meet known and potential obligations, any significant restriction or disruption of BKFC’s ability to obtain funding from these or other sources could have a negative effect on BKFC’s ability to satisfy its current and future financial obligations, which could materially affect BKFC’s financial condition.

BKFC is a bank holding company, and its sources of funds are limited.

BKFC is a bank holding company and its operations are primarily conducted by the Bank, which is subject to significant federal and state regulation. Cash available to pay dividends to shareholders of BKFC is derived primarily from dividends paid by the Bank. As a result, BKFC’s ability to receive dividends or loans from its subsidiaries is restricted. Under federal law, the payment of dividends by the Bank is subject to capital adequacy requirements. The FRB and/or the FDIC prohibit a dividend payment by BKFC or the Bank that would constitute an unsafe or unsound practice. See “Dividend Restrictions” under “Item 1. Business”.

The inability of the Bank to generate profits and pay such dividends to BKFC, or regulator restrictions on the payment of such dividends to BKFC even if earned, would have an adverse effect on the financial condition and results of operations of BKFC and BKFC’s ability to pay dividends to its shareholders.

In addition, since BKFC is a legal entity separate and distinct from the Bank, its right to participate in the distribution of assets of the Bank upon the Bank’s liquidation, reorganization or otherwise will be subject to the prior claims of the Bank’s creditors, which will generally take priority over the Bank’s shareholders.

Our Common Stock price can be volatile.

Our Common Stock price can fluctuate widely in response to a variety of factors, making it more difficult for you to resell your Common Stock at prices you find attractive and at the time you want. Factors include actual or anticipated variations in our quarterly operating results; changes in recommendations or projections by securities analysts; operating and stock price performance of other companies deemed to be peers; news reports and perception in the marketplace regarding BKFC, our competitors and/or the financial services industry as a whole; results of litigation; significant acquisitions or business combinations involving BKFC or our competitors; and other factors, including those described in this “Risk Factors” section.

In addition, our Common Stock also has a low average daily trading volume, which limits a person’s ability to quickly accumulate or quickly divest themselves of large blocks of our Common Stock. Further, a low average trading volume can lead to significant price swings even when a relatively small number of shares are being traded.

Recent or future acquisitions by BKFC may not produce revenue enhancements or cost savings at levels or within timeframes originally anticipated and may result in unforeseen integration difficulties.

BKFC regularly explores opportunities to acquire financial services businesses or assets and may also consider opportunities to acquire other banks or financial institutions. In 2007, we acquired FNB Bancorporation. In 2009, we acquired certain banking offices and assumed certain deposit liabilities of Integra Bank, as well as adding the investment professionals of TAM to the Bank’s trust department. In 2011, we completed the purchase of one banking office of United Kentucky Bank in Falmouth, Kentucky and a portfolio of selected loans. Difficulty in integrating an acquired business or company such as those described above or other businesses we acquire in the future may cause BKFC not to realize expected revenue increases, cost savings, increases in geographic or product presence, and/or other projected benefits. The integration could result in higher than expected customer deposit attrition (run-off), loss of key employees, disruption of BKFC’s business or the business of the acquired company, or otherwise adversely affect BKFC’s ability to maintain relationships with customers and employees or achieve the anticipated benefits of the acquisition. Also, the negative effect of any divestitures required by regulatory authorities in acquisitions or business combinations may be greater than expected.

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Some provisions contained in BKFC’s articles of incorporation and bylaws and under Kentucky law could deter a takeover attempt or delay changes in control or management of BKFC.

Certain provisions of BKFC’s articles of incorporation and bylaws may make it more difficult to acquire control of BKFC by means of a tender offer, open market purchase, proxy fight or otherwise. For example, the articles require the affirmative vote of a majority of the outstanding voting power of BKFC or, if the Board of Directors recommends against the approval of certain matters, by the holders of at least 75% of the voting power to, among other things, adopt (i) an amendment to the articles or bylaws, (ii) an agreement of merger or consolidation, (iii) a proposed combination or majority share acquisition involving the issuance of shares of BKFC and requiring shareholder approval, and (iv) a proposal to sell, exchange, transfer or otherwise dispose of all, or substantially all, of BKFC’s assets.

Additionally, certain provisions of the Kentucky Business Corporation Act that apply to BKFC limit the ability of certain shareholders to engage in business combinations with the company in which they own shares.

Such provisions of the articles, bylaws and Kentucky law may have the effect of deterring takeovers or delaying changes in control or management of BKFC.

Higher FDIC deposit insurance premiums and assessments could adversely impact our earnings.

FDIC insurance rates increased significantly in 2009, and we may pay higher FDIC premiums in the future. The Dodd-Frank Act established 1.35% as the minimum DRR. The FDIC has determined that the DRR should be 2.0% and has adopted a plan under which it will meet the statutory minimum DRR of 1.35% by the statutory deadline of September 30, 2020. The Dodd-Frank Act requires the FDIC to offset the effect on institutions with assets less than $10 billion of the increase in the statutory minimum DRR to 1.35% from the former statutory minimum of 1.15%, although the FDIC has not announced how it will implement this offset.

In addition, the FDIC has amended its regulations pursuant to the Dodd-Frank Act to base deposit insurance assessments on an insured depository institution’s average consolidated total assets minus its average tangible equity, rather than on its deposit base. It is possible that our insurance premiums will increase under these regulations.

We rely on other companies to provide key components of our business infrastructure.

Third parties provide key components of our business infrastructure such as banking services, processing, and Internet connections. Any disruption in such services provided by these third parties or any failure of these third parties to handle current or higher volumes of use could adversely affect our ability to deliver products and services to clients and otherwise to conduct business. Technological difficulties of a third party service provider could adversely affect our business to the extent those difficulties result in the interruption of services provided by that party. A cyber security breach of a vendor’s system may result in theft of our data or disruption of business processes. A material breach of customer data security at a service provider’s site may negatively impact our business reputation and cause a loss of customers; result in increased expense and may result in litigation. We rely on our outsourced service providers to implement and maintain prudent cyber security controls. Furthermore, we may not be insured against all types of losses as a result of third party failures and our insurance coverage may be inadequate to cover all losses resulting from system failures or other disruptions.

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Risks Related to the Merger with BB&T

Because the market price of BB&T common stock may fluctuate, we cannot be certain of the precise value of the stock portion of the merger consideration that our shareholders may receive in the merger.

At the time the merger is completed, each issued and outstanding share of BKFC common stock (other than shares owned by BKFC, BB&T or any of their subsidiaries and shares of BKFC common stock in respect of which dissenter’s rights have been properly exercised and perfected) will be converted into the right to receive consideration in the form of a combination of BB&T common stock and cash.

There will be a time lapse between each of the date on which BKFC shareholders voted to approve the merger agreement at the special meeting, and the date on which BKFC shareholders entitled to receive shares of BB&T common stock actually receive such shares. The market value of BB&T common stock may fluctuate during these periods. Consequently, the actual value of the shares of BB&T common stock received by the BKFC shareholders will depend on the market value of shares of BB&T common stock on that date. This market value may be less or more than the value used to determine the exchange ratio, as that determination will be made with respect to a period occurring prior to the consummation of the merger.

The market price for BB&T common stock may be affected by factors different from those that historically have affected BKFC.

Upon completion of the merger, holders of BKYF common stock will become holders of BB&T common stock. BB&T’s businesses differ from those of BKFC, and accordingly the results of operations of BB&T will be affected by some factors that are different from those currently affecting the results of operations of BKFC.

BKFC’s shareholders will have a reduced ownership and voting interest after the merger and will exercise less influence over management.

Currently, BKFC’s shareholders have the power to approve or reject any matters requiring shareholder approval under Kentucky law and BKFC’s charter and bylaws. After the merger, absent any adjustment made to the ratio of stock component in the merger consideration, BKFC shareholders are expected to become owners of approximately 1.1% of the outstanding shares of BB&T common stock. Even if all former BKFC shareholders voted together on all matters presented to BB&T’s shareholders, from time to time, the former BKFC shareholders most likely would not have a significant impact on the approval or rejection of future BB&T proposals submitted to a shareholder vote.

We may not realize the anticipated benefits of the merger.

BB&T and BKFC entered into the merger agreement with the expectation that BB&T would be able to successfully integrate BKFC’s operations and that the merger would result in various benefits, including, among other things, enhanced revenues and revenue synergies, an expanded market reach and operating efficiencies. Achieving the anticipated benefits of the merger is subject to a number of uncertainties, including whether BB&T is able to integrate and operate BKFC in an efficient and effective manner, and general competitive factors in the market place. The process of integrating operations could cause an interruption of, or loss of momentum in, the activities of one or more of the surviving bank’s businesses or the loss of key personnel. The diversion of management’s attention and any delays or difficulties encountered in connection with the merger and the integration of BKFC’s operations could have an adverse effect on the business, financial condition, operating results and prospects of the surviving entity after the merger. Failure to achieve these anticipated benefits could result in increased costs, decreases in the amount of expected revenues and diversion of management’s time and energy and could have an adverse effect on the surviving entity’s business, financial condition, operating results and prospects.

Among the factors considered by the boards of directors of BB&T and BKFC in connection with their respective approvals of the merger agreement were the benefits that could result from the merger. We cannot give any assurance that these benefits will be realized within the time periods contemplated or even that they will be realized at all.

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The merger agreement contains provisions that may discourage other companies from trying to acquire BKFC for greater merger consideration.

The merger agreement contains provisions that may discourage a third party from submitting an acquisition proposal to BKFC that might result in greater value to BKFC’s shareholders than the merger. These provisions include a general prohibition on BKFC from soliciting, or, subject to certain exceptions, entering into discussions with any third party regarding any acquisition proposal or offers for competing transactions. Certain shareholders of BKFC have entered into a voting and support agreement and have agreed to vote their shares of BKFC common stock in favor of the proposal to approve the merger and the proposal to adjourn the special meeting if necessary or appropriate, to solicit additional proxies, and against any alternative transaction. The shareholders that are party to the voting and support agreement described in this paragraph beneficially own in the aggregate approximately 10.3% of the outstanding shares of BKFC common stock as of the record date. In addition, BKFC may be required to pay BB&T a termination fee in certain circumstances involving acquisition proposals for competing transactions.

The merger agreement may be terminated in accordance with its terms and the merger may not be completed.

The merger agreement is subject to a number of conditions which must be fulfilled in order to complete the merger. Those conditions include: the receipt of all required regulatory approvals and expiration or termination of the applicable and all statutory waiting periods in respect thereof, the accuracy of representations and warranties under the merger agreement (subject to the materiality standards set forth in the merger agreement), each party’s readiness to consummate the bank merger, BB&T’s and BKFC’s performance of their respective obligations under the merger agreement in all material respects and each of BB&T’s and BKFC’s receipt of a tax opinion to the effect that the merger will be treated as a “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code. These conditions to the closing of the merger may not be fulfilled and, accordingly, the merger may not be completed.

In addition, if the merger is not completed by September 5, 2015, either BB&T or BKFC may choose not to proceed with the merger, and the parties can mutually decide to terminate the merger agreement at any time. In addition, BB&T and BKFC may elect to terminate the merger agreement in certain other circumstances. If the merger agreement is terminated under certain circumstances, BKFC may be required to pay a termination fee to BB&T.

Failure to complete the merger could negatively impact the stock price and the future business and financial results of BKFC.

If the merger is not completed for any reason, the ongoing business of BKFC may be adversely affected and, without realizing any of the benefits of having completed the merger, BKFC would be subject to a number of risks, including the following:

• BKFC may experience negative reactions from the financial markets, including negative impacts on its stock price;

• BKFC may experience negative reactions from its customers, vendors and employees;

• BKFC will be required to pay certain costs relating to the merger, whether or not the merger is completed;

• the merger agreement places certain restrictions on the conduct of BKFC’s businesses prior to completion of the merger. Such restrictions, the waiver of which is subject to the consent of BB&T (not to be unreasonably withheld or delayed), may prevent BKFC from making certain acquisitions or taking certain other specified actions during the pendency of the merger; and

• matters relating to the merger (including integration planning) will require substantial commitments of time and resources by BKFC management, which would otherwise have been devoted to day-to-day operations and other opportunities that may have been beneficial to BKFC as an independent company.

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In addition to the above risks, if the merger agreement is terminated and BKFC’s board of directors seeks another merger or business combination, BKFC shareholders cannot be certain that BKFC will be able to find a party willing to offer equivalent or more attractive consideration than the consideration BB&T has agreed to provide in the merger. If the merger agreement is terminated under certain circumstances, BKFC may be required to pay a termination fee to BB&T.

Regulatory approvals may not be received, may take longer than expected or may impose conditions that are not presently anticipated or cannot be met.

Before the transactions contemplated in the merger agreement may be completed, various approvals must be obtained from the bank regulatory and other governmental authorities. These governmental entities may impose conditions on the granting of such approvals. Such conditions or changes and the process of obtaining regulatory approvals could have the effect of delaying completion of the merger or of imposing additional costs or limitations on the surviving entity following the merger. The regulatory approvals may not be received at any time, may not be received in a timely fashion, and may contain conditions on the completion of the merger that are not anticipated or cannot be met.

BKFC will be subject to business uncertainties while the merger is pending, which could adversely affect its business.

Uncertainty about the effect of the merger on employees and customers may have an adverse effect on BKFC, and, consequently, the surviving entity. These uncertainties may impair BKFC’s ability to attract, retain and motivate key personnel until the merger is consummated and for a period of time thereafter, and could cause customers and others that deal with BKFC to seek to change their existing business relationships with BKFC. Employee retention at BKFC may be particularly challenging during the pendency of the merger, as employees may experience uncertainty about their roles with the surviving entity following the merger.

Shares of BB&T common stock to be received by BKFC shareholders as a result of the merger will have rights different from the shares of BKFC common stock.

Upon completion of the merger, the rights of former BKFC shareholders will be governed by the articles of incorporation and bylaws of BB&T and by North Carolina corporate law. The rights associated with BB&T common stock and the terms of North Carolina corporate law are different from the rights associated with BKFC common stock and the terms of Kentucky corporate law, which currently govern the rights of BKFC shareholders.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

BKFC maintains its principal executive offices at 111 Lookout Farm Drive, Crestview Hills, Kentucky 41017, which is owned by BKFC. Of the 32 branch locations operated by the Bank, 18 are owned and 14 are leased. Certain of these leases are with affiliates and affiliated entities. The Bank also leases space for its cash management operations center.

No one facility is material to BKFC. Management believes that the facilities are generally in good condition and suitable for its banking operations. However, management continually looks for opportunities to upgrade its facilities and locations and may do so in the future.

Item 3. Legal Proceedings

From time to time, BKFC and the Bank are involved in litigation incidental to the conduct of its business, but neither BKFC nor the Bank is presently involved in any lawsuit or proceeding which, in the opinion of management, is likely to have a material adverse effect on BKFC.

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As previously disclosed in a Current Report on Form 8-K dated January 8, 2015 (the “8-K”) , BKFC , certain members of BKFC’s board of directors and BB&T entered into an agreement in principle with plaintiff regarding the settlement of a putative class action captioned Sector Grid Trading Company v. Bank of Kentucky Financial Corporation, et al., No. 14-C1-2302 (the “Kentucky Action”), pending before the Kenton Circuit Court of the Commonwealth of Kentucky and relating to the merger of BB&T and BKFC. The class action was filed by a shareholder of BKFC on December 9, 2014, naming as defendants BKFC, members of BKFC’s board of directors and BB&T. The plaintiff alleged that BKFC’s board of directors had breached its fiduciary duties to shareholders by entering into the merger agreement with BB&T and further by failing to adequately disclose certain aspects of the transaction. The plaintiff sought to enjoin the transaction or compensatory and punitive damages to be paid to the putative plaintiff class. Pursuant to the agreement in principle, BKFC, with BB&T’s concurrence, agreed to make available additional information to BKFC shareholders. Such additional information has been provided in a supplement filed as an exhibit to the 8-K (the “Supplement”) to, and incorporated by reference in, the Proxy Statement/Prospectus of BB&T and BKFC relating to the merger of BKFC and BB&T, dated December 4, 2014 (the “Proxy Statement”). BKFC, BB&T, and the other defendants deny all of the allegations made by plaintiff in the Kentucky Action and believe the disclosures in the Proxy Statement are adequate under the law. Nevertheless, BKFC, BB&T, and the other defendants have agreed to settle the Kentucky Action in order to avoid the costs, disruption, and distraction of further litigation. BKFC’s 2014 financial statements include a $500,000 accrual for the settlement of this litigation, some of which may be covered by insurance.

Item 4. Mine Safety Disclosures

Not applicable.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information. BKFC’s Common Stock is quoted on the NASDAQ (Global Market) under the symbol “BKYF.” Quarterly high and low prices for the last two fiscal years (which reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions) are shown below.

Fiscal Year 2014	High		Low
First Quarter	$	37.98	$	33.77
Second Quarter		37.76		33.87
Third Quarter		47.84		34.13
Fourth Quarter		49.07		43.93

Fiscal Year 2013	High		Low
First Quarter	$	28.82	$	25.34
Second Quarter		27.70		25.85
Third Quarter		30.35		27.01
Fourth Quarter		38.29		27.13

Holders and Dividends. There were 7,717,928 shares of Common Stock outstanding on December 31, 2014, which were held of record by 725 shareholders. The Board of Directors declared cash dividends of $0.18 per share in December 2014, $0.18 per share in September 2014, $0.18 per share in June 2014, $0.18 per share in March 2014. The Board of Directors declared cash dividends of $0.18 per share in December 2013, $0.17 per share in September 2013, $0.17 per share in June 2013, $0.17 per share in March 2013.

There are a number of statutory and regulatory requirements applicable to the payment of dividends by banks and bank holding companies. Please see the section entitled “Regulation and Supervision – Dividend Restrictions” under “Item 1. Business” and Note 18 of the Financial Statements included in this Annual Report for a discussion on the Bank’s current dividend restrictions.

Equity Compensation Plan Information. The following table reflects BKFC’s equity compensation plan’s information as of December 31, 2014.

	Number of Securities to be Issued Upon Exercise of Outstanding Options		Weighted Average Exercise Price of  Outstanding Options		Number of Securities Remaining Available for Future Issuance
Equity Compensation Plans Approved by Security Holders*		70,680	$	24.33		0
Equity Compensation Plans Not Approved by Security Holders		N/A		N/A		N/A
Total		70,680	$	24.33		0

(*) Consists of The Bank of Kentucky Financial Corporation 1997 Stock Option and Incentive Plan, approved by the shareholders of BKFC in 1997, and The Bank of Kentucky Financial Corporation 2007 Stock Option and Incentive Plan, approved by the shareholders of BKFC in 2007.

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	Number of Securities to be Issued Upon Exercise of Restricted stock units		Number of Securities Remaining Available for Future Issuance
Equity Compensation Plans Approved by Security Holders*		10,820		962,245
Total		10,820		962,245

(*) Consists of The Bank of Kentucky Financial Corporation 2012 Stock Incentive Plan, approved by the shareholders of BKFC in 2012.

			Period Ending
Index	12/31/09		12/31/10		12/31/11		12/31/12		12/31/13		12/31/14
Bank of Kentucky Financial Corporation		100.00		106.36		112.87		142.75		218.37		291.11
Russell 2000		100.00		126.86		121.56		141.43		196.34		205.95
SNL Bank $1B-$5B		100.00		113.35		103.38		127.47		185.36		193.81

Issuer Purchases. Since January 1, 2010, BKFC has not had any repurchase program in place.

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Item 6. Selected Financial Data

SELECTED FINANCIAL DATA

The following is a summary of selected consolidated financial data for The Bank of Kentucky Financial Corporation for the five years ended December 31, 2014. The summary should be read in conjunction with the Financial Statements and Notes to Consolidated Financial Statements.

(Dollars In Thousands	For Year Ended December 31st
Except Per Share Amounts)	2014			2013			2012			2011			2010
Earnings:
Total Interest Income	$	60,414		$	59,912		$	62,524		$	64,798		$	66,682
Total Interest Expense		4,554			4,658			6,339			9,260			13,273
Net Interest Income		55,860			55,254			56,185			55,538			53,409
Provision for Loan Losses		2,200			4,700			7,000			10,750			15,500
Noninterest Income		23,154			24,011			22,421			20,724			20,714
Noninterest Expense		50,817			46,745			46,338			42,114			42,424
Income Before Income Taxes		25,997			27,820			25,268			23,398			16,199
Federal Income Taxes		7,681			8,055			7,123			6,909			4,528
Net Income	$	18,316		$	19,765		$	18,145		$	16,489		$	11,671
Preferred Stock Dividend and Discount Accretion		-			-			-			972			2,246
Net Income available to Common Shareholders	$	18,316		$	19,765		$	18,145		$	15,517		$	9,425
Per Common Share Data:
Basic Earnings	$	2.39		$	2.63		$	2.43		$	2.09		$	1.61
Diluted Earnings		2.37			2.61			2.41			2.07			1.61
Dividends Declared		0.72			0.69			0.79			0.56			0.56
Balances at December 31:
Total Investment Securities		374,767			418,133			381,287			371,487			285,226
Gross Loans		1,258,905			1,249,645			1,195,409			1,129,954			1,106,009
Allowance for Loan Losses		14,639			16,306			16,568			18,288			17,368
Total Assets		1,931,656			1,857,492			1,844,104			1,744,724			1,664,884
Noninterest Bearing Deposits		370,869			359,199			351,916			283,090			260,992
Interest Bearing Deposits		1,245,010			1,228,386			1,218,091			1,215,731			1,161,320
Total Deposits		1,615,879			1,587,585			1,570,007			1,498,821			1,422,312
Total Shareholders’ Equity		200,721			181,139			170,440			156,570			159,370
Other Statistical Information:
Return on Average Assets		.99	%		1.10	%		1.04	%		1.00	%		0.75	%
Return on Average Equity		9.52	%		11.39	%		11.08	%		10.41	%		8.23	%
Dividend Payout Ratio		30.13	%		26.24	%		32.51	%		26.79	%		34.78	%
Capital Ratios at December 31:
Total Equity to Total Assets		10.39	%		9.75	%		9.24	%		8.97	%		9.57	%
Tier 1 Leverage Ratio		10.30	%		9.61	%		9.00	%		8.45	%		9.41	%
Tier 1 Capital to Risk-Weighted Assets		12.13	%		11.28	%		10.77	%		10.26	%		11.02	%
Total Risk-Based Capital to Risk- Weighted Assets		13.83	%		13.37	%		13.28	%		12.95	%		13.77	%
Loan Quality Ratios:
Allowance for Loan Losses
To Total Loans at year-end		1.16	%		1.30	%		1.39	%		1.62	%		1.57	%
Allowance for Loan  Losses
To Nonperforming Loans at year end		149.12	%		105.62	%		85.92	%		115.24	%		82.46	%
Net Charge-Offs to Average Net Loans		0.31	%		0.42	%		0.77	%		0.88	%		1.18	%

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

Management’s Discussion and Analysis of Financial Condition

and Results of Operations

December 31, 2014

The objective of this section is to help shareholders and potential investors understand our views on our results of operations and financial condition. You should read this discussion in conjunction with the consolidated financial statements and notes to the consolidated financial statements that appear elsewhere in this Annual Report. References to “we,” “us,” and “our” in this section refer to BKFC and its subsidiaries, including the Bank, unless otherwise specified or unless the context otherwise requires.

FORWARD-LOOKING STATEMENTS

Certain statements contained in this Annual Report which are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Examples of forward-looking statements include, but are not limited to, projections of revenues, income or loss, earnings or loss per share, the payment or non-payment of dividends, capital structure and other financial items; statements of plans and objectives of us or our management or Board of Directors; and statements of future economic performance and statements of assumptions underlying such statements. Words such as “believes,” “anticipates,” “intends” and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.

Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those in such statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to, the following:

· indications of an improving economy may prove to be premature;

· 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;

· changes or volatility in interest rates may adversely impact the value of securities, loans, deposits and other financial instruments and the interest rate sensitivity of our balance sheet as well as our liquidity;

· our ability to determine accurate values of certain assets and liabilities;

· the impact of turmoil in the financial markets and the effectiveness of governmental actions taken in response, and the effect of such governmental actions on us, our competitors and counterparties, financial markets generally and availability of credit specifically;

· changes in the extensive laws, regulations and policies governing financial services companies, including the Dodd-Frank Act and any regulations promulgated thereunder;

· 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;

· 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;

· the effect of the announcement and pendency of our merger with BB&T Corporation (“BB&T”) on our relationships with customers, vendors or employees;

· the possibility that the merger does not close when expected or at all; and

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· the merger may not produce revenue enhancements or cost savings at levels or within timeframes originally anticipated, or may result in unforeseen integration difficulties.

Any forward-looking statements made by us or on our behalf speak only as of the date they are made, and we do not undertake any obligation to update any forward-looking statement to reflect the impact of subsequent events or circumstances. Before making an investment decision, you should carefully consider all risks and uncertainties disclosed in our other public documents on file with the Securities and Exchange Commission (“SEC”).

OVERVIEW

The business of BKFC consists of holding and administering its interest in the Bank. The Bank conducts basic banking operations from locations in Boone, Kenton, Campbell, Grant, Gallatin and Pendelton Counties in northern Kentucky and Hamilton County in Ohio. The majority of BKFC’s revenue is derived from the Bank’s loan portfolio. The loan portfolio is diversified and the ability of borrowers to repay their loans is not dependent upon any single industry. The majority of the Bank’s loan portfolio, approximately 77%, consists of loans secured by or with real estate. Loans secured by or with real estate are further categorized down by loan type and borrower. Included in loans secured with or by real estate as of December 31, 2014 are residential real estate loans, commercial real estate loans and owner-occupied commercial real estate loans.

Economic Overview

The year ended December 31, 2014 saw slow growth both nationally and in the geographic markets where we operate.  The United States’ gross domestic product (GDP)  rebounded  strongly from a difficult first quarter in 2014.  For the full year 2014, the economy experienced year-over-year growth of 2.4%.  While the economy continues to show improvement, the rate of growth remains below a historical normalized rate of 3%.

Overall economic growth was further sustained by falling energy prices which help spur consumer spending.  Personal consumption grew at rate of 3.6% for 2014.   Unemployment declined, beginning at 6.7% and ending at 5.6% in 2014.  However, the percent of eligible workforce employed is well below historical averages.  Home values rose slightly and equities, despite much uncertainty, finished the year with substantial gains. 

Regulatory Reform Developments

On July 21, 2010, President Obama signed the Dodd-Frank Act into law. The Dodd-Frank Act is intended to address perceived deficiencies and gaps in the regulatory framework for financial services in the United States, reduce the risks of bank failures and better equip the nation’s regulators to guard against or mitigate any future financial crises, and manage systemic risk through increased supervision of systemically important financial companies (including nonbank financial companies). The Dodd-Frank Act implements numerous and far-reaching changes across the financial landscape affecting financial companies, including banks and bank holding companies such as BKFC. For a review of the various changes that the Dodd-Frank Act implements, see “Regulation and Supervision — The Dodd-Frank Act” in “Item 1. Business” of this Annual Report. Many of the rulemakings required by the various regulatory agencies are still in the process of being developed and/or implemented.

2014 Performance Overview

On September 5, 2014, BKFC announced that a merger agreement had been reached with BB&T, pursuant to which the Company will merge into BB&T, with BB&T as the surviving entity. As a result, the 2014 results included approximately $1,467,000 in merger related expenses. The effect of this added overhead was a 7% decrease in net income in 2014 compared with 2013.

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The results of 2014 also reflect the effects of overall improving credit metrics, which were offset by lower levels of non-interest income. Net charge-offs decreased from $4,962,000 in 2013 to $3,867,000 in 2014 and non-performing loans decreased from $15,438,000 at the end of 2013 to $9,817,000 at the end of 2014. These improving credit quality metrics led the Bank to provide $2,200,000 in the provision for loans losses in 2014 compared to $4,700,000 in 2013. While net charge-offs and non-performing loans both decreased in 2014, they remained at a historically high level. Contributing to the decrease in non-interest income was a 50% decline in mortgage banking income which was driven by an increase in long-term interest rates in 2014, which prompted a decrease in demand for home mortgage loan refinancing.

While the credit metrics showed significant improvement and the economy continued to improve during 2014, BKFC continued to experience levels of defaults and foreclosures higher than historical levels during fiscal 2014. Such default levels have been significantly less compared with other regions of the country. This is due, in part, to the fact that BKFC’s market in northern Kentucky and Cincinnati did not experience as dramatic a rise in real estate values in the years preceding the last recession compared with other markets, such as Florida and California. While BKFC’s local markets have not been affected as severely as other markets, management continues to closely monitor developments in the real estate market, given that the majority of the Bank’s loan portfolio is real estate related.

While the level of resources devoted to the credit review function and working out problem loans continued to be high in 2014, BKFC did not make significant changes to its loan underwriting standards. BKFC’s willingness to make loans to qualified applicants that meet its traditional, prudent lending standards has not changed.

Pending Merger

On September 8, 2014, BKFC and BB&T announced the signing of a definitive agreement under which BB&T will acquire BKFC in a cash and stock merger for total consideration valued at approximately $363 million. Under the terms of the agreement, which was approved by the shareholders of BKFC and the Board of Directors of each company, shareholders of BKFC will receive 1.0126 shares of BB&T common stock and $9.40 of cash for each share of BKFC common stock. Based on BB&T’s 14-day average closing price of $37.13 as of September 4, 2014, shareholders of BKFC will receive $47.00 for each share of BKFC common stock. The merger is subject to customary closing conditions, including receipt of regulatory approvals, and is expected to close in the first half of 2015.

The following sections provide more detail on subjects presented in this overview.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

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

The Bank maintains an allowance to absorb probable, incurred loan losses inherent in the loan portfolio. The Bank’s policy is to maintain an allowance for loan losses at an adequate level based upon ongoing quarterly assessments and evaluations of the collectability and historical loss experience of loans. Loan losses are charged and recoveries are credited to the allowance for loan losses. Provisions for loan losses are based on the Bank’s review of its historical loan loss experience and such factors that, in management’s judgment, deserve consideration under existing economic conditions in estimating probable loan losses. The Bank’s strategy for credit risk management includes a combination of well-defined credit policies, uniform underwriting criteria, and ongoing risk monitoring and review processes for all commercial and consumer credit exposures. The credit risk management strategy also includes assessments of compliance with commercial and consumer policies, risk ratings and other important credit information. The strategy also emphasizes regular credit examinations and management reviews of loans exhibiting deterioration in credit quality. The Bank strives to identify potential problem loans early and promptly undertake the appropriate actions necessary to mitigate or eliminate the increasing risk identified in these loans.

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The allowance for loan losses consists of two components, the specific reserve, pursuant to ASC 310, Accounting by Creditors for Impairment of a Loan, and the general reserve, pursuant to ASC 450-10, Accounting for Contingencies. A loan is considered impaired when, based upon current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan. The specific reserve component is an estimate of loss based upon an impairment review of loans which meet certain criteria that are considered impaired. An insignificant delay or insignificant shortfall in amount of payments is not considered an impairment. In addition, a loan is not impaired during a period of delay in payment if the creditor expects to collect all amounts due including interest accrued at the contractual interest rate for the period of delay. Thus, a demand loan or loan that has been extended beyond its original maturity date is not impaired if the creditor expects to collect all amounts due including interest accrued at the contractual interest rate during the period the loan is outstanding.

The general reserve includes an estimate of commercial and consumer loans with similar characteristics. Depending on the set of facts with respect to a particular loan, the Bank utilizes one of the following methods for determining the proper impairment of a loan:

· the present value of expected future cash flows of a loan;

· the market price of the loan based upon readily available information for that type of loan; and

· the fair value of collateral.

The allowance established for impaired loans is generally based, for all collateral-dependent loans, on the fair value of the collateral, less the estimated cost to liquidate. For non-collateral dependent loans (such as accruing troubled debt restructurings), the allowance is based on the present value of expected future cash flows discounted by the loan’s effective interest rate. A small portion of the Bank’s loans which are impaired under the ASC 310 process carry no specific reserve allocation. These loans were reviewed for impairment and are considered adequately collateralized with respect to their respective outstanding principal loan balances. The majority of these loans are loans which have had their respective impairment (or specific reserve) amounts charged off, or are loans related to other impaired loans which continue to have a specific reserve allocation. It is the Bank’s practice to maintain these impaired loans, as analyzed and provided for in the ASC 310 component of the allowance for loan losses, to avoid double counting of any estimated losses that may have been included in the ASC 450-10 component of the allowance for loan losses.

Generally, the Bank orders a new or updated appraisal on real estate properties which are subject to an impairment review. Upon completion of the impairment review, loan reserves are increased as warranted. Charge-offs, if necessary, are generally recognized in a period after the reserves were established. Adjustments to new or updated appraisal values are not typically done, but in those cases when an adjustment is necessary, it is documented with supporting information and typically results in an adjustment to decrease the property’s value because of additional information obtained concerning the property after the appraisal or an update has been received by the Bank. If a new or updated appraisal is not available at the time of a loan’s impairment review, the Bank typically applies a discount to the value of an old appraisal to reflect the property’s current estimated value if there is believed to be deterioration in either (i) the physical or economic aspects of the subject property or (ii) any market conditions. Updated valuations on one to four family residential properties with small to moderate values are generally accomplished by obtaining an evaluation or appraisal. Generally, an “as is” value is utilized in most of the Bank’s real estate based impairment analyses. However, under certain limited circumstances, an “as stabilized” valuation may be utilized, provided that the “as stabilized” value is tied to a well-justified action plan to bring the real estate project to a stabilized occupancy under a reasonable period of time.

If a partially charged-off loan has been restructured in a manner that is reasonably assured of repayment and performance according to prudently modified terms, and has sustained historical payment performance for a reasonable period of time prior to and/or after the restructuring, it may be returned to accrual status and is classified as a TDR loan. However, if the above conditions cannot be reasonably met, the loan remains on non-accrual status.

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In addition, the Bank evaluates the collectability of both principal and interest when assessing the need for loans to be placed on non-accrual status. Non-accrual status denotes loans in which, in the opinion of management, the collection of accrued interest is unlikely. A loan is generally placed on non-accrual status if: (i) it becomes 90 days or more past due or (ii) for which payment in full of both principal and interest cannot be reasonably expected. Payments received on a non-accrual loan re applied to principal, until qualifying for return to accrual status.

The general component of the allowance covers non-impaired loans and is based on historical loss experience adjusted for current factors. For loans that are risk rated, the historical loss experience is determined based on the actual loss history experienced by the Company over the most recent four years. These loss ratios are calculated from a migration analysis of the charge offs over this period, but excludes the ratios from the most recent six months period as they are not appropriately seasoned. The loss ratios for loans designated as belonging to homogeneous pools, including smaller balance consumer loans, are calculated for a five year period and a one year period, with the higher of the two loss ratio’s currently used in the allowance calculation. These actual loss experiences are supplemented with other economic factors based on the risks present for each portfolio segment. These economic factors include consideration of the following: levels of and trends in delinquencies and impaired loans; trends in volume and terms of loans; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations. These factors are consistent within each of the portfolio segments, which have been identified as: commercial, residential real estate, nonresidential real estate, construction, consumer and municipal obligations.

Management utilizes a detailed approach to setting the environmental adjustments to the historical loss. Factors that management considers as part of this approach in setting the environmental adjustments include economic trends, loan policies, lender experience, loan growth, delinquency trend, non-performing asset trends, classified loan trends and credit concentrations.

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

Charge-offs are recognized when it becomes evident that a loan or a portion of a loan is deemed uncollectible regardless of its delinquent status. The Bank generally charges off that portion of a loan that is determined to be unsupported by an obligor’s continued ability to repay the loan from income and/or assets, both pledged and unpledged as collateral.

FINANCIAL CONDITION

Highlighting the changes to the BKFC balance sheet from December 31, 2013 to December 31, 2014 was a $83,126,000, or 361% increase in federal funds sold. This increase in liquidity from the end of 2013 was the result of higher levels of deposits, short-term borrowings and equity, in addition to lower levels of investment securities, all or which added to the Company’s liquidity. Total deposits increased $28,294,000, or 2%, from the end of 2013 to the end of 2014, while total short-term borrowings increased $18,060,000, or 65%, in the same period. Total capital increased $19,582,000, or 11%, from the end of 2013 to the end of 2014. The increase in capital was a result of an increase in retained earnings, and an increase in accumulated other comprehensive income of $3,768,000. The increase in the comprehensive income was the result of an increase in the market value of BKFC’s available-for-sale security portfolio. The value of the securities portfolio increased as rates moved lower in 2014. Changes on the investment securities portfolio included a $39,985,000, or 12%, decrease in available-for-sale securities, and a $3,381,000, or 4%, decrease in held-to-maturity securities. As a result of these changes, the Bank’s total assets increased $74,164,000, or 4%, from $1,857,492,000 at December 31, 2013 to $1,931,656,000 at December 31, 2014.

Total loans increased $9,167,000, or .7%, from the end of 2013 to the end of 2014. While the growth in loans was .7% from December 31, 2013 to December 31,2014, the average loan growth for the year 2014 was $64,961,000 or 5% compared to 2013. The largest increases in loans from December 31, 2013 to December 31, 2014 came from the nonresidential real estate portfolio, which increased $21,421,000, or 4%, which was partially offset with a $10,825,000 or 4% decrease in the residential real estate portfolio in the same period.

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The largest increase in deposits came from interest-bearing transaction NOW accounts, which increased $45,322,000, or 8%, from 2013. Contributing to the increase in NOW accounts was public fund deposits which increased $25,576,000 or 6% from 2013.

The following table illustrates the change in the mix of average assets during 2014 compared with 2013 and 2012. The balance sheet mix was relatively stable in 2014, with an increase in average loans offset by a decrease in average short term investments. The percentage of average assets invested in average loans increased from 65.7% in 2013 to 67.4% in 2014 while average assets invested in short term investments decreased from 2.7% in 2013 to 1.7% in 2014.

Table 1 - Average Assets 2014, 2013 and 2012 (dollars in thousands)

			As a % of					As a % of					As a % of
	2014		total assets			2013		total assets			2012		total assets
Average Assets:
Cash and due from banks	$	52,036		2.8	%		60,884		3.4	%		56,152		3.2	%
Short term investments		30,971		1.7	%		48,887		2.7	%		60,367		3.5	%
Other interest-earning assets		5,141		0.3	%		5,349		0.3	%		5,349		0.3	%
Securities		398,183		21.5	%		388,878		21.6	%		373,029		21.5	%
Loans (net of allowance for loan losses)		1,249,697		67.4	%		1,184,322		65.7	%		1,133,388		65.5	%
Premises and equipment		22,666		1.2	%		22,545		1.2	%		22,986		1.3	%
Goodwill and acquisition intangibles		23,617		1.3	%		24,168		1.3	%		24,857		1.4	%
Cash surrender value of life insurance		40,376		2.2	%		38,063		2.1	%		33,307		1.9	%
Other assets		30,842		1.6	%		30,036		1.7	%		24,173		1.4	%
Total average assets	$	1,853,529		100.0	%		1,803,132		100.0	%		1,733,608		100.0	%

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RESULTS OF OPERATIONS

Summary

2014 vs. 2013. Driven by higher non-interest expense and decreased non-interest income, net income decreased 7% from $19,765,000 for the year ended December 31, 2013, to $18,316,000 for the year ended December 31, 2014. Total non-interest expense increased 9% from $46,745,000 for the year ended December 31, 2013, to $50,817,000 for the year ended December 31, 2014. The increase in non-interest expense included approximately $1,427,000 in merger related expenses and an increase of $799,000, or 60%, in FDIC insurance expense. The merger related expenses were the result of the previously discussed merger agreement with BB&T, while the increase in FDIC insurance expense was the result of an insurance rate increase for the Bank. Total non-interest income decreased $857,000, or 4%, from $24,011,000 in 2013 to $23,154,000 in 2014, as a result of lower mortgage banking income and lower service charges on deposits. Partially offsetting the negative variances in non-interest expense and non-interest income was a decrease in the provision for loan losses of $2,500,000 or 53%, from $4,700,000 in 2013 to $2,200,000 in 2014. The decrease in the provision reflected the overall improved credit metrics and improving economic conditions compared with 2013.

2013 vs. 2012. Driven by lower loan loss provisions and increased non-interest income, net income increased 9% from $18,145,000 for the year ended December 31, 2012, to $19,765,000 for the year ended December 31, 2013. The provision for loan losses decreased $2,300,000 from $7,000,000 in 2012 to $4,700,000 in 2013. The decrease in the provision reflected the overall improved credit metrics and slowly improving economic conditions compared with 2012. These metrics included net charge-offs that decreased from $8,720,000 (0.77% of average loans) in 2012 to $4,962,000 (0.42% of average loans) in 2013, decreased criticized and classified loans by 5%, and non-performing loans that decreased 20% from $19,283,000 at December 31, 2012 to $15,438,000 at December 31, 2013. Total non-interest income increased $1,590,000, or 7%, from $22,421,000 in 2012 to $24,011,000 in 2013, as higher service charges on deposits and trust income offset lower sold loan income.

Net Interest Income

2014 vs. 2013. Net interest income rose to $55,860,000 in 2014, an increase of $606,000 (1%) from the $55,254,000 earned in 2013. As illustrated in Table 3, while the volume variance had a positive impact on net interest income, the rate variances had a negative impact on net interest income in 2014 in contrast to 2013. Table 3 shows the net interest income on a fully tax equivalent basis was positively impacted by the volume additions to the balance sheet by $2,894,000, which was offset by a negative rate variance by $2,169,000. As illustrated in Table 2, the net interest spread decreased by 8 basis points and the net interest margin of 3.37% for 2014 was 7 basis points lower than the 3.44% net interest margin for 2013. Contributing to the decrease in both of these measures was the current extreme low rate environment. The cost of interest-bearing liabilities decreased 1 basis points from 0.36% for 2013 to 0.35% for 2014, while the yield on earning assets decreased 9 basis points from 3.72% for 2013 to 3.63% for 2014. As illustrated in Table 2, average earning assets increased $56,142,000, or 3%, from 2013 to 2014, while average interest-bearing liabilities only increased $21,690,000, or 2%, in the same period. As further illustrated in Table 3, the unfavorable rate variance was driven by the decrease in interest income attributable to rate of $2,251,000 while the decrease in interest expense attributable to rate was only $82,000. Driving the decrease in interest income were loans, which contributed $2,744,000 of the decrease in interest income as a result of rate. BKFC is expected to be negatively affected if rates continue to fall in 2015. For more information on the Bank’s interest rate risk, see the section entitled “Asset/Liability Management and Market Risk” under “Item 7A.”

2013 vs. 2012. Net interest income dropped to $55,254,000 in 2013, a decrease of $931,000 (2%) from the $56,185,000 earned in 2012. As illustrated in Table 3, while the volume variance had a positive impact on net interest income, the rate variances had a negative impact on net interest income in 2013 in contrast to 2012. Table 3 shows the net interest income on a fully tax equivalent basis was positively impacted by the volume additions to the balance sheet by $2,913,000, which was offset by a negative rate variance by $4,016,000. As illustrated in Table 2, the net interest spread decreased by 16 basis points and the net interest margin of 3.44% for 2013 was 18 basis points lower than the 3.62% net interest margin for 2012. Contributing to the decrease in both of these measures was the current extreme low rate environment. The cost of interest-bearing liabilities decreased 14 basis points from 0.50% for 2012 to 0.36% for 2013, while the yield on earning assets decreased 30 basis points from 4.02% for 2012 to 3.72% for 2013. As illustrated in Table 2, average earning assets increased $54,095,000, or 3%, from 2012 to 2013, while average interest-bearing liabilities only increased $14,492,000, or 1%, in the same period. As further illustrated in Table 3, the unfavorable rate variance was driven by the decrease in interest income attributable to rate of $5,385,000 while the decrease in interest expense attributable to rate was only $1,369,000. Driving the decrease in interest income were loans, which contributed $4,984,000 or 93% of the decrease in interest income as a result of rate. BKFC is expected to be negatively affected if rates continue to fall in 2014. For more information on the Bank’s interest rate risk, see the section entitled “Asset/Liability Management and Market Risk” under “Item 7A.”

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

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Table 2 - Average Balance Sheet Rates 2014, 2013 and 2012 (presented on a tax equivalent basis in thousands)

	Year ended December 31,
	2014								2013								2012
	Average outstanding balance			Interest earned/ paid		Yield/ rate			Average outstanding balance			Interest earned/ paid		Yield/ rate			Average outstanding balance			Interest earned/ paid		Yield/ rate
	(Dollars in thousands)
Interest-earning assets:
Loans receivable(1)(2)	$	1,265,827		$	53,649		4.24	%	$	1,200,866		$	53,570		4.46	%	$	1,151,139		$	56,196		4.88
Securities(2)		398,183			7,860		1.97			388,878			7,251		1.87			373,029			7,412		1.99
Other interest-earning assets		36,111			270		0.75			54,235			337		0.62			65,716			334		0.51
Total interest-earning assets		1,700,121			61,779		3.63			1,643,979			61,158		3.72			1,589,884			63,942		4.02
Non-interest-earning assets		153,408								159,153								149,211
Total assets	$	1,853,529							$	1,803,132							$	1,739,095
Interest-bearing liabilities:
Transaction accounts		924,923			1,528		0.17			883,525			1,449		0.16			819,915			1,552		0.21
Time deposits		299,210			2,008		0.67			326,427			2,215		0.68			378,111			3,728		0.93
Borrowings		84,861			1,018		1.20			77,352			994		1.29			74,786			1,059		1.42
Total interest-bearing liabilities		1,308,994			4,554		0.35			1,287,304			4,658		0.36			1,272,812			6,339		0.50
Non-interest-bearing liabilities		352,228								342,272								302,520
Total liabilities		1,661,222								1,629,576								1,575,332
Shareholders’ equity		192,307								173,556								163,763
Total liabilities and shareholders’ equity	$	1,853,529							$	1,803,132							$	1,739,095
Net interest income				$	57,225							$	56,500							$	57,603
Interest rate spread							3.28	%							3.36	%							3.52
Net interest margin (net interest income as a percent of average interest-earning assets)							3.37	%							3.44	%							3.62
Effect of net free funds (the difference between the net interest margin and the interest rate spread)							0.09	%							0.08	%							0.10
Average interest-earning assets to interest-bearing liabilities		129.88	%							127.71	%							124.91	%

⁽¹⁾ Includes non-accrual loans.

⁽²⁾ Income presented on a tax equivalent basis using a 35.00% tax rate. The tax equivalent adjustment was $1,365,000, $1,246,000 and $1,418,000 in 2014, 2013 and 2012, respectively.

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Volume/Rate Analysis. Table 3 below illustrates 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) a combination of 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 3 – Volume/Rate Analysis (in thousands)

	Year ended December 31,
	2014 vs. 2013									2013 vs. 2012
	Increase (Decrease) Due to									Increase (Decrease) Due to
	Volume			Rate			Total			Volume			Rate			Total
Interest income attributable to:
Loans receivable	$	2,823		$	(2,744	)	$	79		$	2,358		$	(4,984	)	$	(2,626	)
Securities		176			433			609			307			(468	)		(161	)
Other interest-earning assets(1)		(127	)		60			(67	)		(64	)		67			3
Total interest-earning assets		2,872			(2,251	)		621			2,601			(5,385	)		(2,784	)
Interest expense attributable to:
Transaction accounts		68			11			79			114			(217	)		(103	)
Time deposits		(183	)		(24	)		(207	)		(461	)		(1,052	)		(1,513	)
Borrowings		93			(69	)		24			35			(100	)		(65	)
Total interest-bearing liabilities		(22	)		(82	)		(104	)		(312	)		(1,369	)		(1,681	)
Increase (decrease) in net interest income	$	2,894		$	(2,169	)	$	725		$	2,913		$	(4,016	)	$	(1,103	)

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

Provision for loan losses- While the economic conditions continue to be challenging, the provision for loan losses reflected the improving economy that was discussed above in the economic overview. While still above historical levels, the credit metrics showed significant improvement in 2014 compared with 2013.

2014 vs. 2013. As discussed above under “Management Overview,” the provision for loan losses reflected the economic recovery. The provision for loan losses was $2,200,000 for the year ended December 31, 2014, compared to $4,700,000 for 2013. As detailed in Table 4, the decrease of $2,500,000 (53%) reflected a decrease in the level of charge-offs, non-performing loans in 2014 compared with 2013. For the year ended December 31, 2014, net charge-offs were $3,867,000, or 0.31%, of average loan balances compared to $4,962,000, or 0.42%, of average loan balances, for 2013. Non-performing loans decreased 36% from $15,438,000 at December 31, 2013 to $9,817,000 at December 31, 2014, while criticized and classified loans decreased by 23% over the same period.

As illustrated in Table 5 below, total non-accrual loans plus accruing loans past due 90 days or more were $9,817,000 (.78% of loans outstanding) at December 31, 2014, compared to $15,438,000 (1.24% of loans outstanding) at December 31, 2013. Management’s evaluation of the inherent risk in the loan portfolio considers both historical losses and information regarding specific borrowers. Management continues to monitor the non-performing relationships and has established appropriate reserves.

Non-performing assets, which include non-performing loans and other real estate owned, totaled $16,487,000 at December 31, 2014 and $20,743,000 at December 31, 2013. This represented .85% of total assets at December 31, 2014 compared to 1.12% at December 31, 2013. Other real estate properties are recorded at their fair value less estimated costs to sell with the difference between this value and the loan balance being recorded as a charge-off.

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2013 vs. 2012. As discussed above under “Management Overview,” the provision for loan losses reflected the slow economic recovery. The provision for loan losses was $4,700,000 for the year ended December 31, 2013, compared to $7,000,000 for 2012. As detailed in Table 4, the decrease of $2,300,000 (33%) reflected a decrease in the level of charge-offs, non-performing loans and lower specific reserves in 2013 compared with 2012. For the year ended December 31, 2013, net charge-offs were $4,962,000, or 0.42%, of average loan balances compared to $8,720,000, or 0.77%, of average loan balances, for 2012. Non-performing loans decreased 20% from $19,283,000 at December 31, 2012 to $15,438,000 at December 31, 2013, while criticized and classified loans decreased by 5%, and specific loan reserves decreased 50% from $6,265,000 to $3,419,000 over the same period.

As illustrated in Table 5 below, total non-accrual loans plus accruing loans past due 90 days or more were $15,438,000 (1.24% of loans outstanding) at December 31, 2013, compared to $19,283,000 (1.61% of loans outstanding) at December 31, 2012. Management’s evaluation of the inherent risk in the loan portfolio considers both historical losses and information regarding specific borrowers. Management continues to monitor the non-performing relationships and has established appropriate reserves.

Non-performing assets, which include non-performing loans and other real estate owned, totaled $20,743,000 at December 31, 2013 and $24,679,000 at December 31, 2012. This represented 1.12% of total assets at December 31, 2013 compared to 1.34% at December 31, 2012. Other real estate properties are recorded at their fair value less estimated costs to sell with the difference between this value and the loan balance being recorded as a charge-off.

Troubled Debt Restructurings (TDRs). In certain circumstances, the Bank may modify the terms of a loan to maximize the collection of amounts due. In cases where the borrower is experiencing financial difficulties or is expected to experience difficulties in the near -term, concessionary modification is granted to minimize or eliminate the economic loss and to avoid foreclosure or repossession of the collateral. Modifications may include interest rate reductions, extension of the maturity date or a reduction in the principal balance. Restructured loans accrue interest as long as the borrower complies with the modified terms. Performing TDRs are loans that are paying as to the agreed upon modified terms and are not more than 30 days past due. Non performing TDRs are the remainder. Total performing TDRs, which are not considered non-performing loans by management, were $6,099,000 at December 31, 2014 compared with $8,816,000 at December 31, 2013. Total non-performing TDRs were $4,222,000 at December 31, 2014 compared with $8,246,000 at December 31, 2013. In order to proactively manage and resolve problem loans, the Bank expects higher than normal levels of TDRs as it continues to work with relationships that show signs of stress. All TDRs are considered impaired loans and any specific reserves related to the TDRs are included in the allowance for loan losses on the balance sheet. Any additional specific reserves related to TDRs added or reduced in a period would be reflected in the provision for loan losses on the income statement for that period. Ordinarily, loans are identified as potential problem loans, through a higher risk weighting, before actually being restructured.

Allowance for Loan Losses (“ALL”). The decrease in the ALL was directionally consistent in 2014 with the improving credit metrics and the slow economic recovery. The ALL decreased 10%, from $16,306,000 at December 31, 2013 to $14,639,000 at December 31, 2014, which decreased the allowance for loan losses as a percentage of total loans from 1.30% at December 31, 2013, to 1.16% at December 31, 2014. The amount of the allowance allocated to impaired loans at year end 2014 was $4,035,000, which was up 18% from the $3,419,000 at year end 2013. The amount of the allowance allocated to specific pools of loans based on risk ratings decreased in 2014. This decrease was a result of a lower volume of substandard loans which did not have specific allocations, from the end of 2014 to the end of 2013. The impairment process is described in the critical accounting policies section of this Annual Report. While the allowance decreased in 2014, it has increased since the recession began in 2008. Contributing to the increase in the allowance for loan losses over this period is the decrease in real estate values experienced in the most recent economic cycle. Management believes the current level of the ALL is sufficient to absorb probable incurred losses in the loan portfolio. Management continues to monitor the loan portfolio closely and believes the provision for loan losses is directionally consistent with the changes in the probable losses inherent in the loan portfolio from 2013 to 2014. The Bank does not originate or purchase sub-prime loans for its portfolio. Management will continue to monitor and evaluate the effects of the housing market conditions and any signs of further deterioration in credit quality on the Bank’s loan portfolio.

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

For additional information on the ALL, see the critical accounting policies section of this discussion.

Table 4 - Analysis of the allowance for loan losses for the periods indicated

	At December 31
	2014			2013			2012			2011			2010
	(dollars in thousands)
Balance of allowance at beginning of period	$	16,306		$	16,568		$	18,288		$	17,368		$	15,153
Recoveries of loans previously charged off:
Commercial loans		290			679			1,427			267			229
Consumer loans		298			335			321			382			487
Mortgage loans		17			112			15			21			5
Total recoveries		605			1,126			1,763			670			721
Loans charged off:
Commercial loans		2,180			2,373			6,464			8,841			11,499
Consumer loans		1,385			1,235			1,827			1,288			2,101
Mortgage loans		907			2,480			2,192			371			406
Total charge-offs		4,472			6,088			10,483			10,500			14,006
Net charge-offs		(3,867	)		(4,962	)		(8,720	)		(9,830	)		(13,285	)
Provision for loan losses		2,200			4,700			7,000			10,750			15,500
Balance of allowance at end of period	$	14,639		$	16,306		$	16,568		$	18,288		$	17,368
Net charge-offs to average loans outstanding for period		0.31	%		0.42	%		0.77	%		0.88	%		1.18	%
Allowance at end of period to loans at end of period		1.16	%		1.30	%		1.39	%		1.62	%		1.57	%
Allowance to non-performing loans at end of period		149.12	%		105.62	%		85.92	%		115.24	%		82.46	%

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Table 5 - Analysis of non-performing loans for the periods indicated

	At December 31
	2014			2013			2012			2011			2010
	(dollars in thousands)
Loans accounted for on a non-accrual basis:
Nonresidential real estate	$	4,458		$	9,156		$	12,138		$	6,628		$	6,311
Residential real estate		2,950			5,360			5,243			5,325			4,208
Construction		1,678			510			1,075			1,897			5,329
Commercial		687			385			740			1,175			4,749
Consumer and other		9			6			48			626			51
Total		9,782			15,417			19,244			15,651			20,648
Accruing loans which are contractually past due 90 days or more:
Nonresidential real estate	$	-		$	-		$	-		$	-		$	68
Residential real estate		7			-			17			112			263
Construction		-			-			-			-			-
Commercial		-			-			-			74			-
Consumer and other loans		28			21			22			33			83
Total		35			21			39			219			414
Total non-performing loans	$	9,817		$	15,438		$	19,283		$	15,870		$	21,062
Non-performing loans as a percentage of total  loans		.78	%		1.24	%		1.61	%		1.40	%		1.90	%
Other real estate owned	$	6,670		$	5,305		$	5,396		$	5,844		$	795
Trouble debt restructured (TDR) loans:
Performing troubled debt restructured (TDR) loans	$	6,099		$	8,816		$	6,046		$	13,306		$	6,135
Nonperforming trouble debt restructured (TDR) loans (included in nonaccrual loans)		4,222			8,246			11,095		$	1,923		$	2,186
Total troubled debt restructured loans	$	10,321		$	17,062		$	17,141		$	15,229		$	8,321

The amount of gross interest income that would have been recorded for nonaccrual loans in 2014 if loans had been current in accordance with their original terms was $609,000 and $789,000 for 2013.

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Non-Interest Income

The following table shows the components of non-interest income and the percentage changes from 2013 to 2014 and from 2012 to 2013.

Table 6 - Major components of non-interest income (dollars in thousands)

	Year ended December 31									Percentage Increase/(Decrease)
	2014			2013			2012			2014/2013			2013/2012
	(dollars in thousands)
Non-interest income:
Service charges and fees	$	9,671		$	10,323		$	9,089			(6	)%		14	%
Mortgage banking income		832			1,658			2,786			(50	)		(40	)
Trust fee income		3,916			3,402			2,842			15			20
Bankcard transaction revenue		4,211			4,021			3,767			5			7
Company owned life insurance earnings		1,119			1,172			1,185			(5	)		(1	)
Net securities gains		290			274			206			6			33
Losses on other real estate owned		(388	)		(535	)		(427	)		(27	)		25
Other		3,503			3,696			2,973			5			24
Total non-interest income	$	23,154		$	24,011		$	22,421			(4	)%		7	%

2014 vs. 2013. Total non-interest income decreased $857,000, or 4%, as lower mortgage banking income and lower service charges and fees was partially offset by higher trust fee income and lower losses on the sale of other real estate owned property. The $826,000, or 50%, decrease in mortgage banking income was driven by an increase in long-term interest rates in 2014, which prompted a decrease in demand for home mortgage loan refinancing. The $652,000, or 6%, decrease in service charges and fees was driven by lower non sufficient fund charges. Driving the $514,000, or 15%, increase in trust fee income was higher levels of assets under management.

2013 vs. 2012. Total non-interest income increased $1,590,000, or 7%, as higher service charges and fees, trust fee income, bankcard transaction revenue more than offset lower mortgage banking income and higher losses on the sale of other real estate owned property. The $1,234,000, or 14%, increase in service charges and fees was driven by a new fee structure put in place in the second quarter of 2013. The $1,128,000, or 40%, decrease in mortgage banking income was driven by an increase in long-term interest rates in 2013, which prompted a decrease in demand for home mortgage loan refinancing. Driving the $560,000, or 20%, increase was higher assets under management and increased sales of brokerage products. The $723,000, or 24%, increase in other non-interest income included $413,000 higher loan fees in 2013 compared with 2012, the majority of which was fees earned for facilitating interest rate swaps for customers. The Dodd-Frank Act excludes banks under $10 billion in assets from the rule that limits the interchange fees paid by merchants to banks for certain debit card transactions.

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Non-Interest Expense

The following table shows the components of non-interest expense and the percentage changes from 2013 to 2014 and from 2012 to 2013.

Table 7 - Major Components of non-interest expense (in thousands)

	Year ended December 31						Percentage Increase/(Decrease)
	2014		2013		2012		2014/2013			2013/2012
	(Dollars in thousands)
Non-interest expense:
Salaries and employee benefits	$	25,224	$	23,561	$	22,953		7	%		3	%
Occupancy and equipment		5,629		5,317		5,249		6			1
Data processing		2,154		2,171		2,191		(1	)		(1	)
Advertising		1,229		1,325		1,503		(7	)		(12	)
Electronic banking processing fees		1,579		1,607		1,525		(2	)		5
Outside service fees		1,187		1,027		1,026		16			-
State bank taxes		2,454		2,389		2,219		3			8
Other real estate owned & loan collection		1,297		1,525		1,543		(15	)		(1	)
Amortization of intangible assets		488		615		766		(21	)		(20	)
FDIC insurance		2,122		1,323		1,163		60			14
Merger related expense		1,467		-		-		100			-
Other		5,987		5,885		6,200		2			(5	)
Total non-interest expense	$	50,817	$	46,745	$	46,338		9	%		1	%

2014 vs. 2013. Non-interest expense increased $4,072,000 (9%), to $50,817,000 for 2014, compared to $46,745,000 for 2013. The largest increase in non-interest expense was in the salaries and benefits expense, which increased $1,663,000 (7%) in 2014 compared to 2013. The increase in salaries and benefits included $746,000 in higher accruals for pension plan expense. Contributing to the increased pension plan expense was a decrease in the discount rate used to calculate the liability. As discussed above, the merger related expenses were the result of the pending merger with BB&T, and the FDIC insurance increase was the result of higher rates charged to the Bank.

2013 vs. 2012. Non-interest expense increased $407,000 (1%), to $46,745,000 for 2013, compared to $46,338,000 for 2012. The largest increase in non-interest expense was in the salaries and benefits expense, which increased $608,000 (3%) in 2013 compared to 2012. The increase in salaries and benefits included $286,000 in higher accruals for pension plan expense. The increased pension plan expense was the result of higher projected earnings for plan participants. The largest decrease in other non-interest expense was appraisal expense, which decreased $207,000 (47%) in 2013 compared with 2012, as the result of a decrease in the number of loans sold.

Tax Expense

2014 vs. 2013 As a result of lower income before taxes, the federal income tax expense decreased $374,000 (5%) to $7,681,000 for 2014 compared to $8,055,000 for 2013. The effective tax rate was 29.5% for 2014, an increase of .5% from 29.0% for 2013. The increase in effective tax rate was a result of a significant portion of the merger related expenses being non tax deductible.

2013 vs. 2012 As a result of higher income before taxes, the federal income tax expense increased $932,000 (13%) to $8,055,000 for 2013 compared to $7,123,000 for 2012. The effective tax rate was 29.0% for 2013, an increase of .8% from 28.2% for 2012. The increase in effective tax rate was a result of a lower ratio of tax exempt income and tax credit investments to income before taxes in 2013 compared with 2012.

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Contractual Obligations and Off-Balance Sheet Arrangements

The Bank enters into certain contractual obligations in the ordinary course of operations. Table 8 presents, as of December 31, 2014, the Bank’s significant fixed and determinable contractual obligations by payment date. The required payments under these contracts represent future cash requirements of the Bank. The payment amounts represent those amounts due to the recipient.

Table 8 - Contractual obligations (dollars in thousands)

	Maturity by Period
	Total		Less than 1 year		1 - 3 years		3 - 5 years		More than 5 years
Certificates of deposit	$	298,522	$	190,861	$	82,910	$	24,751	$	-
FHLB advances		10,000		-		10,000		-		-
Subordinated debentures		38,557		-		-		20,000		18,557
Other notes payable		1,768		255		1,513		-		-
St. Elizabeth Cardiovascular Building naming rights		500		250		250		-		-
Executive pension plan		295		25		49		49		172
Lease commitments		4,899		1,031		1,505		906		1,457
Total	$	354,541	$	192,422	$	96,227	$	45,706	$	20,186

(1) Lease commitments represent the total minimum lease payments under non-cancelable leases.

In order to meet the financing needs of its customers, the Bank is also a party to certain financial instruments with off-balance sheet risk in the normal course of business. These financial instruments include commitments to extend credit and standby letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in BKFC’s consolidated balance sheets. Table 9 presents, as of December 31, 2014, the Bank’s significant off-balance sheet commitments.

Table 9 – Significant Off-Balance Sheet Commitments (in thousands)

	Maturity by Period
	Total		Less than 1 year		1 - 3 years		3 - 5 years		More than 5 years
Unused lines of credit and loan commitments	$	437,461	$	242,747	$	113,115	$	14,484	$	67,115
Standby letters of credit		45,170		34,197		416		8,335		2,222
FHLB letters of credit		187,000		187,000		-		-		-

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

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

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

52

On September 10, 2014, the Bank entered into an agreement with St. Elizabeth Medical Center, Inc. whereby the medical center granted to the Bank the naming rights for its new cardiovascular center located in Kenton County, Kentucky. The Bank committed $750,000 to the project, and the cost of the naming rights will be amortized over a ten-year period commencing in 2015.

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

Liquidity and Capital Resources

Liquidity refers to the availability of sufficient levels of cash to fund BKFC’s operations, such as meeting deposit withdrawals, funding loan commitments, paying expenses, meeting its quarterly payment obligations under certain subordinated debentures issued by BKFC in connection with the issuance of floating rate redeemable trust preferred securities issued by BKFC’s unconsolidated trust subsidiary. The source of the funds for BKFC’s debt obligations is dependent on the Bank. During 2014, as discussed in the financial condition section of this Annual Report, the decrease in securities and the growth in deposits funded the significant increase in short-term investments. At December 31, 2014, the Bank’s customers had available $482,631,000 in unused lines and letters of credit. Historically, many such commitments have expired without being drawn and, accordingly, do not necessarily represent future cash commitments.

If needed, the Bank has the ability to borrow term and overnight funds from the FHLB or other financial intermediaries. Further, the Bank also has $301,138,000 of securities designated as available-for-sale and an additional $5,862,000 of held-to-maturity securities that mature within one year that can serve as sources of funds. Management is satisfied that BKFC’s liquidity is sufficient at December 31, 2014 to meet known and potential obligations.

As illustrated in BKFC’s statement of cash flows, the net change in cash and cash equivalents from 2014 compared with 2013 was an increase of $106,755,000. Net income provided $18,316,000 of the $27,770,000 in the Bank’s cash flows from operating activities, while the largest cash inflow from investing activities was in the form of proceeds from maturities and sales of available-for –sale securities of $76,628,000. As discussed in the financial condition section of this Annual Report, the largest source of cash from financing activities came from the increase in deposits.

Both BKFC and the Bank are required to comply with capital requirements promulgated by their primary regulators. These regulations and other regulatory requirements limit the amount of dividends that may be paid by the Bank to BKFC and by BKFC to its shareholders. In 2014, BKFC paid cash dividends of $0.72 per share totaling $5,536,000 on Common Stock. Please see the section entitled “Regulation and Supervision – Dividend Restrictions” under “Item 1. Business” and Note 16 of the financial statements for a discussion on the Bank’s current dividend restrictions.

The FDIC has issued regulations relating a bank’s deposit insurance assessment and certain aspects of its operations to specified capital levels. A “well-capitalized” bank, one with a leverage ratio of 5% or more and a Total Risk-Based Ratio of 10% or more, and no particular areas of supervisory concern, pays the lowest premium and is subject to the fewest restrictions. The Bank’s capital levels and ratios exceed the regulatory definitions of well-capitalized institutions. At December 31, 2014, BKFC’s Leverage Ratio and Total Risk-Based Ratios were 10.30% and 13.83%, respectively, which exceed all required ratios established for bank holding companies.

Effect of Inflation and Changing Prices

The financial statements and related financial data presented in this Annual Report have been prepared in accordance with GAAP, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution’s performance than do general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

53

Newly Issued Not yet Effective Accounting Standards

In January 2014, the FASB amended existing guidance to clarify when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan should be derecognized and the real estate recognized. These amendments clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either: (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure, or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additional disclosures are required. These amendments are effective for public business entities for annual periods and interim periods within those annual periods beginning after December 15, 2014. Early adoption is permitted. The Company did not early adopt this standard and the effect of this standard is not expected to have a material effect on the BKFC’s operating results or financial condition.

Item 7A. Quantitative and Qualitative Disclosure About Market Risk

Asset/Liability Management and Market Risk

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

The Bank utilizes an earnings simulation model to measure and define the amount of interest rate risk it assumes. Interest rate risk is the potential for economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a decline in fair market values. Interest rate risk results from the fact that the interest sensitive assets and liabilities can adjust their rates at different times and by different amounts. The goal of asset/liability management is to maintain a high, yet stable, net interest margin and to manage the effect that changes in market interest rates will have on net interest income. A common measure of interest rate risk is interest rate “gap” measurement. The gap is the difference, in dollars, between the amount of interest-earning assets and interest-bearing liabilities that will reprice within a certain time frame. Repricing can occur when an asset or liability matures or, if an adjustable rate instrument, when it can be adjusted. Typically, the measurement will focus on the interest rate gap position over the next 12 months. An institution is said to have a negative gap position when more interest-bearing liabilities reprice within a certain period than interest-earning assets, and a positive gap position when more interest-earning assets reprice than interest-bearing liabilities. Interest rate gap is considered an indicator of the effect that changing rates may have on net interest income. Generally, an institution with a negative gap will benefit from declining market interest rates and be negatively impacted by rising interest rates. The Bank currently is in a negative gap position, $203,134,000 (10.52%), and as a result would, without considering other factors, generally benefit from lower rates and be negatively impacted by higher interest rates. The ability to benefit from the Bank’s liability-sensitive position would depend on a number of factors, including: the competitive pressures on consumer deposit and loan pricing; the movement of certain deposit rate indices in relationship to asset rate indices; and the extent of the decrease in the rate environment.

At December 31, 2014, BKFC’s 12-month interest rate gap position, as measured by the Bank’s asset/liability model, was negative. Over the preceding 12 months, interest rate sensitive liabilities exceeded interest rate sensitive assets by $203,134,000 (10.52% of total assets). At December 31, 2013, interest rate sensitive liabilities exceeded interest rate sensitive assets by $266,251,000 (14.33% of total assets).

54

The Bank’s asset/liability management policy establishes guidelines governing the amount of interest income at risk, market value at risk and parameters for the gap position. Management continually monitors these risks through the use of gap analysis and the earnings simulation model. The simulation model is used to estimate and evaluate the impact of changing interest rates on earnings and market value. The model projects the effect of instantaneous movements in interest rates of both 100 and 200 basis points. The assumptions used in the simulation are inherently uncertain and, as a result, the model cannot precisely measure future net interest income. The results of the model are used by management to approximate the results of rate changes and do not indicate actual expected results. Actual results will differ from the model’s simulated results due to timing, frequency of interest rate changes as well as changes in various management strategies and market conditions. Additionally, actual results can differ materially from the model if interest rates do not move equally across the yield curve.

The changes in the estimates of an increasing rate scenario on the net interest income change, as shown below, from 2013 to 2014 were a result of the same influences that increased the liability sensitivity of BKFC’s gap position and show that risk to income from rate changes would be negative in a rising rate environment. Although the gap position is negative, or in a liability sensitive position, the results of the simulation show income would also decline in a falling rate environment. The effects of the estimates for a decreasing rate environment are the results of the current rate environment. In December of 2008, the FRB lowered the targeted federal funds rate to 0.25%, and as a result most short-term deposit interest rates cannot drop 100 basis points while earning assets could in theory decrease by these amounts. The result of this extreme low rate environment is a declining rate scenario which produces a negative impact on earnings.

Net interest income estimates are summarized below.

	Net Interest Income Change
	2014			2013
Increase 300 bp		2.52	%		0.00	%
Increase 200 bp		1.90			.13
Increase 100 bp		.86			(.12	)
Decrease 100 bp		(3.45	)		(3.88	)

55

The table below provides information about the quantitative market risk of interest sensitive instruments at December 31, 2014 (dollars in thousands) and shows the contractual repricing intervals, and related average interest rates, for each of the next five years and thereafter. The amounts included in loans exclude ALL, deferred fees, in process accounts and purchase accounting adjustments:

Table 10 - Balance Sheet Repricing data (in thousands)

Repricing in:	2015			2016			2017			2018		2019			Thereafter			Total		Fair Value
Federal Funds Sold	$	106,142			-			-			-		-			-		$	106,142	$	106,142
Average Interest Rate		0.24	%		-			-			-		-			-			-		-
Interest-Bearing Deposits	$	252			-			-			-		-			-		$	252	$	252
Average Interest Rate		.71	%		-			-			-		-			-			-		-
Securities	$	74,068		$	53,837		$	42,320			-	$	91,744		$	112,798		$	374,767	$	375,072
Average Interest Rate		1.69	%		1.98	%		2.10	%		-		1.91	%		2.20	%		-		-
FHLB Stock	$	4,850			-			-			-		-			-		$	4,850		N/A
Average Dividend Rate		4.00	%		-			-			*		-			-			-		-
Loans	$	844,273		$	160,884		$	130,177			*	$	100,381		$	28,776		$	1,264,491	$	1,269,623
Average Interest Rate		3.74	%		4.31	%		4.22	%		*		4.26	%		4.95	%		-		-
Liabilities
Savings, NOW, MMA	$	946,488			-			-			-		-			-		$	946,488	$	946,488
Average Interest Rate		0.17	%		-			-			-		-			-			-		-
CDs and IRAs	$	190,861		$	71,924		$	10,986			-	$	24,733		$	18		$	298,522	$	299,586
Average Interest Rate		0.55	%		0.85	%		1.30	%		-		1.82	%		.75	%		-		-
Short-term Borrowings	$	45,703			-			-			-		-			-		$	45,703	$	45,703
Average Interest Rate		0.23	%		-			-			-		-			-			-		-
Notes Payable	$	49,667			-			-			-		-		$	658		$	50,325	$	45,126
Average Interest Rate		1.72	%		-			-			-		-			1.66	%		-		-

56

Item 8. Financial Statements and Supplementary Data

THE BANK OF KENTUCKY

FINANCIAL CORPORATION

FINANCIAL STATEMENTS

December 31, 2014, 2013 and 2012

57

THE BANK OF KENTUCKY FINANCIAL CORPORATION

Crestview Hills, Kentucky

FINANCIAL STATEMENTS

December 31, 2014, 2013 and 2012

CONTENTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM	F-1
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS	F-3
CONSOLIDATED STATEMENTS OF INCOME	F-4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME	F-5
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY	F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS	F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	F-10

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders

The Bank of Kentucky Financial Corporation

Crestview Hills, Kentucky

We have audited the accompanying consolidated balance sheets of The Bank of Kentucky Financial Corporation as of December 31, 2014 and 2013 and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2014. We also have audited The Bank of Kentucky Financial Corporation’s internal control over financial reporting as of December 31, 2014, based on criteria established in the 1992 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Bank of Kentucky Financial Corporation’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting included in Item 9A. Our responsibility is to express an opinion on these financial statements and an opinion on the company's internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

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

(Continued) F-1

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Bank of Kentucky Financial Corporation as of December 31, 2014 and 2013, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2014, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, The Bank of Kentucky Financial Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on criteria established in the 1992 Internal Control – Integrated Framework issued by the COSO.

Crowe Horwath LLP

Indianapolis, Indiana

March 12, 2015 

F-2

THE BANK OF KENTUCKY FINANCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS

Years ended December 31, 2014 and 2013

(Dollar amounts in thousands, except per share amounts)

	2014		2013
ASSETS
Cash and due from banks	$	79,234	$	55,605
Federal funds sold and other short-term investments		106,142		23,016
Total cash and cash equivalents		185,376		78,621
Interest bearing deposits with banks		252		252
Available-for-sale securities		301,138		341,123
Held-to-maturity securities
(Fair value of $73,934 and $76,457)		73,629		77,010
Loans held for sale		2,255		3,214
Loans, net of allowance ($14,639 and $16,306)		1,244,266		1,233,339
Premises and equipment-net		22,300		22,444
Federal Home Loan Bank stock, at cost		4,850		5,099
Goodwill		22,023		22,023
Acquisition intangibles		1,360		1,848
Company owned life insurance		40,925		39,806
Accrued interest receivable and other assets		33,282		32,713
	$	1,931,656	$	1,857,492
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest bearing deposits	$	370,869	$	359,199
Interest bearing deposits		1,245,010		1,228,386
Total deposits		1,615,879		1,587,585
Short-term borrowings		45,703		27,643
Notes payable		50,325		45,577
Accrued expenses and other liabilities		19,028		15,548
		1,730,935		1,676,353
Commitments and contingent liabilities
Shareholders’ equity
Common stock, no par value, 15,000,000 shares authorized, 7,717,928 (2014) and 7,619,999 (2013) shares issued		3,098		3,098
Additional paid-in capital		41,134		38,100
Retained earnings		154,498		141,718
Accumulated other comprehensive income (loss)		1,991		(1,777	)
		200,721		181,139
	$	1,931,656	$	1,857,492

See accompanying notes 

F-3

THE BANK OF KENTUCKY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

Years ended December 31, 2014, 2013 and 2012

(Dollar amounts in thousands, except per share amounts)

	2014		2013		2012
Interest income
Loans, including related fees	$	53,031	$	53,109	$	55,468
Securities
Taxable		5,724		5,008		5,440
Tax exempt		1,387		1,458		1,282
Other		272		337		334
		60,414		59,912		62,524
Interest expense
Deposits		3,536		3,664		5,280
Borrowings		1,018		994		1,059
		4,554		4,658		6,339
Net interest income		55,860		55,254		56,185
Provision for loan losses		2,200		4,700		7,000
Net interest income after provision for loan losses		53,660		50,554		49,185
Non-interest income
Service charges and fees		9,671		10,323		9,089
Mortgage banking income		832		1,658		2,786
Trust fee income		3,916		3,402		2,842
Bankcard transaction revenue		4,211		4,021		3,767
Company owned life insurance earnings		1,119		1,172		1,185
Net securities gains		290		274		206
Other		3,115		3,161		2,546
		23,154		24,011		22,421
Non-interest expense
Salaries and employee benefits		25,224		23,561		22,953
Occupancy and equipment		5,629		5,317		5,249
Data processing		2,154		2,171		2,191
Advertising		1,229		1,325		1,503
Electronic banking processing fees		1,579		1,607		1,525
Outside service fees		1,187		1,027		1,026
State bank taxes		2,454		2,389		2,219
Amortization of intangible assets		488		615		766
Merger related expense		1,467		-		-
FDIC insurance		2,122		1,323		1,163
Other		7,284		7,410		7,743
		50,817		46,745		46,338
Income before income taxes		25,997		27,820		25,268
Federal income taxes		7,681		8,055		7,123
Net income	$	18,316	$	19,765	$	18,145
Per share data
Earnings per share	$	2.39	$	2.63	$	2.43
Earnings per share, assuming dilution	$	2.37	$	2.61	$	2.41

See accompanying notes

F-4

THE BANK OF KENTUCKY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Years ended December 31, 2014, 2013 and 2012

(Dollar amounts in thousands, except per share amounts)

	2014			2013			2012
Net income	$	18,316		$	19,765		$	18,145
Other comprehensive income (loss):
Unrealized gains/losses on securities:
Unrealized holding gain/(loss) arising during the period		6,046			(8,368	)		1,136
Reclassification adjustment for gains included in net income		(290	)		(274	)		(206	)
Tax effect		1,988			(2,938	)		316
Net of tax		3,768			(5,704	)		614
Total other comprehensive income (loss)		3,768			(5,704	)		614
Comprehensive income	$	22,084		$	14,061		$	18,759

See accompanying notes 

F-5

THE BANK OF KENTUCKY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

Years ended December 31, 2014, 2013 and 2012

(Dollar amounts in thousands, except per share amounts)

													Accumulated
							Additional						Other
	Preferred		Common		Common		Paid-in			Retained			Comprehensive
	Stock		Shares		Stock		Capital			Earnings			Income (Loss)			Total
Balance January 1, 2012	$	-		7,432,995	$	3,098	$	34,121		$	116,038		$	3,313		$	156,570
Net income											18,145						18,145
Change in net unrealized gain (loss), net of tax														614			614
Dividends declared - $0.79 per share											(5,894	)					(5,894	)
Dividends paid and accrued on preferred stock
Exercise of stock options				37,241				841									841
Stock-based compensation expense								164									164
Balance December 31, 2012		-		7,470,236		3,098		35,126			128,289			3,927			170,440
Net income											19,765						19,765
Change in net unrealized gain (loss), net of tax														(5,704	)		(5,704	)
Dividends declared - $0.69 per share											(5,200	)					(5,200	)
Warrant repurchased								(1,015	)		(1,136	)					(2,151	)
Stock activity under stock based compensation plans				149,763				3,552									3,552
Stock-based compensation expense								437									437
Balance December 31, 2013		-		7,619,999		3,098		38,100			141,718			(1,777	)		181,139

(Continued) F-6

THE BANK OF KENTUCKY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

Years ended December 31, 2014, 2013 and 2012

(Dollar amounts in thousands, except per share amounts)

												Accumulated
							Additional					Other
	Preferred		Common		Common		Paid-in		Retained			Comprehensive
	Stock		Shares		Stock		Capital		Earnings			Income (Loss)			Total
Balance December 31, 2013	$	-		7,619,999	$	3,098	$	38,100	$	141,718		$	(1,777	)	$	181,139
Net income										18,316						18,316
Change in net unrealized gain (loss), net of tax													3,768			3,768
Dividends declared - $.72 per share										(5,536	)					(5,536	)
Stock activity under stock based compensation plans				97,929				2,515								2,515
Stock-based compensation expense								519								519
Balance December 31, 2014	$	-		7,717,928	$	3,098	$	41,134	$	154,498		$	1,991		$	200,721

See accompanying notes

F-7

THE BANK OF KENTUCKY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended December 31, 2014, 2013 and 2012

(Dollar amounts in thousands)

	2014			2013			2012
Cash flows from operating activities
Net income	$	18,316		$	19,765		$	18,145
Adjustments to reconcile net income to net cash from operating activities
Depreciation, amortization, and accretion		1,845			1,460			1,544
Net amortization on securities		2,279			3,024			3,419
Provision for loan losses		2,200			4,700			7,000
Amortization of acquisition intangibles		488			615			766
Earnings on life insurance		(1,119	)		(1,172	)		(1,185	)
(Gain)/Loss on sale/write-down of other real estate		388			880			485
Mortgage banking income		(832	)		(1,658	)		(2,786	)
Proceeds from loans sold		54,104			120,519			187,525
Origination of loans held for sale		(52,313	)		(105,752	)		(192,143	)
Net securities gains		(290	)		(274	)		(206	)
Stock based compensation expense		519			437			164
Net change in:
Accrued interest receivable and other assets		(845	)		(5	)		278
Accrued expenses and other liabilities		3,460			1,912			654
Net cash from operating activities		28,200			44,451			23,660
Cash flows from investing activities
Net change in interest bearing balances		-			(2	)		-
Proceeds from maturities and principal reductions of held-to-maturity securities		9,787			6,523			4,735
Purchase of held-to-maturity securities		(6,460	)		(16,755	)		(22,674	)
Proceeds from maturities and sales of available-for-sale securities		76,629			102,303			181,966
Purchase of available-for-sale securities		(32,823	)		(140,309	)		(176,110	)
Purchase of company owned life insurance		-			(5,000	)		-
Proceeds from company owned life insurance		-			-			227
Loans made to customers, net of principal collections		(19,667	)		(63,701	)		(78,411	)
Property and equipment expenditures, net		(1,720	)		(1,598	)		(1,422	)
Proceeds from the sale of other real estate		4,805			3,899			4,410
Proceeds from Federal Home loan Bank Stock repurchase		249			-			-
Net cash from investing activities		30,800			(114,640	)		(87,279	)
Cash flows from financing activities
Net change in deposits		28,294			17,578			71,186
Net change in short-term borrowings		18,060			(13,765	)		12,108
Advances on notes payable		10,000			2,000			-
Payments on notes payable		(5,252	)		(5,138	)		(24	)
Dividends paid on common stock		(5,516	)		(5,098	)		(4,624	)
Redemption of warrant		-			(2,151	)		-
Proceeds from exercise of stock options		2,169			3,552			841
Net cash from financing activities		47,755			(3,022	)		79,487
Net change in cash and cash equivalents		106,755			(73,211	)		15,868
Cash and cash equivalents at beginning of year		78,621			151,832			135,964
Cash and cash equivalents at end of year	$	185,376		$	78,621		$	151,832

(Continued) F-8

THE BANK OF KENTUCKY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended December 31, 2014, 2013 and 2012

(Dollar amounts in thousands)

	2014		2013		2012
Supplemental cash flow information:
Cash paid for interest	$	4,355	$	4,996	$	6,889
Cash paid for income taxes		7,050		8,550		6,995
Supplemental noncash disclosures:
Transfers from loans to other real estate	$	6,559	$	4,691	$	4,447

See accompanying notes

F-9

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014, 2013 and 2012

(Dollar amounts in thousands, except per share amounts)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

Use of Estimates: To prepare financial statements in conformity with U.S. generally accepted principles, 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.

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

Interest-Bearing Deposits in Other Financial Institutions: Interest-bearing deposits in other financial institutions mature within one year and are carried at cost.

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

Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the level-yield method without anticipating prepayments except for mortgage backed securities where prepayments are anticipated. Gains and losses on sales are based on the amortized cost of the security sold.

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.

In determining OTTI, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the Company has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

(Continued) F-10

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014, 2013 and 2012

(Dollar amounts in thousands, except per share amounts)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

When OTTI occurs, the amount of the OTTI recognized in earnings depends on whether the Company intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss. If the Company intends to sell or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the OTTI shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. Otherwise, the OTTI shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total OTTI related to other factors shall be recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings shall become the new amortized cost basis of the investment.

Loans Held For Sale: The Bank originates loans for sale to secondary market brokers. Loans held for sale are loans which have been closed and are awaiting delivery to these brokers. They are reported at the lower of cost or fair value, on an aggregate basis. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings. Most loans are sold servicing released such that there would be no servicing asset recognized upon the sale.

Loans: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, purchase premiums and discounts, deferred loan fees and costs, and an allowance for loan losses. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method without anticipating prepayments.

Interest income on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in process of collection. Interest income is not reported when full loan repayment is in doubt, typically when the loan is impaired or payments are significantly past due. Past due status is based on the contractual terms of the loan.

All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Troubled debt restructurings (TDR’s) are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For troubled debt restructurings that subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.

(Continued) F-11

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014, 2013 and 2012

(Dollar amounts in thousands, except per share amounts)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

In general, once a modified loan is considered a TDR, the loan will always be considered a TDR, and therefore impaired, until it is paid in full, otherwise settled, sold or charged off. However, the Company’s policy also permits for loans to be removed from TDR status in the years following the restructuring if the following two conditions are met: (1) the restructuring agreement specifies an interest rate equal to or greater than the rate that the Company was willing to accept at the time of the restructuring for a new loan with comparable risk, and (2) the loan is performing in accordance with its restructured terms. To determine if the interest rate is a market rate, management will look at the interest rates on the Bank’s pool of similar risk graded credits. Management will also consider other financial and non-financial factors to determine if a loan can be removed from TDR status.

If a partially charged-off loan has been restructured in a manner that is reasonably assured of repayment and performance according to prudently modified terms, and has sustained historical payment performance for a reasonable period of time of at least six months prior to and/or after the restructuring, it may be returned to accrual status and classified as a TDR loan. However, in limited situations, the Company may restore the accrual status of a TDR loan under a shorter period of time (versus the aforementioned minimum six month post-restructuring payment performance), if the restructuring coincides with another event which substantially improves a borrower’s financial condition and ability to repay the restructured loan. Such an event might include substantial new leases in a troubled real estate project, significant new sources of business revenues (i.e. new contracts) or significant new equity contributed from a source not financed by the Company. The Company also performs a financial analysis to determine the borrower’s current capacity to repay the loan, as modified before it is returned to accrual status. However, if the above conditions cannot be reasonably met, the loan remains on non-accrual status.

Concentration of Credit Risk: Most of the Company’s business activity is with customers located within Northern Kentucky and the Cincinnati metropolitan area. Therefore, the Company’s exposure to credit risk is significantly affected by changes in the economy in this area.

Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable incurred credit losses, increased by the provision for loan losses and decreased by charge-offs less recoveries. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed.

The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component covers both classified and non-classified loans and is based on historical loss experience adjusted for current factors.

(Continued) F-12

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014, 2013 and 2012

(Dollar amounts in thousands, except per share amounts)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

The general component covers non-impaired loans and is based on historical loss experience adjusted for current factors. For loans that are risk rated, the historical loss experience is determined based on the actual loss history experienced by the Company over the most recent four years. These loss ratios are calculated from a migration analysis of the charge offs over this period, but excludes the ratios from the most recent six month period as they are not appropriately seasoned. The loss ratios for loans designated as belonging to homogeneous pools, including smaller balance consumer loans, are calculated for a five year period and a one year period, with the higher of the two loss ratios currently used in the allowance calculation. These actual loss experiences are supplemented with other economic factors based on the risks present for each portfolio segment. These economic factors include consideration of the following: levels of and trends in delinquencies and impaired loans; trends in volume and terms of loans; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations. These factors are consistent within each of the portfolio segments, which have been identified as: commercial, residential real estate, nonresidential real estate, construction, consumer and municipal obligations.

The risk characteristics of each of the identified portfolio segments are as follows:

Commercial: Commercial loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. Borrowers may be subject to adverse economic conditions that can lead to decreases in product demand; increasing material or other production costs; interest rate increases that could have an adverse impact on profitability; non-payment of credit that has been extended under normal vendor terms for goods sold or services extended; and interruption related to the importing or exporting of production materials or sold products.

Residential Real Estate: Residential real estate loans are secured by 1-4 family residences and are generally owner occupied; the Company generally establishes a maximum loan-to-value ratio. Home equity loans are typically secured by a subordinate interest in 1-4 family residences. These loans are subject to adverse employment conditions in the local economy leading to increased default rate; decreased market values from oversupply in a geographic area and; impact to borrowers’ ability to maintain payments in the event of incremental rate increases on adjustable rate mortgages.

Non Residential Real Estate: Nonresidential real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. These loans are subject to adverse market conditions that cause a decrease in market value or lease rates and; the potential for environmental impairment and the obsolescence of the location or function.

Construction: Construction loans are underwritten utilizing independent appraisal reviews, absorption rate analysis, lease rates and financial analysis of the developers and property owners. Construction loans are generally based on estimates of costs and value associated with the complete project. These loans are subject to adverse market conditions that cause a decrease in market value or absorption rates and; the potential for environmental impairment. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans.

(Continued) F-13

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014, 2013 and 2012

(Dollar amounts in thousands, except per share amounts)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Consumer: Consumer loans generally consist of loans secured by personal property or unsecured loans such as credit cards. Repayment of these loans is primarily dependent on the personal income of the borrowers, who are subject to adverse employment conditions in the local economy which may lead to higher unemployment.

Municipal Obligations: Municipal obligations are generally secured by specific assets or the taxing power of the municipality. These loans are subject to adverse employment conditions in the local economy and lower real estate values which can reduce the municipality’s tax base.

A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans, for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired.

Impairment is evaluated in total for smaller-balance loans of similar nature such as residential mortgage, consumer, and credit card loans, and on an individual loan basis for other loans. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans, are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For troubled debt restructurings that subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses. The Company’s impairment policies are consistent across all of the loan portfolio segments. Recorded investment excludes accrued interest, due to materiality.

Premises and Equipment: Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Buildings and related components are depreciated using the straight-line method with useful lives ranging from 10 to 25 years. Leasehold improvements are depreciated using the straight-line method over the lesser of the useful life of the asset or the length of the lease. Furniture, fixtures and equipment are depreciated using the straight-line method with useful lives ranging from 3 to 10 years.

Transfers of Financial Assets: Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Other Real Estate: Other real estate acquired through or instead of foreclosure is initially recorded at fair value less cost to sell when acquired, establishing a new cost basis. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Expenses incurred in carrying other real estate are charged to operations as incurred. A total of $6,670 and $5,305 of other real estate was owned on December 31, 2014 and 2013, respectively, and included in other assets.

(Continued) F-14

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014, 2013 and 2012

(Dollar amounts in thousands, except per share amounts)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Federal Home Loan Bank (FHLB) Stock: The Bank is a member of the FHLB system. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income.

Company Owned Life Insurance: The Company has purchased life insurance policies on certain key executives. Company owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.

Goodwill and Other Intangible Assets: Goodwill resulting from business combinations prior to January 1, 2009 represents the excess of the purchase price over the fair value of the net assets of businesses acquired. Goodwill resulting from business combinations after January 1, 2009 is generally determined as the excess of the fair value of the consideration transferred plus the fair value of any non-controlling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually, or more frequently if events and circumstances exist that indicate that a goodwill impairment test should be performed. The Company has selected September 30 as the date to perform the annual impairment test. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Goodwill is the only intangible asset with an indefinite life on our balance sheet.

Other intangible assets consist of core deposit and acquired customer relationship intangible assets arising from whole bank, branch and asset management business acquisitions. They are initially measured at fair value and then are amortized on an accelerated method over their estimated useful lives of four to ten years.

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

(Continued) F-15

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014, 2013 and 2012

(Dollar amounts in thousands, except per share amounts)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Stock-Based Compensation: Compensation cost is recognized for stock options and restricted stock units issued to directors and officers, based on the fair value of these awards at the date of grant. For stock options, a Black-Scholes model is utilized to estimate the fair value of stock options. For restricted stocks units the fair value is equal to the stock price on the day the units are granted. Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.

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

A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The Company recognizes interest and/or penalties related to income tax matters in income tax expense.

Loan Commitments and Related Financial Instruments: Financial instruments include credit instruments, such as commitments to make loans and standby letters of credit, issued to meet customer financing needs. The face amount of these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded. Instruments, such as standby letters of credit that are considered financial guarantees are recorded at fair value.

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

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

Comprehensive Income: Comprehensive income consists of net income and other comprehensive income (loss). Other comprehensive income (loss) includes unrealized gains and losses on securities available for sale which are also recognized as separate components of equity.

Dividend Restriction: Banking regulations require the maintenance of certain capital levels and may limit the amount of dividends which may be paid by the Bank to the Company or by the Company to its shareholders. See Note 16 for further discussion.

(Continued) F-16

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014, 2013 and 2012

(Dollar amounts in thousands, except per share amounts)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Long-term Assets: These assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.

Restrictions on Cash: Cash on hand or on deposit with the Federal Reserve Bank was required to meet regulatory reserve and clearing requirements.

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

Reclassifications: Some items in the prior year financial statements were reclassified to conform to the current presentation. Reclassifications had no material effect on the financial statements.

Derivative Financial Instruments: The Bank operates an interest rate protection program in which the Bank earns a fee by providing the Bank’s commercial loan customers the ability to swap from variable to fixed, or fixed to variable interest rates. Under these agreements the Bank enters into a variable or fixed rate loan agreement with its customer in addition to a swap agreement. The swap agreement effectively swaps the customer’s variable rate to a fixed rate or vice versa. The Bank then enters into a corresponding swap agreement with a third party in order to swap its exposure on the variable to fixed rate swap with the Bank’s customer. The agreements are considered standalone derivatives and changes in the fair value of derivatives are reported in earnings as noninterest income.

The Bank is exposed to losses if a counterparty fails to make its payments under a contract in which the Bank is in the receiving status. In this situation the Bank receives collateral from the counterparty for the fair market value of the derivative. Also, the Bank minimizes its credit risk by monitoring the credit standing of the counterparties. We anticipate the counterparties will be able to fully satisfy their obligations under these agreements.

Earnings Per Common Share: Basic earnings per common share is net income available to common shareholders divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable under stock options, restricted stock units, and warrants. Earnings and dividends per share are restated for all stock splits and stock dividends through the date of issuance of the financial statements.

Retirement Plans: Employee 401(k) and profit sharing plan expense is the amount of matching contributions. Deferred compensation and supplemental retirement plan expense allocates the benefits over years of service.

(Continued) F-17

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014, 2013 and 2012

(Dollar amounts in thousands, except per share amounts)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Newly Issued Not Yet Effective Accounting Standards: In January 2014, the FASB amended existing guidance to clarify when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan should be derecognized and the real estate recognized. These amendments clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either: (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure, or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additional disclosures are required. These amendments are effective for public business entities for annual periods and interim periods within those annual periods beginning after December 15, 2014. Early adoption is permitted. The Company did not early adopt this standard and the effect of this standard is not expected to have a material effect on the Company’s operating results or financial condition.

NOTE 2 - SECURITIES

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

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
Available-for-Sale	Cost		Gains		Losses			Value
2014
U.S. Government, federal agencies and
Government sponsored enterprises	$	90,439	$	319	$	(1,074	)	$	89,684
U.S. Government mortgage-backed		206,786		4,174		(356	)		210,604
Corporate		850		-		-			850
	$	298,075	$	4,493	$	(1,430	)	$	301,138
2013
U.S. Government, federal agencies and
Government sponsored enterprises	$	122,905	$	142	$	(2,908	)	$	120,139
U.S. Government mortgage-backed		219,986		2,408		(2,335	)		220,059
Corporate		925		-		-			925
	$	343,816	$	2,550	$	(5,243	)	$	341,123

(Continued) F-18

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014, 2013 and 2012

(Dollar amounts in thousands, except per share amounts)

NOTE 2 - SECURITIES (Continued)

All mortgage-backed securities are secured by residential properties.

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

			Gross		Gross
	Amortized		Unrecognized		Unrecognized			Fair
Held-to-Maturity	Cost		Gains		Losses			Value
2014
Municipal and other obligations	$	73,629	$	1,084	$	(779	)	$	73,934
2013
Municipal and other obligations	$	77,010	$	1,085	$	(1,638	)	$	76,457

The fair value of debt securities and amortized cost, if different, at year-end 2014 by contractual maturity were as follows. Securities not due at a single maturity date, primarily mortgage backed securities, are shown separately.

	Available-for-Sale				Held-to-Maturity
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
Due in one year or less	$	4,055	$	4,066	$	5,862	$	5,897
Due after one year through five years		72,051		71,396		32,851		33,362
Due after five years through ten years		11,159		10,941		30,076		29,835
Due after ten years		4,024		4,131		4,840		4,840
U.S. Government mortgage-backed		206,786		210,604		-		-
	$	298,075	$	301,138	$	73,629	$	73,934

At December 31, 2014 and 2013, securities with a carrying value of $363,344 and $402,999 were pledged to secure public deposits and repurchase agreements.

The proceeds from sales and calls of securities and the associated gains are listed below:

	2014		2013		2012
Proceeds	$	5,028	$	5,230	$	6,944
Gross gains		316		274		206
Gross losses		26		-		-

The tax provision related to these net realized gains and losses was $102, $96, and $72, respectively.

(Continued) F-19

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014, 2013 and 2012

(Dollar amounts in thousands, except per share amounts)

NOTE 2 - SECURITIES (Continued)

Securities with unrealized losses at year-end 2014 and 2013, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows:

	Less than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
2014	Value		Loss			Value		Loss			Value		Loss
Description of Securities
U.S. Gov’t., federal agencies and Government sponsored enterprises	$	4,987	$	(13	)	$	53,188	$	(1,061	)	$	58,175	$	(1,074	)
U.S Gov’t. mortgage-backed		14,982		(129	)		34,683		(227	)		49,665		(356	)
Municipal & other obligations		6,719		(93	)		21,840		(686	)		28,559		(779	)
Total temporarily impaired	$	26,688	$	(235	)	$	109,711	$	(1,974	)	$	136,399	$	(2,209	)

	Less than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
2013	Value		Loss			Value		Loss			Value		Loss
Description of Securities
U.S. Gov’t., federal agencies and Government sponsored enterprises	$	94,641	$	(2,522	)	$	5,996	$	(386	)	$	100,637	$	(2,908	)
U.S Gov’t. mortgage-backed		116,709		(2,241	)		7,530		(94	)		124,239		(2,335	)
Municipal & other obligations		26,936		(1,262	)		6,570		(376	)		33,506		(1,638	)
Total temporarily impaired	$	238,286	$	(6,025	)	$	20,096	$	(856	)	$	258,382	$	(6,881	)

As of December 31, 2014, the Bank’s security portfolio consisted of 217 securities, 56 of which were in an unrealized loss position; totaling $2,209. There was no other-than-temporary-impairment of securities as of or for the year ended December 31, 2014. Unrealized losses have not been recognized into income because the issuers’ bonds are of high credit quality (U.S. government agencies and government sponsored enterprises and “A” rated or better Kentucky municipalities), management does not have the intent to sell these securities and it is not likely that it will be required to sell the securities before their anticipated recovery.

(Continued) F-20

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014, 2013 and 2012

(Dollar amounts in thousands, except per share amounts)

NOTE 3 - LOANS

Year-end loans were as follows:

	2014			2013
Commercial	$	233,522		$	241,794
Residential real estate		272,531			283,356
Nonresidential real estate		592,642			571,221
Construction		104,299			103,019
Consumer		15,080			15,806
Municipal obligations		42,347			36,058
Gross loans		1,260,421			1,251,254
Less:   Deferred loan origination fees and discount		(1,516	)		(1,609	)
Allowance for loan losses		(14,639	)		(16,306	)
Net loans	$	1,244,266		$	1,233,339

Certain of the Company’s directors and executive officers are loan customers of the Bank. A schedule of the aggregate activity in these loans follows:

	2014
Beginning balance	$	4,394
Effect of change in composition of board		(93	)
New loans and advances on lines of credit		14,434
Loan payments		(13,541	)
Ending balance	$	5,194

(Continued) F-21

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014, 2013 and 2012

(Dollar amounts in thousands, except per share amounts)

NOTE 3 - LOANS (Continued)

The following table presents the activity in the allowance for loan losses by portfolio segment for the years ending December 31, 2014 and 2013:

							Non
				Residential			Residential									Municipal
December 31, 2014	Commercial			Real estate			Real estate			Construction			Consumer			Obligations		Total
Allowance for loan losses
Beginning balance	$	3,247		$	4,554		$	6,502		$	1,538		$	373		$	92	$	16,306
Provision for loan losses		919			(70	)		834			340			144			33		2,200
Loans charged off		(991	)		(1,657	)		(510	)		(881	)		(433	)		-		(4,472	)
Recoveries		122			225			29			1			228			-		605
Total ending allowance balance	$	3,297		$	3,052		$	6,855		$	998		$	312		$	125	$	14,639
Ending allowance balance attributable to loans
Individually evaluated for impairment	$	2,025		$	227		$	1,569		$	214		$	-		$	-	$	4,035
Collectively evaluated for impairment		1,272			2,825			5,286			784			312			125		10,604
Total ending allowance balance	$	3,297		$	3,052		$	6,855		$	998		$	312		$	125	$	14,639
Loans
Loans individually evaluated for impairment	$	4,669		$	3,985		$	6,645		$	1,678		$	-		$	-	$	16,977
Loans collectively evaluated for impairment		228,853			268,546			585,997			102,621			15,080			42,347		1,243,444
Total ending loan balance	$	233,522		$	272,531		$	592,642		$	104,299		$	15,080		$	42,347	$	1,260,421

(Continued) F-22

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014, 2013 and 2012

(Dollar amounts in thousands, except per share amounts)

NOTE 3 - LOANS(Continued)

							Non
				Residential			Residential									Municipal
December 31, 2013	Commercial			Real estate			Real estate			Construction			Consumer			Obligations		Total
Allowance for loan losses
Beginning balance	$	2,716		$	4,272		$	6,991		$	1,964		$	584		$	41	$	16,568
Provision for loan losses		1,029			2,317			1,577			(560	)		286			51		4,700
Loans charged off		(582	)		(2,244	)		(2,151	)		(319	)		(792	)		-		(6,088	)
Recoveries		84			209			85			453			295			-		1,126
Total ending allowance balance	$	3,247		$	4,554		$	6,502		$	1,538		$	373		$	92	$	16,306
Ending allowance balance attributable to loans
Individually evaluated for impairment	$	709		$	1,085		$	951		$	674		$	-		$	-	$	3,419
Collectively evaluated for impairment		2,538			3,469			5,551			864			373			92		12,887
Total ending allowance balance	$	3,247		$	4,554		$	6,502		$	1,538		$	373		$	92	$	16,306
Loans
Loans individually evaluated for impairment	$	4,116		$	8,179		$	14,220		$	2,549		$	-		$	-	$	29,064
Loans collectively evaluated for impairment		237,678			275,177			557,001			100,470			15,806			36,058		1,222,190
Total ending loan balance	$	241,794		$	283,356		$	571,221		$	103,019		$	15,806		$	36,058	$	1,251,254

(Continued) F-23

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014, 2013 and 2012

(Dollar amounts in thousands, except per share amounts)

NOTE 3 - LOANS (Continued)

Activity in the allowance for loan losses as of December 31, 2012 was as follows:

							Non
				Residential			Residential									Municipal
December 31, 2012	Commercial			Real estate			Real estate			Construction			Consumer			Obligations		Total
Allowance for loan losses
Beginning balance	$	3,207		$	2,591		$	7,614		$	4,701		$	162		$	13	$	18,288
Provision for loan losses		303			3,831			1,955			(187	)		1,070			28		7,000
Loans charged off		(975	)		(2,196	)		(2,817	)		(3,554	)		(941	)		-		(10,483	)
Recoveries		181			46			239			1,004			293			-		1,763
Total ending allowance balance	$	2,716		$	4,272		$	6,991		$	1,964		$	584		$	41	$	16,568
Ending allowance balance attributable to loans
Individually evaluated for impairment	$	1,266		$	970		$	2,540		$	1,369		$	120		$	-	$	6,265
Collectively evaluated for impairment		1,450			3,302			4,451			595			464			41		10,303
Total ending allowance balance	$	2,716		$	4,272		$	6,991		$	1,964		$	584		$	41	$	16,568
Loans
Loans individually evaluated for impairment	$	1,840		$	8,666		$	18,076		$	5,154		$	120		$	-	$	33,856
Loans collectively evaluated for impairment		199,544			269,620			555,025			99,344			16,327			23,128		1,162,988
Total ending loan balance	$	201,384		$	278,286		$	573,101		$	104,498		$	16,447		$	23,128	$	1,196,844

(Continued) F-24

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014, 2013 and 2012

(Dollar amounts in thousands, except per share amounts)

NOTE 3 - LOANS (Continued)

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2014:

	Unpaid				Allowance for		Average		Interest		Cash Basis
	Principal		Recorded		Loan Losses		Recorded		Income		Interest
	Balance		Investment		Allocated		Investment		Recognized		Recognized
With no related allowance recorded
Commercial	$	699	$	699	$	-	$	517	$	-	$	-
Residential real estate
Home equity lines of credit		-		-		-		-		-		-
Multifamily properties		1,455		1,105		-		954		-		-
Other		1,267		1,253		-		1,711		-		-
Nonresidential real estate
Owner occupied properties		1,034		1,034		-		1,003		-		-
Non owner occupied properties		1,912		1,862		-		2,793		-		-
Construction		787		507		-		317		-		-
Consumer		-		-		-		-		-		-
		7,154		6,460		-		7,295		-		-
With an allowance recorded Commercial		4,568		3,970		2,025		5,969		238		224
Residential real estate
Home equity lines of credit		-		-		-		301		3		3
Multifamily properties		579		579		113		1,308		66		66
Other		1,048		1,048		114		2,113		37		30
Nonresidential real estate
Owner occupied properties		3,318		1,689		1,040		5,419		20		20
Non owner occupied properties		2,705		2,060		529		2,014		104		92
Construction		1,947		1,171		214		2,113		77		72
Consumer		-		-		-		-		-		-
		14,165		10,517		4,035		19,237		545		507
Total	$	21,319	$	16,977	$	4,035	$	26,532	$	545	$	507

(Continued) F-25

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014, 2013 and 2012

(Dollar amounts in thousands, except per share amounts)

NOTE 3 - LOANS (Continued)

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2013:

	Unpaid				Allowance for		Average		Interest		Cash Basis
	Principal		Recorded		Loan Losses		Recorded		Income		Interest
	Balance		Investment		Allocated		Investment		Recognized		Recognized
With no related allowance recorded Commercial	$	1,104	$	1,104	$	-	$	256	$	-	$	-
Residential real estate
Home equity lines of credit		-		-		-		15		-		-
Multifamily properties		1,308		958		-		605		-		-
Other		1,949		1,694		-		1,769		-		-
Nonresidential real estate
Owner occupied properties		1,032		1,032		-		2,113		-		-
Non owner occupied properties		3,873		3,823		-		4,284		-		-
Construction		-		-		-		386		-		-
Consumer		-		-		-		-		-		-
		9,266		8,611		-		9,428		-		-
With an allowance recorded Commercial		3,012		3,012		709		2,974		104		93
Residential real estate
Home equity lines of credit		388		373		155		449		12		12
Multifamily properties		1,484		1,484		239		593		29		28
Other		3,776		3,670		691		4,930		74		71
Nonresidential real estate
Owner occupied properties		8,288		6,532		685		6,264		15		11
Non owner occupied properties		3,439		2,833		266		3,494		143		136
Construction		2,830		2,549		674		3,234		119		102
Consumer		-		-		-		-		-
		23,217		20,453		3,419		21,938		496		453
Total	$	32,483	$	29,064	$	3,419	$	31,366	$	496	$	453

(Continued) F-26

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014, 2013 and 2012

(Dollar amounts in thousands, except per share amounts)

NOTE 3 - LOANS (Continued)

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2012:

	Unpaid				Allowance for		Average		Interest		Cash Basis
	Principal		Recorded		Loan Losses		Recorded		Income		Interest
	Balance		Investment		Allocated		Investment		Recognized		Recognized
With no related allowance recorded Commercial	$	28	$	28	$	-	$	204	$	-	$	-
Residential real estate
Home equity lines of credit		50		50		-		50		-		-
Multifamily properties		-		-		-		211		-		-
Other		1,922		1,679		-		2,109		-		-
Nonresidential real estate
Owner occupied properties		-		-		-		623		-		-
Non owner occupied properties		5,056		4,551		-		3,417		-		-
Construction		-		-		-		256		-		-
Consumer		-		-		-		-		-		-
		7,056		6,308		-		6,870		-		-
With an allowance recorded Commercial		1,812		1,812		1,266		1,075		20		18
Residential real estate
Home equity lines of credit		766		566		212		511		15		15
Multifamily properties		1,320		1,320		248		942		33		33
Other		5,196		5,051		510		3,670		121		106
Nonresidential real estate
Owner occupied properties		9,142		8,190		1,644		8,903		250		248
Non owner occupied properties		5,876		5,335		896		6,731		194		156
Construction		6,274		5,154		1,369		7,315		207		193
Consumer		120		120		120		15		1		1
		30,506		27,548		6,265		29,162		841		770
Total	$	37,562	$	33,856	$	6,265	$	36,032	$	841	$	770

(Continued) F-27

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014, 2013 and 2012

(Dollar amounts in thousands, except per share amounts)

NOTE 3 - LOANS (Continued)

The following table presents the aging of the recorded investment in past due loans as of December 31, 2014 and 2013 by class of loans:

	Loans		Loans over
	30-90 days		90 days				Loans Not
	past due		past due		Nonaccrual		past due		Total
December 31, 2014
Commercial	$	224	$	-	$	687	$	232,611	$	233,522
Residential real estate
Home equity lines of credit		1,006		7		365		100,393		101,771
Multifamily properties		-		-		206		53,280		53,486
Other residential real estate		2,173		-		2,379		112,722		117,274
Nonresidential real estate
Owner occupied properties		275		-		2,045		300,150		302,470
Non owner occupied properties		271		-		2,413		287,488		290,172
Construction		-		-		1,678		102,621		104,299
Consumer
Credit card balances		70		28		-		6,862		6,960
Other consumer		9		-		9		8,102		8,120
Municipal obligations		-		-		-		42,347		42,347
Total	$	4,028	$	35	$	9,782	$	1,246,576	$	1,260,421

	Loans		Loans over
	30-90 days		90 days				Loans Not
	past due		past due		Nonaccrual		past due		Total
December 31, 2013
Commercial	$	100	$	-	$	385	$	241,309	$	241,794
Residential real estate
Home equity lines of credit		550		-		622		97,786		98,958
Multifamily properties		-		-		-		67,964		67,964
Other residential real estate		3,693		-		4,738		108,003		116,434
Nonresidential real estate
Owner occupied properties		838		-		6,583		294,389		301,810
Non owner occupied properties		608		-		2,573		266,230		269,411
Construction		-		-		510		102,509		103,019
Consumer
Credit card balances		16		20		-		7,103		7,139
Other consumer		9		1		6		8,651		8,667
Municipal obligations						-		36,058		36,058
Total	$	5,814	$	21	$	15,417	$	1,230,002	$	1,251,254

(Continued) F-28

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014, 2013 and 2012

(Dollar amounts in thousands, except per share amounts)

NOTE 3 - LOANS (Continued)

Troubled Debt Restructurings:

The Company has allocated $2,123 and $914 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of December 31, 2014 and 2013, respectively. Troubled debt restructurings totaled $10,321 and $17,062 as of December 31, 2014 and 2013, respectively. The Company has not committed to lend additional amounts as of December 31, 2014 and 2013 to customers with outstanding loans that are classified as troubled debt restructurings.

Modifications involving a reduction of the stated interest rate of the loan were for periods up to three years. Modifications involving an extension of the maturity date were for periods ranging from eight months to twelve months.

The following table presents loans by class modified as troubled debt restructurings that occurred during the year ending December 31, 2014 and 2013:

	2014								2013
	Number Of Loans		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Number Of Loans		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
Troubled Debt Restructurings:
Commercial		6	$	1,841	$	1,243		2	$	113	$	112
Residential real estate
Multifamily properties		1		1,485		1,485		2		2,455		2,443
Other residential real estate								4		1,001		998
Nonresidential real estate
Owner occupied properties		3		432		432		2		323		323
Non owner occupied properties		1		84		84		2		970		926
Total		11	$	3,842	$	3,244		12	$	4,862	$	4,802

(Continued) F-29

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014, 2013 and 2012

(Dollar amounts in thousands, except per share amounts)

NOTE 3 - LOANS (Continued)

The eleven restructured notes added during 2014 for $3,244 were added as performing troubled debt restructured loans. The twelve restructured notes added during 2013 for $4,802 were added as performing troubled debt restructured loans.

The troubled debt restructurings described above increased the allowance for loan losses by $512 and resulted in charge-offs of $658 during the year ending December 31, 2014.

The troubled debt restructurings described above increased the allowance for loan losses by $245 and resulted in charge-offs of $364 during the year ending December 31, 2013.

The following table presents loans by class modified as troubled debt restructurings for which there was a payment default within twelve months following the modification during the period ending December 31, 2014 and 2013:

Troubled Debt Restructurings That Subsequently Defaulted:

	2014				2013
	Number		Recorded		Number		Recorded
	of Loans		Investment		of Loans		Investment
Commercial		5	$	2,310		3	$	170
Residential real estate
Multifamily properties						1		958
Other residential real estate		2		575		-		-
Nonresidential real estate
Owner occupied properties						1		144
Non owner occupied properties		1		72		3		2,302
Construction						4		1,465
Total		8	$	2,957		12	$	5,039

A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms.

The troubled debt restructurings that subsequently defaulted described above had $373 increased on the allowance for loan losses and resulted in charge-offs of $881 for the year ending December 31, 2014.

The troubled debt restructurings that subsequently defaulted described above had $195 increased on the allowance for loan losses and resulted in charge-offs of $630 for the year ending December 31, 2013.

(Continued) F-30

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014, 2013 and 2012

(Dollar amounts in thousands, except per share amounts)

NOTE 3 - LOANS (Continued)

Credit Quality Indicators:

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis includes loans with an outstanding balance greater than $100 and non-homogeneous loans, such as commercial and commercial real estate loans. This analysis is performed on a quarterly basis. The Company uses the following definitions for risk ratings:

Special Mention. Loans classified as special mention have a potential weakness that deserves management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution's credit position at some future date.

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. Loans listed as not rated are either less than $100 or are included in group of homogeneous loans.

As of December 31, 2014 and 2013, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

			Special
	Pass		Mention		Substandard		Doubtful		Not Rated		Total
December 31, 2014
Commercial	$	223,920	$	3,294	$	6,308	$	-	$	-	$	233,522
Residential real estate
Home equity lines of credit		12,105		167		2,070		-		87,429		101,771
Multifamily properties		52,701		-		785		-		-		53,486
Other residential real estate		35,151		2,749		5,982		-		73,392		117,274
Nonresidential real estate
Owner occupied properties		273,465		11,266		17,739		-		-		302,470
Non owner occupied properties		280,392		5,292		4,488		-		-		290,172
Construction		100,101		-		4,198		-		-		104,299
Consumer
Credit card balances		-		-		-		-		6,960		6,960
Other consumer		-		-		9		-		8,111		8,120
Municipal obligations		42,347		-		-		-		-		42,347
Total	$	1,020,182	$	22,768	$	41,579	$	-	$	175,892	$	1,260,421

(Continued) F-31

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014, 2013 and 2012

(Dollar amounts in thousands, except per share amounts)

NOTE 3 - LOANS (Continued)

			Special
	Pass		Mention		Substandard		Doubtful		Not Rated		Total
December 31, 2013
Commercial	$	226,021	$	4,736	$	11,037	$	-	$	-	$	241,794
Residential real estate
Home equity lines of credit		11,775		1,721		1,582		-		83,880		98,958
Multifamily properties		65,521		-		2,443		-		-		67,964
Other residential real estate		24,697		4,594		8,606		-		78,537		116,434
Nonresidential real estate
Owner occupied properties		271,281		9,058		21,471		-		-		301,810
Non owner occupied properties		256,328		5,216		7,867		-		-		269,411
Construction		97,738		2,264		3,017		-		-		103,019
Consumer
Credit card balances		-		-		-		-		7,139		7,139
Other consumer		-		-		4		-		8,663		8,667
Municipal obligations		36,058		-		-		-		-		36,058
Total	$	989,419	$	27,589	$	56,027	$	-	$	178,219	$	1,251,254

Loans listed as not rated are included in groups of homogeneous loans. These loans are evaluated based on delinquency status.

NOTE 4 - PREMISES AND EQUIPMENT

Year-end premises and equipment were as follows:

	2014			2013
Land and improvements	$	7,920		$	7,920
Leasehold improvements		3,220			2,924
Buildings		19,061			19,024
Furniture, fixtures and equipment		14,043			12,916
Total		44,244			42,784
Accumulated depreciation		(21,944	)		(20,340	)
Net premises and equipment	$	22,300		$	22,444

Year-end depreciation expense was $1,864, $1,648, and $1,755 for 2014, 2013, and 2012, respectively.

NOTE 5 - GOODWILL AND ACQUISITION INTANGIBLES

Goodwill:

There was no change in Goodwill in 2014.

(Continued) F-32

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014, 2013 and 2012

(Dollar amounts in thousands, except per share amounts)

NOTE 5 - GOODWILL AND ACQUISITION INTANGIBLES (Continued)

Acquisition Intangibles:

Acquisition intangibles were as follows as of year-end:

	2014				2013
	Gross				Gross
	Carrying		Accumulated		Carrying		Accumulated
	Amount		Amortization		Amount		Amortization
Amortized intangible assets:
Core deposit intangibles	$	3,595	$	2,722	$	3,595	$	2,407
Trade name intangibles		165		165		165		165
Non-compete agreement intangibles		320		320		320		320
Other customer relationship intangibles		2,650		2,163		2,650		1,990
Total	$	6,730	$	5,370	$	6,730	$	4,882

Aggregate amortization expense was $488, $615, and $766 for 2014, 2013 and 2012, respectively.

Estimated amortization expense for each of the next five years:

2015	$	403
2016		332
2017		249
2018		186
2019		153

NOTE 6 - INTEREST BEARING DEPOSITS

Time deposits of $250 or more were $58,949 and $60,480 at year-end 2014 and 2013.

Scheduled maturities of time deposits are as follows:

2015	$	190,861
2016		71,924
2017		10,986
2018		904
2019		23,847
	$	298,522

Deposits from directors and their affiliates at year-end 2014 and 2013 were $15 and $13, comprising 0.95% and 0.86% of total deposits at those dates.

(Continued) F-33

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014, 2013 and 2012

(Dollar amounts in thousands, except per share amounts)

NOTE 7 - SHORT-TERM BORROWINGS

Short-term borrowings consisted of the following:

	2014		2013
FHLB advance	$	20,000	$	-
Retail repurchase agreements		25,703		27,643
	$	45,703	$	27,643

Information regarding repurchase agreements for the years ended December 31, 2014 and 2013 is presented below:

	2014			2013
Average balance during the year	$	25,639		$	27,739
Maximum month end balance during the year		29,220			32,514
Average rate paid during the year		0.22	%		0.22	%
Year-end weighted average rate		0.22	%		0.20	%

NOTE 8 - NOTES PAYABLE

Notes payable consisted of the following:

	2014		2013
FHLB advances	$	10,000	$	5,000
Subordinated debentures		38,557		38,557
Other notes payable		1,768		2,020
	$	50,325	$	45,577

The FHLB advances are secured by a blanket pledge of eligible loans and securities and require monthly interest payments. The following advances were outstanding as of December 31:

	2014		2013
Fixed rate advances with maturity in 2017 and an interest rate of 1.01%	$	10,000	$	-
Fixed rate advances with maturity in 2014 and an interest rate of 1.72%		-		5,000
	$	10,000	$	5,000

In March 2008, The Bank of Kentucky, a wholly-owned subsidiary of the Company, issued $20,000 of LIBOR plus 1.75% floating rate subordinated debenture to USB Capital Resources, Inc. The debenture may be redeemed after March 2013 at face value. Final maturity is March of 2018. The subordinated debentures are classified as liabilities on the Consolidated Balance Sheets and are considered Tier 2 capital for regulatory capital purposes.

(Continued) F-34

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014, 2013 and 2012

(Dollar amounts in thousands, except per share amounts)

NOTE 8 - NOTES PAYABLE (Continued)

In May of 2007, The Bank of Kentucky Capital Trust II (“the Trust”), a trust subsidiary of the Company, issued $18,000 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 2011 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 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 Consolidated Balance Sheets are considered as Tier 1 capital for regulatory capital purposes, subject to certain limitations. The Company is not considered the primary beneficiary of this Trust (variable interest entity), therefore the trust is not consolidated in the Company’s financial statements, but rather the subordinated debentures are shown as a liability.

Other notes payable include a capitalized lease obligation for $101 and a $1,667 note payable to US Bank. The US Bank note was utilized to fund the warrant repurchase during 2013 and has a rate of one-month LIBOR plus 2.35% and matures on June 30, 2016.

Payments on notes payable over the next five years are as follows:

2015	$	222
2016		1,445
2017		10,101
2018		20,000
2019		-
Thereafter		18,557
Total notes payable	$	50,325

The Bank maintains a $200,000 letter of credit from the Federal Home Loan Bank of Cincinnati. The letter is pledged to secure public funds deposit accounts and is secured by a blanket pledge of the Bank’s residential and commercial real estate loans.

NOTE 9 - PREFERRED STOCK

On February 13, 2009, the Company entered into a Letter Agreement (the “Purchase Agreement”) with the United States Department of Treasury (the “Treasury Department”) under the Troubled Asset Relief Program (“TARP”) Capital Purchase Program (“CPP”), pursuant to which the Company issued 34,000 shares of Series A Non-Cumulative Perpetual Preferred Stock (the “Series A Preferred Stock”) for a total price of $34 million. The Series A Preferred Stock is to pay cumulative dividends at an annual dividend rate of 5% for the first five years and thereafter at an annual dividend rate of 9%. No cash dividends can be paid to common stockholders unless all dividends on the Series A Preferred Stock have been declared and paid in full (or an amount sufficient for the payment of the dividends on the Series A Preferred Stock has been set aside for the payment of such dividends). Pursuant to the American Recovery and Reinvestment Act of 2009 (the “ARRA”), the Company may redeem the Series A Preferred Stock at any time, subject to the approval of its primary federal regulator.

(Continued) F-35

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014, 2013 and 2012

(Dollar amounts in thousands, except per share amounts)

NOTE 9 - PREFERRED STOCK (Continued)

As part of its purchase of the Series A Preferred Stock, the Treasury Department received a warrant (the “Warrant”) to purchase 274,784 shares of the Company’s common stock at an initial per share exercise price of $18.56. The Warrant provides for the adjustment of the exercise price and the number of shares of common stock issuable upon exercise pursuant to customary anti-dilution provisions. The Warrant expires ten years from the issuance date.

Both the Series A Preferred Stock and the Warrant are accounted for as components of Tier 1 capital. The net proceeds received from the Treasury Department were allocated between the Series A Preferred Stock and Warrant based on relative fair value. The Series A Preferred Stock will be accreted to liquidation value over the expected life of the shares, with accretion charged to retained earnings.

On December 22, 2010, the Company repurchased $17 million of the outstanding $34 million of its Fixed Rate Cumulative Perpetual Preferred Stock, Series A, issued in February 2009 to the Treasury Department pursuant to the Troubled Asset Relief Program Capital Purchase Program.

On November 23, 2011, the Company repurchased the final $17 million of the original outstanding $34 million of its Fixed Rate Cumulative Perpetual Preferred Stock, Series A, issued in February 2009 to the Treasury Department pursuant to the Troubled Asset Relief Program Capital Purchase Program.

In the second quarter of 2013, the Company completed the repurchase of the “Warrant” from the Treasury Department issued on February 13, 2009, as part of the TARP Capital Purchase Program for an aggregate repurchase price of $2,151. Prior to the repurchase transaction, the Warrant permitted the Treasury Department to purchase 276,078.12 shares of the Company’s common stock at an exercise price of $18.473 per share. The Warrant originally had provided for the purchase of 274,784 shares of the Company’s common stock at an exercise price of $18.56 per share and was thereafter adjusted for certain cash dividends declared by the Company from time to time. The Warrant had been issued in connection with the Company’s sale to the Treasury Department of 34,000 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Preferred Stock”) in 2009. As previously disclosed on the Company’s Current Report on Form 8-K filed November 23, 2011, the Company completed the repurchase of the remaining outstanding Preferred Stock from the Treasury Department on November 23, 2011. As a result of the Warrant repurchase, the Company has repurchased all securities issued to the Treasury under the TARP Capital Purchase Program. The repurchase of the Warrant was funded by a $2,000 note payable as described in Note 8.

NOTE 10 - EMPLOYEE BENEFITS

The Bank maintains an employee profit sharing plan covering substantially all employees. Contributions are at the discretion of the Board of Directors. Profit sharing expense totaled $369, $336, and $249, for the years ended December 31, 2014, 2013 and 2012, respectively.

In 2003, the Company adopted a benefit program for certain officers to encourage long-term retention. The program consists principally of a defined benefit component, providing each officer with payments equal to 30% of final average pay for 15 years after retirement, and a deferral component, permitting each officer the ability to defer a portion of their current compensation and earn pre-tax returns on such deferred amounts. The accrued liability under the defined benefit component was $6,740 and $4,884 at December 31, 2014 and 2013, respectively. Expense related to the program was $1,882, $1,136, and $850 for the years ended December 31, 2014, 2013 and 2012.

(Continued) F-36

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014, 2013 and 2012

(Dollar amounts in thousands, except per share amounts)

NOTE 11 - STOCK-BASED COMPENSATION

Stock-based compensation in the form of options to buy stock and restricted stock units (“RSUs”) are granted to directors, officers and employees under the Company’s incentive stock plan (the “Plan”), which provides for the issuance of up to 1,000,000 shares. The Company believes that such awards better align the interests of its employees with those of its shareholders. The specific terms of each option agreement are determined by the Compensation Committee at the date of the grant.

Stock Option Plan: 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 options’ lives are generally ten years for employees and five years for directors. Total compensation cost that has been charged against income for those plans was $20, $50, and $97 for 2014, 2013 and 2012, respectively. The total income tax benefit was $0, $0, and $0.

The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model that uses the assumptions noted in the table below. Expected volatilities are based on historical volatilities of the Company’s common stock. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. Expected term is estimated based upon the contractual term and vesting period of the options including consideration of historical trends segregated by employees and directors. A forfeiture rate of 19% for employees and 0% for directors is used in the model and is based on historical experience.

There have been no options granted in 2014, 2013, or 2012.

A summary of the activity in the stock option plan for 2014 follows:

						Weighted
				Weighted		Average
				Average		Remaining		Aggregate
				Exercise		Contractual		Intrinsic
	Shares			Price		Term		Value
Outstanding at beginning of year		162,019		$	24.69
Granted		-			-
Exercised		(87,109	)		24.89
Forfeited or expired		(4,230	)		23.53
Outstanding at end of year		70,680		$	24.33		2.06	$	1,692
Exercisable at end of year		48,880		$	24.40		2.06	$	1,167

The Company expects all of the nonvested shares to become exercisable.

Information related to the stock option plan during each year follows:

	2014		2013		2012
Intrinsic value of options exercised	$	1,029	$	475	$	84
Cash received from option exercises		2,169		3,507		810
Tax benefit realized from option exercises		360		121		31
Weighted average fair value/share of options granted		-		-		-

(Continued) F-37

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014, 2013 and 2012

(Dollar amounts in thousands, except per share amounts)

NOTE 11 - STOCK-BASED COMPENSATION (Continued)

As of December 31, 2014, there was $19 of total unrecognized compensation cost related to nonvested stock options granted under the plan. The cost is expected to be recognized over a weighted-average period of 1.41 years.

Restricted Stock Units: The specific terms of each restricted stock unit (“RSU”) award are determined by the Compensation Committee at the date of the grant. Compensation expense is recognized over the vesting period of the awards based on the fair value of the stock at the issue date. The fair value of the stock was determined using the total number of RSUs granted multiplied by the fair market value of a share of Company stock at the grant date. In 2014 11,415 of the granted RSU’s will fully vest on the first anniversary of the grant date, while 7,679 of the RSU’s were granted to employees under a long term incentive plan which are performance based and vest over a three year time frame.

A summary of changes in the Company’s nonvested shares for the year follows:

				Weighted-Average
				Grant-Date
Nonvested Shares	Shares			Fair Value
Nonvested at January 1, 2014		4,494		$	26.25
Granted		19,094			36.16
Vested		(12,655	)		32.00
Forfeited		(113	)		35.16
Nonvested at December 31, 2014		10,820		$	36.93

The Company recorded RSU expense of $499, $387 and $67 in 2014, 2013 and 2012, respectively. As of December 31, 2014, there was $227 of total unrecognized compensation cost related to nonvested shares granted under the 2012 stock incentive plan. The cost is expected to be recognized by December 31, 2016.

NOTE 12 - FEDERAL INCOME TAXES

Federal income taxes consisted of the following components:

	2014		2013		2012
Income tax/(benefit)
Currently payable	$	6,797	$	7,680	$	7,275
Deferred		884		375		(152	)
	$	7,681	$	8,055	$	7,123

(Continued) F-38

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014, 2013 and 2012

(Dollar amounts in thousands, except per share amounts)

NOTE 12 - FEDERAL INCOME TAXES (Continued)

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

	2014			2013			2012
Statutory rate applied to income before income taxes	$	9,099		$	9,737		$	8,844
Tax exempt income		(869	)		(794	)		(903	)
Company owned life insurance income		(380	)		(399	)		(407	)
Incentive stock options		-			17			34
Non-qualified options expired		-			162			-
Low-income housing tax credit		(557	)		(557	)		(547	)
Other		388			(111	)		102
	$	7,681		$	8,055		$	7,123

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

	2014			2013
Deferred tax assets from:
Allowance for loan losses	$	5,124		$	5,707
Benefit plans		2,848			2,142
Premises and equipment		358			775
Net operating loss carryforward		2,533			2,832
Acquisition intangibles		280			360
Net unrealized loss on available for sale securities		-			916
Other		656			634
		11,799			13,366
Deferred tax liabilities for:
FHLB stock dividends		(919	)		(966	)
Acquisition intangibles		(3,310	)		(3,035	)
Net unrealized gain on available for sale securities		(1,072	)		-
Other		(11	)		(6	)
		(5,312	)		(4,007	)
Net deferred tax asset	$	6,487		$	9,359

(Continued) F-39

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014, 2013 and 2012

(Dollar amounts in thousands, except per share amounts)

NOTE 12 - FEDERAL INCOME TAXES (Continued)

At year-end 2014, the Company had net operating loss carry forwards from its 2007 acquisition of approximately $7,236, which expire beginning in 2022 and have an annual limitation by IRC section 382. No valuation allowance has been established as management believes it will generate sufficient income in future years to realize the net operating loss benefits before expiration.

The Company had no unrecognized tax benefits as of January 1, 2014 and 2013 and did not recognize any increase in unrecognized benefits during 2014 or 2013 relative to any tax positions taken in 2014 and 2013. 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 December 31, 2014 and 2013. The Company and its corporate subsidiary file a consolidated U.S. federal income tax return, which is subject to examination for all years after 2011.

NOTE 13 - EARNINGS PER SHARE

The factors used in the earnings per share computation follow:

	2014		2013		2012
Basic
Net income available to common shareholders	$	18,316	$	19,765	$	18,145
Weighted average common shares outstanding		7,669,608		7,513,103		7,462,528
Basic earnings per common share	$	2.39	$	2.63	$	2.43
Diluted
Net income available to common shareholders	$	18,316	$	19,765	$	18,145
Weighted average common shares outstanding for basic earnings per common share		7,669,608		7,513,103		7,462,528
Add: Dilutive effects of assumed exercises of stock options and restricted stock units		47,321		33,949		11,972
Add: Dilutive effects of assumed exercise of stock warrant		-		38,390		69,800
Average shares and dilutive potential common shares		7,716,929		7,585,442		7,544,300
Diluted earnings per common share	$	2.37	$	2.61	$	2.41

Stock options for 0, 5,050, and 239,225 shares of common stock were not considered in computing diluted earnings per common share for 2014, 2013 and 2012 because they were antidilutive.

(Continued) F-40

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014, 2013 and 2012

(Dollar amounts in thousands, except per share amounts)

NOTE 14 - COMMITMENTS AND OFF BALANCE SHEET ACTIVITIES

The Bank leases branch facilities and sites and is committed under various non-cancelable lease contracts that expire at various dates through the year 2026. Some of these leases are with members of the Bank’s Board of Directors or companies they control. Expense for leased premises was $1,021, $986, and $947 for 2014, 2013 and 2012, respectively. Minimum lease payments at December 31, 2014 for all non-cancelable leases were as follows:

2015	$	1,031
2016		779
2017		726
2018		532
2019		374
Thereafter		1,546
Total minimum lease payments	$	4,988

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

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

	2014				2013
	Fixed		Variable		Fixed		Variable
	Rate		Rate		Rate		Rate
Commitments to make loans (at market rates)	$	7,670	$	19,323	$	7,509	$	8,188
Unused lines of credit		-		410,468		-		392,719
Unused letters of credit		-		45,170		-		47,155

The loan commitments are generally extended for terms of up to 60 days and, in many cases, allow the customer to select from one of several financing options offered. For the fixed rate commitments, the interest range was 4.25% to 6.50% in 2014 and 3.25% to 5.50% in 2013.

At December 31, 2014 and 2013, the Bank was required to have $11,434 and $11,643, respectively, on deposit with the Federal Reserve or as cash on hand as reserve.

On March 3, 2005, the Bank entered into an agreement with Northern Kentucky University whereby the University granted to the Bank the naming rights for the new Northern Kentucky University Arena 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 paid $6,000 in seven equal annual installments which began after substantial completion and opening of the Arena which occurred in September 2009.

(Continued) F-41

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014, 2013 and 2012

(Dollar amounts in thousands, except per share amounts)

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

The cost of the naming rights is being amortized over the life of the contract commencing on the opening of the Arena, which took place in September 2009. The Company recorded $300 in expense for these naming rights in 2014, 2013 and 2012, the year end balance for this asset was $4,100 and $3,543 at December 31, 2014 and 2013, respectively

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 $1,000 to the project, which has been named The Bank of Kentucky Field. The cost of the naming rights is being amortized over the twenty-five year life of the agreement commencing on the opening of the field, which took place in September 2008. The Company recorded $40 in expense for these naming rights in 2014, 2013 and 2012, the year end balance for this asset was $747 and $787 at December 31, 2014 and 2013 respectively.

On November 8, 2012, the Bank entered into an agreement with Gateway Community and Technical College whereby the College granted to the Bank the naming rights for the new classroom and training center located in Boone County, Kentucky. The Bank committed $1,000 to the project, which will be named The Bank of Kentucky Classroom and Training Center. The cost of the naming rights will be amortized over a twenty year life, which commenced in 2013. The Company recorded $50 amortized expense in 2014 under this agreement. The year-end balance for this asset was $925 and $643 at December 31, 2014 and 2013, respectively.

On September 10, 2014, the Bank entered into an agreement with St. Elizabeth Medical Center, Inc. whereby the medical center granted to the Bank the naming rights for its new cardiovascular center located in Kenton County, Kentucky. The Bank committed $750 to the project, and the cost of the naming rights will be amortized over a ten-year period commencing in 2015. The year-end balance for this asset was $250 at December 31, 2014

NOTE 15 - INTEREST RATE CONTRACTS

As a result of loans acquired through the Integra Bank transaction in the fourth quarter of 2010, the Bank initiated an interest rate protection program in which the Bank earns a fee by providing the Bank’s commercial loan customers the ability to swap from variable to fixed, or fixed to variable interest rates. Under these agreements the Bank enters into a variable or fixed rate loan agreement with its customer in addition to a swap agreement. The swap agreement effectively swaps the customer’s variable rate to a fixed rate or vice versa. The Bank then enters into a corresponding swap agreement with a third party in order to swap its exposure on the variable to fixed rate swap with the Bank’s customer. Since the swaps are structured to offset each other, changes in fair values, while recorded, have no material net earnings impact. The notional amount of interest rate swaps at December 31, 2014 was $122,819 and $107,966 on December 31, 2013 with maturities ranging from one to ten years. The current fair value of these swaps was $2,280 and $1,915 at December 31, 2014 and 2013, respectively, and is included in other assets and other liabilities for the value of each of the swaps.

The Bank is exposed to losses if a counterparty fails to make its payments under a contract in which the Bank is in the receiving status. Although collateral or other security is not obtained, as the Bank is not currently in the receiving status, we minimize our credit risk by monitoring the credit standing of the counterparties. We anticipate the counterparties will be able to fully satisfy their obligations under these agreements.

(Continued) F-42

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014, 2013 and 2012

(Dollar amounts in thousands, except per share amounts)

NOTE 16 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. Management believes as of December 31, 2014, the Company and Bank meet all capital adequacy requirements to which they are subject.

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At year-end 2014 and 2013, the most recent regulatory notifications categorized the Bank as “well capitalized” under the regulatory framework for prompt corrective action.

There have been no subsequent conditions or events that management believes have changed the institution's category.

The consolidated and Bank’s capital amounts and ratios, at December 31, 2014 and 2013 are presented below:

											To Be Well
											Capitalized Under
						For Capital					Prompt Corrective
	Actual					Adequacy Purposes					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
2014
Total Capital to risk
weighted assets
Consolidated	$	217,453		13.83	%	$	125,816		8.00	%		N/A		N/A
Bank		217,446		13.82	%		125,863		8.00	%	$	157,329		10.00	%
Tier 1 (Core) Capital to risk
weighted assets
Consolidated	$	190,814		12.13	%	$	62,908		4.00	%		N/A		N/A
Bank		190,807		12.13	%		62,931		4.00	%	$	94,397		6.00	%
Tier 1 (Core) Capital to
average assets
Consolidated	$	190,814		10.30	%	$	74,122		4.00	%		N/A		N/A
Bank		190,807		10.34	%		73,807		4.00	%	$	92,258		5.00	%

(Continued) F-43

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014, 2013 and 2012

(Dollar amounts in thousands, except per share amounts)

NOTE 16 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS (Continued)

											To Be Well
											Capitalized Under
						For Capital					Prompt Corrective
	Actual					Adequacy Purposes					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
2013
Total Capital to risk
weighted assets
Consolidated	$	206,520		13.37	%	$	123,573		8.00	%		N/A		N/A
Bank		206,466		13.37	%		123,523		8.00	%	$	154,403		10.00	%
Tier 1 (Core) Capital to risk
weighted assets
Consolidated	$	174,214		11.28	%	$	61,786		4.00	%		N/A		N/A
Bank		174,160		11.28	%		61,761		4.00	%	$	92,642		6.00	%
Tier 1 (Core) Capital to
average assets
Consolidated	$	174,214		9.61	%	$	72,506		4.00	%		N/A		N/A
Bank		174,160		9.66	%		72,150		4.00	%	$	90,188		5.00	%

The Company’s principal source of funds for dividend payments is dividends received from the Bank. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year’s net profits, combined with the retained net profits of the preceding two years, subject to the capital requirements described above. At December 31, 2014, the Bank could pay $46,243 without regulatory approval.

NOTE 17 - DISCLOSURES ABOUT FAIR VALUE

Accounting guidance establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

Investment Securities: The fair values of securities available-for-sale are determined by matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). One corporate security is valued using Level 3 inputs as there is no readily observable market activity. Management determines the value of this security based on expected cash flows, the credit quality of the security and current market interest rates.

(Continued) F-44

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014, 2013 and 2012

(Dollar amounts in thousands, except per share amounts)

NOTE 17 - DISCLOSURES ABOUT FAIR VALUE (Continued)

Derivatives: The Bank’s derivative instruments consist of over-the-counter interest-rate swaps that trade in liquid markets. The fair value of the derivative instruments is primarily measured by obtaining pricing from broker-dealers recognized to be market participants. The pricing is derived from market observable inputs that can generally be verified and do not typically involve significant judgment by the Bank. This valuation method is classified as Level 2 in the fair value hierarchy.

Impaired Loans: At the time a loan is considered impaired, it is recorded at the lower of cost or fair value. Impaired loans carried at fair value generally receive specific allocations of the allowance for loan losses. For collateral dependent loans, fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Other Real Estate Owned: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at the lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

Loans Held For Sale: Loans held for sale are carried at the lower of cost or fair value, which is evaluated on a pool-level basis. The fair value of loans held for sale is determined using quoted prices for similar assets, adjusted for specific attributes of that loan or other observable market data, such as outstanding commitments from third party investors (Level 2).

(Continued) F-45

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014, 2013 and 2012

(Dollar amounts in thousands, except per share amounts)

NOTE 17 - DISCLOSURES ABOUT FAIR VALUE (Continued)

Assets and Liabilities Measured on a Recurring Basis

Assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands):

			Fair Value Measurements at
			December 31, 2014 Using:
					Significant
			Quoted Prices in		Other		Significant
			Active Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
Assets
Investment securities available-for-sale
U.S. government sponsored entities and agencies	$	89,684	$	-	$	89,684	$	-
U.S. government agency mortgage backed		210,604		-		210,604		-
Corporate		850		-		-		850
Derivatives		2,280		-		2,280		-
Total	$	303,418	$	-	$	302,568	$	850
Liabilities
Derivatives	$	2,280	$	-	$	2,280	$	-
Total	$	2,280	$	-	$	2,280	$	-

			Fair Value Measurements at
			December 31, 2013 Using:
					Significant
			Quoted Prices in		Other		Significant
			Active Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
Assets
Investment securities available-for-sale
U.S. government sponsored entities and agencies	$	120,139	$	-	$	120,139	$	-
U.S. government agency mortgage backed		220,059		-		220,059		-
Corporate		925		-		-		925
Derivatives		1,915		-		1,915		-
Total	$	343,038	$		$	342,113	$	925
Liabilities
Derivatives	$	1,915	$	-	$	1,915	$	-
Total	$	1,915	$	-	$	1,915	$	-

(Continued) F-46

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014, 2013 and 2012

(Dollar amounts in thousands, except per share amounts)

NOTE 17 - DISCLOSURES ABOUT FAIR VALUE (Continued)

There were no transfers between Level 1 and Level 2 during 2014 or 2013.

There were no gains or losses for assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the period ended December 31, 2014.

There were no changes in unrealized gains and losses recorded in earnings for the period ended December 31, 2014 for Level 3 assets and liabilities that are still held at December 31, 2014.

The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the period ended December 31 (in thousands):

	Corporate Securities
	2014		2013
Balance of recurring Level 3 assets at January 1	$	925	$	1,060
Total gains or losses for the period:
Included in earnings		-		-
Included in other comprehensive income		-		-
Purchases		-		-
Sales		-		-
Issuances		-		-
Settlements		75		135
Transfers into Level 3		-		-
Transfers out of Level 3		-		-
Balance of recurring Level 3 assets at December 31	$	850	$	925

The following table presents quantitative information about recurring Level 3 fair value measurements at December 31, 2014 (in thousands):

			Valuation
	Fair value		Technique(s)	Unobservable Input(s)	Value
Corporate security	$	850	Discounted cash flow	Probability of default		0	%

The following table presents quantitative information about recurring Level 3 fair value measurements at December 31, 2013 (in thousands):

			Valuation
	Fair value		Technique(s)	Unobservable Input(s)	Value
Corporate security	$	925	Discounted cash flow	Probability of default		0	%

(Continued) F-47

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014, 2013 and 2012

(Dollar amounts in thousands, except per share amounts)

NOTE 17 - DISCLOSURES ABOUT FAIR VALUE (Continued)

The interest rate on this security is based on interest rates paid for securities with similar credit characteristics, but the probability of default is determined through a credit quality review rather than formal ratings or other observable inputs. The interest rate adjusts to reflect current market conditions of highly rated investments, if probability of default changed significantly, the interest rate would adjust accordingly and the fair value would be updated. Management reviews this interest rate and the security’s credit quality quarterly and a market value adjustment is made if necessary pursuant to this review.

Assets and Liabilities Measured on a Non-Recurring Basis

Assets and liabilities measured at fair value on a non-recurring basis are summarized below:

			Fair Value Measurements at
			December 31, 2014 Using:
					Significant
			Quoted Prices in		Other		Significant
	Total		Active Markets for		Observable		Unobservable
	December 31,		Identical Assets		Inputs		Inputs
	2014		(Level 1)		(Level 2)		(Level 3)
Assets
Impaired loans
Commercial	$	1,085	$	-	$	-	$	1,085
Nonresidential real estate
Owner occupied properties		337		-		-		337
Non owner occupied properties		366		-		-		366
Residential real estate
Home equity lines of credit		-		-		-		-
Multifamily properties		-		-		-		-
Other		124		-		-		124
Construction		957		-		-		957
Other real estate owned
Residential		36		-		-		36
Non-Residential		1,438		-		-		1,438
Total	$	4,343	$	-	$	-	$	4,343

(Continued) F-48

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014, 2013 and 2012

(Dollar amounts in thousands, except per share amounts)

NOTE 17 - DISCLOSURES ABOUT FAIR VALUE (Continued)

			Fair Value Measurements at
			December 31, 2013 Using:
					Significant
			Quoted Prices in		Other		Significant
	Total		Active Markets for		Observable		Unobservable
	December 31,		Identical Assets		Inputs		Inputs
	2013		(Level 1)		(Level 2)		(Level 3)
Assets
Impaired loans
Commercial	$	2,215	$	-	$	-	$	2,215
Nonresidential real estate
Owner occupied properties		5,673		-		-		5,673
Non owner occupied properties		942		-		-		942
Residential real estate
Home equity lines of credit		218		-		-		218
Multifamily properties		1,245		-		-		1,245
Other		2,013		-		-		2,013
Construction		1,875		-		-		1,875
Other real estate owned
Residential		-		-		-		-
Non-Residential		2,772		-		-		2,772
Total	$	16,953	$		$		$	16,953

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a gross carrying amount of $4,702 with a valuation allowance of $1,833, resulting in a decrease in provision for loan losses of $738 for 2014. As of December 31, 2013, impaired loans had a gross carrying amount of $17,600, with a valuation allowance of $3,419, resulting in a decrease in provision for loan losses of $2,846.

Other real estate owned measured at fair value less costs to sell, had a net carrying amount of $1,474, which is made up of the outstanding balance of $1,701, net of a valuation allowance of $227 at December 31, 2014 resulting in a write-down of $227, for the year ended December 31, 2014. At December 31, 2013, other real estate owned had a net carrying amount of $2,772, made up of the outstanding balance of $3,287, net of a valuation allowance of $515, resulting in a write-down of $263 for the year ended December 31, 2013.

Values for collateral dependent loans and other real estate owned are generally based on appraisals obtained from licensed real estate appraisers and in certain circumstances consideration of offers obtained to purchase properties prior to foreclosure or other factors management deems relevant to arrive at a representative fair value.  Appraisals for commercial real estate generally use three methods to derive value: cost, sales or market comparison and income approach.  The cost method bases value on the cost to replace the current property.  The market comparison approach evaluates the sales price of similar properties in the same market area.  The income approach considers net operating income generated by the property and an investor’s required return.  The final fair value is based on a reconciliation of these three approaches. Values for non-real estate collateral, such as business equipment, are based on the licensed real estate appraisals valuation or the customer’s financial statements. Values for the non-real estate collateral use much higher discounts than does real estate collateral. This is reflected in the high discount rate used on Commercial loans which have a much higher percentage of equipment collateral than other loan types have.

(Continued) F-49

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014, 2013 and 2012

(Dollar amounts in thousands, except per share amounts)

NOTE 17 - DISCLOSURES ABOUT FAIR VALUE (Continued)

The following table presents quantitative information about recurring Level 3 fair value measurements at December 31, 2014 (in thousands):

	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Discount Range (Avg discount)
Assets
Impaired Loans:
Commercial	$	1,085	Cost, sales, income approach	Adjustment for comparable properties, market conditions	48-61% (54%)
Nonresidential real estate
Owner occupied properties		337	Cost, sales, income approach	Adjustment for comparable properties, market conditions	4-95% (19%)
Non owner occupied properties		366	Cost, sales, income approach	Adjustment for comparable properties, market conditions	7% (7%)
Residential real estate
Home equity lines of credit			Cost, sales, income approach	Adjustment for comparable properties, market conditions	- -
Multifamily properties			Cost, sales, income approach	Adjustment for comparable properties, market conditions	- -
Other		124	Cost, sales, income approach	Adjustment for comparable properties, market conditions	13-74% (25%)
Construction		957	Cost, sales, income approach	Adjustment for comparable properties, market conditions	3-56% (27%)
Other real estate owned Residential		36	Cost, sales, income approach	Adjustment for comparable properties, market conditions	11% (11%)
Non-residential		1,438			7% (7%)
Total	$	4,343

(Continued) F-50

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014, 2013 and 2012

(Dollar amounts in thousands, except per share amounts)

NOTE 17 - DISCLOSURES ABOUT FAIR VALUE (Continued)

The following table presents quantitative information about recurring Level 3 fair value measurements at December 31, 2013 (in thousands):

	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Discount Range (Avg discount)
Assets
Impaired Loans:					6-25%
Commercial		2,215	Cost, sales, income approach	Adjustment for comparable properties, market conditions	(11%)
Nonresidential real estate					6-76%
Owner occupied properties		5,673	Cost, sales, income approach	Adjustment for comparable properties, market conditions	(17%)
Non owner occupied properties		942	Cost, sales, income approach	Adjustment for comparable properties, market conditions	3-66% (15%)
Residential real estate					6-26%
Home equity lines of credit		218	Cost, sales, income approach	Adjustment for comparable properties, market conditions	(8%)
Multifamily properties		1,245	Cost, sales, income approach	Adjustment for comparable properties, market conditions	6% (6%)
Other		2,013	Cost, sales, income approach	Adjustment for comparable properties, market conditions	0-100% (36%)
Construction		1,875	Cost, sales, income approach	Adjustment for comparable properties, market conditions	6-16% (14%)
Other real estate owned Residential		-			0-0%
Non-residential		2,772			(0%)
Total	$	16,953

(Continued) F-51

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014, 2013 and 2012

(Dollar amounts in thousands, except per share amounts)

NOTE 17 - DISCLOSURES ABOUT FAIR VALUE (Continued)

The carrying amounts and estimated fair values of financial instruments at December 31, 2014 and December 31, 2013 are as follows (in thousands):

				Fair Value Measurements at
				December 31, 2014 Using:
	Carrying Value			Level 1			Level 2			Level 3			Total
Financial assets
Cash and cash equivalents	$	185,376		$	185,376		$	-		$	-		$	185,376
Interest-bearing deposits with banks		252			252			-			-			252
Securities available-for-sale		301,138			-			300,288			850			301,138
Securities held-to-maturity		73,629			-			73,934			-			73,934
Federal Home Loan Bank stock		4,850			N/A			N/A			N/A			N/A
Loans held for sale		2,255			-			2,255			-			2,255
Loans, net		1,244,266			-			-			1,249,398			1,249,398
Accrued interest receivable		3,911			-			1,213			2,698			3,911
Derivative assets		2,280			-			2,280			-			2,280
Financial liabilities
Deposits	$	(1,615,879	)	$	(1,317,357	)	$	(299,586	)	$	-		$	(1,616,943	)
Short-term borrowings		(45,703	)		-			(45,703	)		-			(45,703	)
Notes payable		(50,325	)		-			(27,014	)		(18,112	)		(45,126	)
Accrued interest payable		(892	)		-			(878	)		(14	)		(892	)
Standby letters of credit		(307	)		-			-			(307	)		(307	)
Derivative liabilities		(2,280	)		-			(2,280	)		-			(2,280	)

				Fair Value Measurements at
				December 31, 2013 Using:
	Carrying Value			Level 1			Level 2			Level 3			Total
Financial assets
Cash and cash equivalents	$	78,621		$	78,621		$	-		$	-		$	78,621
Interest-bearing deposits with banks		252			252			-			-			252
Securities available-for-sale		341,123			-			340,198			925			341,123
Securities held-to-maturity		77,010			-			76,457			-			76,457
Federal Home Loan Bank stock		5,099			N/A			N/A			N/A			N/A
Loans held for sale		3,214			-			3,214			-			3,214
Loans, net		1,233,339			-			-			1,236,112			1,236,112
Accrued interest receivable		4,123			-			1,420			2,703			4,123
Derivative assets		1,915			-			1,915			-			1,915
Financial liabilities
Deposits	$	(1,587,585	)	$	(1,286,733	)	$	(302,701	)	$	-		$	(1,589,434	)
Short-term borrowings		(27,643	)		-			(27,643	)		-			(27,643	)
Notes payable		(45,577	)		-			(20,083	)		(17,414	)		(37,497	)
Accrued interest payable		(693	)		-			(680	)		(13	)		(693	)
Standby letters of credit		(415	)		-			-			(415	)		(415	)
Derivative liabilities		(1,915	)		-			(1,915	)		-			(1,915	)

(Continued) F-52

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014, 2013 and 2012

(Dollar amounts in thousands, except per share amounts)

NOTE 17 - DISCLOSURES ABOUT FAIR VALUE (Continued)

The estimated fair value approximates carrying amounts for all items except those described below. The carrying amounts of cash and short-term instruments approximate fair values and are classified as either Level 1 or Level 2. Estimated fair value for both securities available-for-sale and held-to-maturity is as previously described for securities available-for-sale. It is not practicable to determine the fair value of Federal Home Loan Bank stock due to restrictions placed on its transferability. Fair values of loans, excluding loans held for sale, are estimated as set forth below:

The methods and assumptions, not previously presented, used to estimate fair values are described as follows:

Cash and Cash Equivalents: The carrying amounts of cash and cash equivalents approximate fair values and are classified as Level 1.

Interest-Bearing Deposits With Banks: The carrying amount of interest-bearing deposits equivalents approximate fair value and are classified a Level 1.

Federal Home Loan Bank Stock: It is not practicable to determine the fair value of Federal Home Loan Bank stock due to restrictions placed on its transferability.

Loans Held for Sale: The fair value of loans held for sale is estimated based upon binding contracts and quotes from third party investors resulting in a Level 2 classification.

Loans, Net: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

Accrued Interest Receivable/Payable: The carrying amounts of accrued interest approximate fair value resulting in a Level 1, Level 2 or Level 3 classification consistent with the classification of the asset/liability with which they are associated.

Deposits: The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in a Level 1 classification. The carrying amounts of variable rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date resulting in a Level 2 classification. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

(Continued) F-53

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014, 2013 and 2012

(Dollar amounts in thousands, except per share amounts)

NOTE 17 - DISCLOSURES ABOUT FAIR VALUE (Continued)

Short-Term Borrowings: The carrying amounts of short-term borrowings, generally maturing within ninety days, approximate their fair values resulting in a Level 2 classification.

Notes Payable: The carrying amounts of borrowings under repurchase agreements approximate their fair values resulting in a Level 2 classification. The fair values of the Company’s long-term borrowings are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification. The fair values of the Company’s subordinated debentures are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 3 classification.

Standby Letters of Credit and Off-Balance Sheet Instruments: Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing, which results in a level 3 classification. The fair value of commitments is not material. Estimated fair value of standby letters of credit are based on their current unearned fee balance. Estimated fair value for commitments to make loans and unused lines of credit are considered nominal.

NOTE 18 - PARENT COMPANY FINANCIAL STATEMENTS

Presented below are condensed balance sheets and the related statements of income and cash flows for the parent company:

CONDENSED BALANCE SHEETS

December 31, 2014 and 2013

	2014		2013
Assets
Cash	$	2,664	$	2,612
Investment in bank subsidiary		218,714		199,084
Investment in unconsolidated trust		557		557
Other assets		985		717
	$	222,920	$	202,970
Liabilities and shareholders’ equity
Subordinated debentures and notes payable	$	20,224	$	20,446
Other liabilities		1,975		1,385
Total liabilities		22,199		21,831
Shareholders’ equity		200,721		181,139
	$	222,920	$	202,970

(Continued) F-54

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014, 2013 and 2012

(Dollar amounts in thousands, except per share amounts)

NOTE 18 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)

CONDENSED STATEMENTS OF INCOME

Years ended December 31, 2014, 2013 and 2012

	2014			2013			2012
Dividends from subsidiary	$	4,400		$	3,200		$	5,500
Interest expense		(366	)		(355	)		(355	)
Operating expenses		(2,117	)		(631	)		(381	)
Tax benefit		537			328			224
Income before equity in undistributed income of the Bank		2,454			2,542			4,988
Equity in undistributed income (dividends in excess   of earnings) of the Bank		15,862			17,223			13,157
Net income	$	18,316		$	19,765		$	18,145

CONDENSED STATEMENTS OF CASH FLOWS

Years ended December 31, 2014, 2013 and 2012

	2014			2013			2012
Cash flows from operating activities
Net income	$	18,316		$	19,765		$	18,145
Adjustments to reconcile net income to net cash from operating activities
(Equity in undistributed income)		(15,862	)		(17,223	)		(13,157	)
Other changes		736			337			115
Net cash from operating activities		3,190			2,879			5,103
Cash flows from investing activities
Net cash from investing activities		-			-
Cash flows from financing activities
Advances on notes payable		-			2,000			-
Redemption of warrant		-			(2,151	)		-
Payments on notes payable		(222	)		(111	)		-
Dividends paid on common stock		(5,516	)		(5,098	)		(4,624	)
Exercise of stock options		2,600			3,552			841
Net cash from financing activities		(3,138	)		(1,808	)		(3,783	)
Net change in cash		52			1,071			1,320
Cash at beginning of year		2,612			1,541			221
Cash at end of year	$	2,664		$	2,612		$	1,541

(Continued) F-55

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014, 2013 and 2012

(Dollar amounts in thousands, except per share amounts)

NOTE 19 - OTHER COMPREHENSIVE INCOME

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

	2014			2013			2012
Unrealized holding gains on available-for-sale securities	$	6,046		$	(8,368	)	$	1,136
Reclassification adjustment for losses (gains) realized in income		(290	)		(274	)		(206	)
Net unrealized gains (losses)		5,756			(8,642	)		930
Tax effect		1,988			2,938			316
	$	3,768		$	(5,704	)	$	614

The following is a summary of the accumulated other comprehensive income balances, net of tax:

	Balance at December 31, 2013			Current year change		Balance at December 31, 2014
Unrealized gains (losses) on securities available for sale	$	(1,777	)	$	3,768	$	1,991

	Balance at December 31, 2012		Current year change			Balance at December 31, 2013
Unrealized gains (losses) on securities available for sale	$	3,927	$	(5,704	)	$	(1,777	)

F-56

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014, 2013 and 2012

(Dollar amounts in thousands, except per share amounts)

The following table summarizes the changes within each classification of accumulated other comprehensive income December 31, 2014:

Reclassifications Out Of Accumulated Other Comprehensive Income

Details about Accumulated other Comprehensive Income Components	Amount Reclassified From Accumulated Other Comprehensive Income			Affected Line Item In the Statement Where Net Income is Presented
	(in thousands)
Unrealized gains and losses on available-for-sale securities	$	290		Net securities gains
		(102	)	Income tax expense
	$	188		Net of tax

The following table summarizes the changes within each classification of accumulated other comprehensive income (loss) December 31, 2013:

Reclassifications Out Of Accumulated Other Comprehensive Income

Details about Accumulated other Comprehensive Income Components	Amount Reclassified From Accumulated Other Comprehensive Income			Affected Line Item In the Statement Where Net Income is Presented
	(in thousands)
Unrealized gains and losses on available-for-sale securities	$	274		Net securities gains
		(96	)	Income tax expense
	$	178		Net of tax

F-57

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014, 2013 and 2012

(Dollar amounts in thousands, except per share amounts)

NOTE 20 - SELECTED QUARTERLY DATA (UNAUDITED)

Presented below is a summary of the consolidated quarterly financial data for the years ended December 31, 2014 and 2013.

	2014
					Net		Provision				Earnings Per
	Interest		Interest		Interest		for Loan				Common Share
	Income		Expense		Income		Losses		Net Income		Basic		Diluted
Quarter ended
March 31	$	14,929	$	1,060	$	13,869	$	900	$	4,618	$	.60	$	.60
June 30		15,100		1,119		13,981		1,000		5,065		.66		.66
September 30		15,202		1,174		14,028		300		4,561		.59		.59
December 31		15,183		1,201		13,982		-		4,072		.53		.53

	2013
					Net		Provision				Earnings Per
	Interest		Interest		Interest		for Loan				Common Share
	Income		Expense		Income		Losses		Net Income		Basic		Diluted
Quarter ended
March 31	$	14,866	$	1,283	$	13,583	$	2,000	$	4,090	$	.55	$	.54
June 30		14,880		1,172		13,708		1,600		4,485		.60		.59
September 30		15,034		1,112		13,922		600		5,415		.72		.72
December 31		15,132		1,091		14,041		500		5,775		.76		.76

F-58

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

None.

Item 9A. Controls and Procedures

Disclosure Controls and Procedures

Disclosure controls and procedures are BKFC’s controls and other procedures that are designed to ensure that information required to be disclosed by BKFC in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure. Under the supervision, and with the participation of our management, including our chief executive officer and chief financial officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2014. In making this assessment, management used the 1992 criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based upon this evaluation, our chief executive officer and chief financial officer have concluded that these controls and procedures were effective at December 31, 2014 to ensure that information requiring disclosure be communicated to management in a timely manner and reported within the timeframe specified by the SEC’s rules and forms.

Changes in Internal Control Over Financial Reporting

During the fourth quarter of 2014, no change occurred in our internal control over financial reporting that materially affected, or is reasonably likely to materially affect, BKFC’s internal control over financial reporting.

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of The Bank of Kentucky Financial Corporation has prepared the consolidated financial statements in accordance with U.S. generally accepted accounting principles and is responsible for its accuracy. The financial statements necessarily include amounts that are based on management’s best estimates and judgments.

The Bank of Kentucky Financial Corporation’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Under the supervision and with the participation of management, including The Bank of Kentucky Financial Corporation’s principal executive officer and principal financial officer, the Company conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal Control – Integrated Framework established in 1992 issued by the Committee of Sponsoring Organizations of the Treadway Commission. Our evaluation included a review of the documentation of controls, evaluations of the design of the internal control system, and tests of the effectiveness of internal controls.

Based on The Bank of Kentucky Financial Corporation’s evaluation under the framework in Internal Control – Integrated Framework established in 1992, management concluded that internal control over financial reporting was effective as of December 31, 2014. Management’s internal control over financial reporting as of December 31, 2014 has been audited by Crowe Horwath LLP, an independent registered public accounting firm, as stated in their report which is contained herein.

Robert W. Zapp	Martin J. Gerrety
President  & CEO	Treasurer and Assistant Secretary

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The Independent Registered Public Accounting Firm’s opinion on the effectiveness of internal controls over financial reporting is included in their opinion in the financial statement section of this Annual Report.

Item 9B. Other Information

None.

PART III

Item 10. Directors, Executive Officers and Corporate Governance.

DIRECTORS, EXECUTIVE OFFICERS AND CONTROL PERSONS

(a) Identification of Directors

The following individuals serve on our board of directors:

Name	Age	Position(s) Held
Charles M. Berger	62	Director
John S. Cain	51	Director
Barry G. Kienzle	63	Director
John E. Miracle	72	Secretary and Director
Mary Sue Rudicill	71	Director
Ruth M. Seligman-Doering	74	Director
James C. Votruba	69	Director
Herbert H. Works	86	Chairman and Director
Robert W. Zapp	63	President, CEO and Director

Charles M. Berger has served as a director of both BKFC and the Bank since April 2002. He currently is chair of the Nominating and Corporate Governance Committee and serves as a member of the Executive, Trust and IT Committees of the Bank. Since 1975, Mr. Berger has been employed by Chas. H. Bilz Insurance Agency, Inc., an independent insurance agency based in Covington, Kentucky that offers commercial and personal insurance products and solutions and employee benefits services, and has served as its President since 1994. In such capacity, Mr. Berger has extensive experience in the financial services industry, overseeing the day-to-day operations of the Chas. H. Bilz Insurance Agency and its 28 employees in representing national and regional insurance carriers in offering a variety of products and services. He received his Bachelor of Science degree in business from Northern Kentucky University in 1975. As a result of these and other professional experiences, the Board of Directors has concluded that Mr. Berger should serve as a director because of his general business, risk management, finance and accounting, compliance, corporate governance and entrepreneurial experience, as well as his experience in the financial services industry and corporate management experience and skills.

John S. Cain has served as a director of both BKFC and the Bank since August 2010, is currently a member of the BKFC’s Audit Committee, and serves as a member of the Audit, Asset Quality Committees of the Bank, and Chair of the IT Committee of the Bank. Mr. Cain is the President of Wiseway Supply, a privately held electrical, plumbing and lighting supplies company based in Florence, Kentucky, and, as President, has been responsible for the day-to-day operations and strategic decisions of the family business since 1994. Mr. Cain has served on the Board of Directors of Elite Distributor Insurance Company since 2013. In 2011, Mr. Cain co-founded and serves on the Board of Managers and Credit Committee for Alliance Business Lending, LLC, an asset-based lender. Prior to that, Mr. Cain was an internal auditor and financial analyst for Procter & Gamble Company. Mr. Cain is the immediate past chairman of the board of directors for IMARK Electrical Buying Group from 2007. He obtained his undergraduate degree from the University of Kentucky in 1986 with a triple major in Accounting, Finance and German and received his Juris Doctor from Northern Kentucky University in 1993. Raised in Kentucky, Mr. Cain is heavily involved in the community, contributing his talents to many local organizations. He is past Chair of the Northern Kentucky Chamber of Commerce and was a member of Tri-County Economic Development Corporation until 2013. Mr. Cain was chosen to be a director due to his community leadership, management skills and entrepreneurial experiences. Mr. Cain brings to our board in-depth knowledge and experiences with various members of the community, his expertise on financial matters, as well as a perspective on making decisions necessary for growth and success.

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Barry G. Kienzle has served as a director of BKFC and the Bank since February 2007, and is currently the Chair of the Audit Committee of both BKFC and the Bank and serves as a member of the Nominating and Corporate Governance Committee and of the Compensation Committee. Mr. Kienzle also serves as a member of the Trust Committee and IT Committee of the Bank. Since 1987, Mr. Kienzle has been employed as the Senior Vice President and Chief Financial Officer (“CFO”) of Paul Hemmer Company, a real estate development and construction firm based in Fort Mitchell, Kentucky. Mr. Kienzle is also a member of the board of directors of the Paul Hemmer Company and serves as a director for affiliated entities Paul Hemmer Development Co., Paul Hemmer Development Co. III and Paul Hemmer Development Co IV. Mr. Kienzle is a member of the Ohio Society of CPAs and maintains an inactive Ohio CPA license. Mr. Kienzle is also a director of Northern Kentucky University Foundation, and serves as the chairman of its Audit Committee and a member of its Executive Committee and Finance Committee. As a result of these and other professional experiences, the Board of Directors has concluded that Mr. Kienzle should serve as a director because of his general business, finance and accounting, audit, compliance, corporate governance and corporate management experience, as well as his experience in the real estate industry. Mr. Kienzle’s experience as a CFO provides him with an in-depth understanding of generally accepted accounting principles and the application of such principles to various accounting estimates, accruals and reserves.

John E. Miracle, D.M.D., has served as a director of BKFC since its inception in 1994 and of the Bank since 1991. He is currently a member of the Compensation and Nominating and Corporate Governance Committees for BKFC and the Trust, Asset Quality and Executive Loan Committees for the Bank. In 2012 Dr. Miracle was also appointed to the non-executive role of Secretary for both BKFC and the Bank. Dr. Miracle had a private dental practice for 30 years and retired from practice in September 1999. As a result of these and other professional experiences, the Board of Directors has concluded that Dr. Miracle should serve as a director because of his general business and entrepreneurial experience. Through his long-term service on the Board of Directors of BKFC and the Bank, Dr. Miracle brings to our Board an in-depth knowledge of the business of the Bank and BKFC.

Mary Sue Rudicill has served as a director of BKFC since its inception in 1994 and of the Bank since 1991 and is presently a member of Audit and Compensation Committees of both the BKFC and the Bank. She is also a member of the CRA and Compliance Committees of the Bank. Ms. Rudicill has a background in accounting and finance, serving as an auditor and a member of the board of directors of Boone State Bank & Trust Company from 1971 to 1986. Ms. Rudicill is presently, and has served for the past 18 years as, the Chairperson of Belleview Sand and Gravel, Inc. and Gravelview Trucking Company, family owned businesses based in Burlington, Kentucky that supply sand, gravel, concrete, aggregates and masonry products throughout northern Kentucky. As Chairperson, Ms. Rudicill oversees all aspects of the business, finance and operations of Belleview Sand and Gravel, Inc. and Gravelview Trucking Company, which have a total of 20 employees. As a result of these and other professional experiences, including the experience and skills acquired by Ms. Rudicill during her long-term service on the boards of directors of financial services institutions, the Board of Directors has concluded that Ms. Rudicill should serve as a director because of her corporate management skills and experience, as well as her general business, sales, corporate governance, accounting and finance, audit and entrepreneurial experience.

Ruth M. Seligman-Doering has served as a director of BKFC since its inception in 1994 and of the Bank since its inception in 1990 and is presently a member of the Nominating and Corporate Governance Committee of BKFC, chair of the Trust Committee of the Bank and a member of the CRA and IT Committees of the Bank. Ms. Seligman-Doering is director of Charles Seligman Distributing Company, Inc., a family owned beverage wholesaler and distributor based in Walton, Kentucky and has also been its President and CEO since 1992, overseeing all aspects of its day-to-day operations and approximately 125 employees. As a result of these and other professional experiences, the Board of Directors has concluded that Ms. Seligman-Doering should serve as a director because of her corporate management skills and experience, as well as her general business, sales, corporate governance and entrepreneurial experience.

James C. Votruba has served as a director of BKFC since 2013. Dr. James C. Votruba is President Emeritus and Professor of Educational Leadership at Northern Kentucky University (“NKU”), where he served as President from 1997 to 2012. As President of NKU Dr. Votruba oversaw a $250 million university, a position which required business and financial decision making expertise. Dr. Votruba has served on the Board of Directors for Ohio National Mutual Holding Company since 2005, as well as serving on Ohio National Mutual Holding Company’s audit committee. As a result of these and other professional experiences, including the experience and skills acquired by Dr. Votruba during his long-term service on the boards of directors of another financial services institution, the Board of Directors has concluded that Dr. Votruba should serve as a director because of his corporate management skills and experience, as well as his general business, sales, corporate governance, accounting and finance, audit and entrepreneurial experience.

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Herbert H. Works has served as a director of BKFC since its inception in 1994 and a director of the Bank since 1992. Mr. Works has served as the Chairman of both BKFC and the Bank since 2012 and currently serves as a member of the Executive, Asset Quality, CRA and IT Committees of the Bank. From 2003 to 2012, Mr. Works served as the Secretary of both BKFC and the Bank. Mr. Works is the President of Boone-Kenton Lumber Company, located in Erlanger, Kentucky, which provides lumber and related products and services for the building industry. Mr. Works has been employed by that company for the last 27 years where he has overseen all aspects of its business and operations. As a result of these and other professional experiences, including the experience and skills acquired by Mr. Works during his service as Secretary of BKFC, the Board of Directors has concluded that Mr. Works should serve as a director because of his general business, corporate management, sales and entrepreneurial experience.

Robert W. Zapp has served as a director of BKFC since its inception in 1994 and a director of the Bank since its inception in 1990. Mr. Zapp is the President and CEO of the Bank and BKFC and has served in that capacity since each of their inceptions. Prior to that, Mr. Zapp was the President of Fifth Third Bank of Kenton County, formerly Security Bank, and resigned as President of such institution in order to participate in the organization of the Bank. Prior to that, Mr. Zapp served as the Executive Vice President over lending and on the board of directors for Boone State Bank in northern Kentucky. As a result of these and other professional experiences, including the experience and skills acquired by Mr. Zapp during his service in various management positions within BKFC and the Bank, as well as his extensive experience in the financial services industry, the Board of Directors has concluded that Mr. Zapp should serve as a director because of his general business, risk management, corporate governance, corporate management, bank regulatory, legal and public company experience.

(b) Identification of Executive Officers

The executive officers of BKFC as of the date of this Form 10-K are listed below. All executive officers hold office until their successors are appointed. Executive officers are appointed annually by the Board of Directors.

Name	Age	Position
Herbert H. Works	86	Chairman
Robert W. Zapp	63	President and Chief Executive Officer
John E. Miracle	72	Secretary
Martin J. Gerrety	51	Treasurer and Assistant Secretary

Biographical information regarding each of these executive officers, except Mr. Gerrety, is set forth above. Biographical information regarding Mr. Gerrety is set forth below.

Martin J. Gerrety was Senior Vice President and Chief Financial Officer of Peoples Bank of Northern Kentucky from 1996 until 2002, where he oversaw all aspects of the finance and accounting functions as well as a staff of finance professionals. He has served as both Treasurer and Assistant Secretary of BKFC since May 2003, and as Senior Vice President, CFO of the Bank since 2002 until July of 2005, and as Executive Vice President, CFO of the Bank since July of 2005. In those capacities he is responsible for the financial reporting and accounting functions for both BKFC and the Bank. He received his Bachelor of Science degree from Northern Kentucky University in 1985 and his Masters of Business Administration from Xavier University in 1995.

(c) Identification of Certain Significant Employees

Not Applicable.

(d) Family Relationships

Not Applicable.

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(e) Business Experience

The business experience of each of our current directors and executive officers is set forth in Part III, Item 10(a), “Identification of Directors” and Part III, Item 10(b), “Identification of Executive Officers,” respectively, of this Annual Report on Form 10-K.

The directorships currently held, and held during the past five years, by each of our directors in any company with a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended, or subject to Section 15 of such Act or any company registered as an investment company under the Investment Company Act of 1940, as amended, are set forth in Part III, Item 10(a), “Identification of Directors” of this Annual Report on From 10-K.

(f) Involvement in Certain Legal Proceedings

To the best of our knowledge, none of our directors or executive officers that served during the year ended December 31, 2014 or currently has been involved during the past ten years in any legal proceedings required to be disclosed pursuant to Item 401(f) of Regulation S-K.

(g) Promoters and Control Person

Not applicable.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Under the federal securities laws, BKFC’s directors and executive officers and persons holding more than ten percent of the outstanding Shares are required to report their ownership of Shares and changes in such ownership to the SEC and BKFC. Based solely on its review of the copies of such reports, BKFC believes that, for the year ended December 31, 2014, all Section 16(a) filing requirements applicable to BKFC’s officers, directors and greater than ten percent stockholders were complied with on a timely basis, except for a Form 4 for Barry G. Kienzle for the acquisition of 1,000 shares filed on January 8, 2014, a Form 4 for Robert W. Zapp for the exercise of options and forfeiture of 100 shares filed on February 4, 2014, and a voluntarily filed Form 4 for John S. Cain for the acquisition by gift of 28,600 shares filed on July 17, 2014.

CODE OF ETHICS

All BKFC and Bank employees and directors, including BKFC’s principal executive officer, principal financial officer and principal accounting officer or persons performing similar functions, are required to abide by the Bank’s Code of Ethics (the “Code of Ethics”). Accordingly, BKFC does not maintain a separate code of ethics applicable solely to its principal executive officer, principal financial officer and/or its principal accounting officer or persons performing similar functions. The BKFC Board of Directors believes that this Code of Ethics substantially conforms to the code of ethics required by the rules and regulations of the Securities and Exchange Commission (the “SEC”). The Code of Ethics requires that the Bank’s directors, executive officers and employees avoid conflicts of interest, comply with all laws and other legal requirements, conduct business in an honest and ethical manner and otherwise act with integrity and in the Bank’s best interest. Under the terms of the Code of Ethics, directors, executive officers and employees are required to report any conduct that they believe in good faith to be an actual or apparent violation of the Code of Ethics.

BKFC will provide a copy of the Code of Ethics without charge to any person upon written request to BKFC at its principal executive office at 111 Lookout Farm Drive, Crestview Hills, Kentucky 41017, Attention: President.

Procedures for Stockholder Nominations to the Board of Directors

No material changes to the procedures for nominating directors by our stockholders were made during the year ended December 31, 2015.

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Audit Committee and Audit Committee Financial Expert

The Audit Committee of BKFC consisted of Messrs. Humpert, Cain, Kienzle and Ms. Rudicill in 2014, each of whom was “independent” as that term is defined in NASDAQ Rule 5605(a)(2) and met the criteria for independence set forth in Rule 10A-3 of the Exchange Act. The Board has determined that each Audit Committee member is financially literate and has determined that Mr. Kienzle is an “audit committee financial expert” as defined under SEC rules and regulations by virtue of his background and experience, as described in his biography set forth in Part III, Item 10(a), “Identification of Directors” of this Annual Report on From 10-K.

Item 11. Executive Compensation.

COMPENSATION DISCUSSION AND ANALYSIS

This Compensation Discussion and Analysis explains BKFC’s compensation philosophy, policies and practices with respect to the President and CEO, and Treasurer and Assistant Secretary, both of whom are referred to collectively as the “Named Executive Officers.”

Responsibility for Executive Compensation Program

The Compensation Committee of the Board of Directors is responsible for establishing compensation policies with respect to the President and CEO and the Treasurer and Assistant Secretary, whose compensation is listed in the “Executive Compensation—Summary Compensation Table” below, and overseeing their compensation. The Compensation Committee consults with the President and CEO in setting the compensation for BKFC’s Treasurer and Assistant Secretary.

At the 2014 annual meeting of stockholders of BKFC, pursuant to a non-binding, advisory vote, the stockholders approved the compensation of BKFC’s Named Executive Officers as disclosed in the proxy statement. The Compensation Committee has considered the results of this advisory vote and believes that it shows support by BKFC’s stockholders for BKFC’s compensation philosophy and the executive compensation programs that implement BKFC’s compensation philosophy. BKFC has not significantly changed its executive compensation programs following the advisory vote. The Board of Directors has determined that stockholder non-binding, advisory vote on BKFC’s executive compensation shall occur every year.

Compensation Objectives

The Compensation Committee seeks to achieve three broad goals in connection with the compensation program and decisions regarding Named Executive Officers. First, the Compensation Committee structures the compensation program in a manner that the Compensation Committee believes will enable BKFC and the Bank to retain the Named Executive Officers. Second, the Compensation Committee establishes the compensation program for the Named Executive Officers to reward them for the achievement of business objectives of BKFC and the Bank. Finally, the compensation programs for the Named Executive Officers are intended to provide each respective officer with an equity interest in BKFC so as to link a portion of his compensation with the performance of BKFC’s Shares.

Neither BKFC nor the Bank have entered into employment agreements or separate change-of-control or severance agreements with the Named Executive Officers in connection with BKFC and the Bank’s compensation programs because BKFC does not favor treatment of the Named Executive Officers in those circumstances beyond that provided for employees generally.

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Compensation Components

The key components of the compensation program for the Named Executive Officers consist of a base salary, a performance-based cash bonus plan and participation in various performance-based and other compensation plans, including BKFC’s 1997 Stock Option and Incentive Plan (the “1997 Stock Option Plan”) (which has expired), 2007 Stock Option Plan (which has expired) and 2012 Stock Incentive Plan, Pension Plan, Contribution Plan and Insurance Plan, as further described below.

In determining annual base salary and performance-based compensation, such as cash bonuses, the Compensation Committee believes that establishing performance-based goals for the Bank provides an opportunity to align awards with performance. The base salaries for the Named Executive Officers are established from year to year by the Board of Directors, based on the recommendations of the Compensation Committee. Bonus compensation is determined as described below.

At the end of each calendar year, the Compensation Committee reviews the past year’s performance by the Named Executive Officers and also reviews any matters which may have occurred during the prior year that represented extraordinary services or accomplishments or any extraordinary matters which were beyond the Named Executive Officer’s control. Based upon the foregoing, the Compensation Committee formulates its recommendations pertaining to the Named Executive Officers and submits them for approval by the Board of Directors.

The key components of BKFC’s executive compensation program are set forth in greater detail below.

Base Salary. BKFC’s base salary program is designed to provide a competitive base salary to management and other employees. The salary levels of all employees, including the Named Executive Officers, are set to reflect the duties and levels of responsibilities inherent in the position and the competitive conditions in the banking business in BKFC’s market area. Comparative salaries paid by peer financial institutions are considered in establishing the salary for a given position. Particularly in determining the Named Executive Officers’ base salaries, the Compensation Committee utilizes surveys prepared by trade groups and other independent sources of salaries paid to executive officers of other bank holding companies, non-diversified banks and other financial institutions similar in size, market capitalization and other characteristics. The base salaries for the President and CEO and the Treasurer and Assistant Secretary are reviewed annually by the Compensation Committee, taking into account the competitive level of pay as reflected in the surveys consulted. In setting base salaries, the Compensation Committee also considers a number of factors relating to the individual, including individual performance, historic salary levels, general market conditions, job responsibilities, level of experience, ability and knowledge of the position and complexity of BKFC’s operations. These factors are considered in the aggregate and none of the factors is accorded a specific weight. See “Executive Compensation—Summary Compensation Table” for base salaries paid to the Named Executive Officers during the 2014 fiscal year.

Bonus Plan. BKFC’s bonus plan provides the Named Executive Officers with additional incentive to attain company-wide financial objectives and individual performance goals. For fiscal years 2004 through 2007, the Board of Directors established a variable cash bonus award of up to 49% of base salary for each such year, based upon the Bank’s achievement of levels of return on equity (“ROE”), return on assets (“ROA”) and asset growth. For 2008 and thereafter, subject to the right of the Board to make changes to the plan, the Board of Directors revised its criteria under the bonus plan. The criteria established for 2008 and thereafter provide for potential bonus awards based upon the increase in BKFC’s diluted earnings per share as compared to the prior fiscal year. The minimum level of increase in diluted earnings per share under the bonus plan is 3%, corresponding to a possible discretionary bonus award of 5% of the Named Executive Officer’s base salary. The maximum level of increase in diluted earnings per share under the bonus plan is 15%, corresponding to a possible discretionary bonus award of 50% of the Named Executive Officer’s base salary. Varying levels of performance in-between these minimum and maximum levels establish possible discretionary bonus awards ranging from 5% to 50%. The Compensation Committee, in connection with its annual performance review of the Named Executive Officers, considers making discretionary bonus awards under this program in light of the foregoing criteria as well as the individual performance and other relevant factors.

As a result of BKFC’s strong core earnings and the successful negotiation of the transaction with BB&T, the Compensation Committee recommended, and the Board of Directors approved, awarding the President and CEO a bonus equal to 42% and the Treasurer and Assistant Secretary a bonus equal to 30% of their respective base salary for 2014 under the bonus plan applicable for 2014.

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Long-Term Equity Incentive Compensation Program. BKFC’s long-term incentive compensation consists of incentive stock options (“ISOs”), nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares and performance units related to BKFC’s common stock.

1997 Stock Option Plan and 2007 Stock Option Plan. Both of BKFC’s 1997 Stock Option Plan and 2007 Stock Option Plan, which consist entirely of stock option awards to purchase shares of BKFC’s common stock, encourage directors, officers, managerial and key employees to focus on the long-term growth of BKFC and the Bank since the value of these awards depends on their performance and BKFC’s future stock value. Both plans were designed to be administered by a committee composed of members of the Board of Directors of BKFC (a “Stock Option Committee”). The Stock Option Committee determined the proportions and terms of stock option grants. In deciding to award options, the Stock Option Committee considered a number of factors, including the number of options outstanding or previously granted and the aggregate size of current awards. All stock options that have been granted under these two plans have an exercise price equal to the fair market value of BKFC’s Shares at the time of grant and are exercisable within a 10-year or less period. The 1997 Stock Option Plan expired on March 21, 2007 and was replaced with the 2007 Stock Option Plan, which was adopted by the Board of Directors on March 16, 2007 upon the recommendation of the Compensation Committee, and approved by stockholders at BKFC’s 2007 annual meeting on April 20, 2007. The 2007 Stock Option Plan expired on April 20, 2012 and was replaced with the 2012 Stock Incentive Plan, which was adopted by the Board of Directors on March 16, 2012 and approved by stockholders at BKFC’s 2012 annual meeting on April 20, 2012.

The 2007 Stock Option Plan provides that up to a maximum of 1,200,000 shares of BKFC’s common stock (subject to certain adjustments such as stock splits, stock dividends or recapitalizations) are available for issuance thereunder. Of these shares, options for up to 360,000 shares may be awarded to non-employee directors and non-employee officers, and options for up to 840,000 shares may be awarded to employees. No more than 25% of the shares subject to options may be awarded to any individual who is an employee of BKFC, no more than 5% of such shares may be awarded to any director or officer who is not an employee, and no more than 30% of such shares may be awarded to non-employee directors and non-employee officers in the aggregate. During fiscal year 2013, no options were awarded under the 2007 Stock Option Plan.

2012 Stock Incentive Plan. The 2012 Stock Incentive Plan, which authorizes the grant of ISOs, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares and performance units, permits BKFC to have significant flexibility in determining the types and specific terms of awards made to participants. The purpose of the 2012 Stock Incentive Plan is to assist BKFC in (i) attracting and retaining employees and directors of, and independent contractors to, BKFC; (ii) motivating such individuals by means of performance-related incentives to achieve longer-range performance goals and (iii) enabling such individuals to participate in the long-term growth and financial success of BKFC. The 2012 Stock Incentive Plan permits BKFC to have significant flexibility in determining the types and specific terms of awards made to participants based on then-current objectives for aligning compensation with stockholder value. The 2012 Stock Incentive Plan is administered by the Compensation Committee.

The 2012 Stock Incentive Plan provides that up to a maximum of 1,000,000 Shares (subject to certain adjustments such as stock splits, stock dividends or recapitalizations) are available for issuance thereunder. Of these shares, (a) no more than 750,000 Shares may be issued as ISOs; (b) no more than 250,000 Shares may be issued as nonqualified stock options; (c) no more than 400,000 Shares may be issued pursuant to restricted stock; and (d) no more than 400,000 Shares may be issued pursuant to restricted stock units.

In addition, under the 2012 Stock Incentive Plan, in a given calendar year, no participant may (a) be granted stock options and tandem stock appreciation rights that are related to stock options for more than 25,000 Shares; (b) receive Shares pursuant to the grant of any freestanding SARs for more than a total of 25,000 Shares;(c) receive awards of performance shares in excess of 10,000 Shares; (d) receive performance share units of more than 10,000 Shares or (e) receive awards paid in cash having an aggregate dollar value in excess of $250,000.

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Each Share issued or transferred pursuant to an award of options or stock appreciation rights will reduce the aggregate plan limit of one million Shares by one Share. Each Share issued or transferred (and in the case of restricted stock, restricted stock units, performance shares and performance units, released from all substantial risk of forfeiture) pursuant to an award other than options or stock appreciation right will reduce the aggregate plan limit of one million Shares by 2.50 Shares. The following are not included in calculating the Share limitations set forth above: (i) awards that are settled in cash and (ii) any Shares subject to an award under the 2012 Stock Incentive Plan if the award is forfeited, cancelled, terminated, expired or lapsed for any reason without the issuance of Shares underlying the award. Any Shares that again become available for issuance as described above will be added back to the aggregate plan limit in the same manner such Shares were originally deducted from the aggregate plan limit.

In January, 2014, the Board of Directors approved awarding the President and CEO 455 Restricted Stock Units under the 2012 Stock Incentive Plan which were exchanged for 455 Shares in December, 2014 and the Treasurer and Assistant Secretary 341 Restricted Stock Units under the 2012 Stock Incentive Plan which were exchanged for 341 Shares in December, 2014. Also In January, 2014 the and the Board of Directors approved, awarding the Treasurer and Assistant Secretary 661 Restricted Stock Units under the 2012 Stock Incentive Plan in the form of a long term incentive award that vest in December of 2016 if certain financial goals are achieved. For the awards granted to non-employee directors in 2014 pursuant to the 2012 Stock Incentive Plan, see the section entitled “Director Compensation – Restrictive Stock Unit Program for Non-Employee Directors and General Counsel.”

Retirement Benefits. BKFC’s 401(k) plan has proven to be an important retention tool for BKFC and the Bank. The 401(k) plan is a broad-based tax-qualified defined contribution plan that provides employees with valuable retirement benefits. Under the 401(k) plan, BKFC provides participants with the opportunity to defer their compensation for retirement up to the maximum amount permitted by law.

Effective September 1, 2003, the Bank’s Board of Directors adopted The Bank of Kentucky, Inc. Executive Private Pension Plan (the “Pension Plan”) to provide supplemental retirement income for eligible employees. The Pension Plan is a defined benefit pension plan which covers any person employed by the Bank who is determined by the Bank to be a member of management and who is designated as an eligible employee under the Pension Plan.

Eligible employees are entitled to receive a pension benefit of 30% of their “final average compensation” if employment is terminated on or after the date on which the eligible employee turns 65. The term “final average compensation” is defined to mean the annual adjusted compensation of a participant averaged over the five consecutive plan years from the date of participation which produces the highest annual average, provided that if the participant has less than five consecutive plan years of service, final average compensation will be based on adjusted compensation for those years of service from the date of employment to the date of termination. The benefits under the Plan shall be paid in the form of an immediate 15-year term annuity. There are currently 16 employees of the Bank who are considered to be eligible employees of the Pension Plan, all of whom participate in the Pension Plan, including Messrs. Zapp and Gerrety. The Pension Plan was subsequently amended to add the definition of “separation from service” to comply with Section 409A of the Internal Revenue Code of 1986, as amended (the “Code” ”) and again amended on October 29, 2014 to eliminate the existing lump sum provisions upon a “separation from service” prior to the “normal retirement age,” as such terms are defined in the Pension Plan, to provide the commencement date of a term annuity and modify the definition of years of service to provide for 2015 service.

Other Compensation. Effective September 1, 2003, the Board of Directors of the Bank adopted an Executive Deferred Contribution Plan (the “Contribution Plan”) providing certain employees an opportunity to defer the receipt of compensation pursuant to Section 451 of the Code. The Contribution Plan is intended as an unfunded arrangement for the benefit of a select group of management employees. The Contribution Plan allows participants to defer a portion of their annual compensation into a deferred compensation account which is deemed to be invested among such categories of investments as may be made available under the Contribution Plan, with the participant’s account being credited or debited with the increase or decrease in the realizable net asset value or credited interest, as applicable, of the designated deemed investments. The Contribution Plan was subsequently amended to update the definitions of “disability” and “separation from service” to comply with Section 409A of the Code. Additionally, the Contribution Plan was amended to expand the securities to which a participant’s deferred compensation account may be directed to include common or preferred stock of BKFC or any affiliate. In connection with the amendments to the Contribution Plan, BKFC also created a nonqualified grantor trust, commonly known as a rabbi trust, the assets of which may be used to pay participants’ benefits in the Contribution Plan.

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Employees are provided with coverage under medical, life insurance and disability plans on terms consistent with industry practice. Other coverage, such as dental insurance, is available to employees on a voluntary basis. Employees are provided with access to a flexible spending plan which allows employees to set aside pre-tax dollars to pay for certain benefits.

Effective September 1, 2003, the Board of Directors of the Bank adopted a Group Insurance Endorsement Plan (the “Insurance Plan”) to supplement insurance death protection to certain employees. The Insurance Plan provides a death benefit to the policy’s beneficiaries equal to two times such participant’s annual salary for the year of his or her death.

Detailed information regarding other compensation is provided in footnote 2 to the Summary Compensation Table below. In general, BKFC believes that perquisites should not constitute a consequential portion of any executive officer’s compensation.

Tax and Accounting Considerations

In consultation with advisors, the tax and accounting treatment of each of BKFC’s compensation programs is evaluated at the time of adoption and annually to ensure that we understand the financial impact of each program on BKFC. BKFC’s analysis includes a review of recently adopted and pending changes in tax and accounting requirements. During fiscal 2014, we continued to consider the implications of significant developments in the tax and accounting area.

Section 162(m) of the Code limits the Bank’s Federal income tax deduction for certain executive compensation in excess of $1 million paid to each of the Named Executive Officers. The $1 million deduction limit does not apply, however, to “performance-based compensation,” as that term is defined in Section 162(m)(4)(C) of the Code and the regulations promulgated thereunder. The Compensation Committee recognizes the possibility that if the amount of the base salary of a Named Executive Officer, and other compensation not described in the preceding paragraph, exceeds $1 million, it may not be fully deductible for Federal income tax purposes. The Compensation Committee will make a determination at any such time whether to authorize the payment of such amounts without regard to deductibility or whether the terms of such payment should be modified as to preserve any deduction otherwise available. To date, the compensation of the Named Executive Officers has not approached $1 million, nor is it expected to in the near future.

Stock Ownership Requirements

BKFC has not adopted formal stock ownership requirements for the Named Executive Officers and members of the Board of Directors. As a practical matter, the Named Executive Officers and directors hold significant interests of BKFC stock, which they have accumulated primarily through individual purchases and receipt of stock option awards.

Under our Restrictive Stock Unit Program for Non-Employee Directors and General Counsel established in 2012, the award of restricted stock units places a restriction on the restricted stock of BKFC subsequently issued in exchange for such restricted stock units. The restriction requires that the first $60,000 worth of restricted stock must continue to be held by the recipient until one year after he or she ceases to serve in the applicable capacity, or sooner dies.

Compensation for the Named Executive Officers in 2013

Chief Executive Officer Compensation. In determining Mr. Zapp’s compensation for fiscal 2014, the Compensation Committee focused on BKFC’s financial performance during the year, the number of initiatives begun, expanded or completed by BKFC and the Bank, competitive levels of compensation for CEOs managing operations of similar size, complexity and performance level, the importance of retaining a President and CEO with the strategic, financial and leadership skills to ensure BKFC’s continued growth in the foreseeable future, and the challenging conditions facing the financial services sector at the present time and in the coming months. Under the bonus plan for Mr. Zapp, he was eligible to earn a bonus of 0% to 50% of his base salary based on BKFC’s achievement of the financial performance target based on diluted earnings per share, described above. The Compensation Committee recommended, and the Board of Directors approved, a bonus to Mr. Zapp for the 2014 fiscal year in the amount of $220,000, or 42% of his base salary. A total of 455 restricted stock units were granted, and subsequently vested, to Mr. Zapp under the 2012 Stock Incentive Stock Plan for the 2014 fiscal year.

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Treasurer Compensation. The base salary for Mr. Gerrety is also set by the Compensation Committee, based upon recommendations provided by the President and CEO, in a manner consistent with the base salary guidelines applied to the President and CEO. In general, the Compensation Committee considers the Bank’s financial performance, peer group financial performance and compensation survey data when making decisions regarding other executive officers’ compensation, including salary, bonus and awards under the 2012 Stock Incentive Plan. The Compensation Committee also considers the challenging conditions facing the financial services sector at the present time and in the coming months. Under the bonus plan for Mr. Gerrety, he was eligible to earn a bonus of 0% to 50% of his base salary based on BKFC’s achievement of the financial performance target based on diluted earnings per share, described above. The Compensation Committee recommended, and the Board approved, a bonus to Mr. Gerrety for the 2014 fiscal year in the amount of $60,300, or 30% of his base salary. A total of 351 restricted stock units were granted, and subsequently vested, to Mr. Gerrety under the 2012 Stock Incentive Stock Plan for the 2014 fiscal year. Mr. Gerrety was also granted 661 restricted stock units as a long term incentive, these units vest in December 2016 if certain financial performance goals are reached.

Economic Considerations. The Compensation Committee’s decisions with respect to Mr. Zapp’s and Mr. Gerrety’s respective compensation reflect the significant issues existing for financial institutions in the current and anticipated economic environment, including mortgage defaults, decline in housing prices, other credit defaults, other bank failures, unemployment rates and special factors for individual markets, such as the economy in northern Kentucky. BKFC executives have, for the most part, avoided the major mistakes of other financial institutions, but nonetheless must deal with the circumstances created by these other institutions.

The Compensation Committee will continue to review the Named Executive Officers’ compensation and consider any changes to the terms of existing compensation arrangements with such Named Executive Officers as it deems advisable to accomplish the objectives of BKFC’s executive compensation program, which are described above.  

EXECUTIVE COMPENSATION

The following table sets forth the compensation paid by BKFC in 2014, 2013 and 2012 to BKFC’s Named Executive Officers (its Chief Executive Officer and its Treasurer and Assistant Secretary), whose total compensation exceeded $100,000 for fiscal year 2014. BKFC’s executive officers are compensated by BKFC’s subsidiary, the Bank. Except for the Named Executive Officers, no executive officer of BKFC received more than $100,000 in total compensation payments from the Bank during the year ended December 31, 2014.

Summary Compensation Table

Name and Principal Position	Year	Salary ($)		Bonus ($)		Stock(5) Awards		Option Awards ($)		Non-equity Incentive Plan Compensation		Change in Pension Value and Non- Qualified Deferred Compensation Earnings ($)(1)		All Other Compensation ($)(2)		Total ($)
Robert W. Zapp(3)	2014		524,943		220,000		16,000		—		—		525,337		30,334		1,316,614
President and CEO	2013		511,000		153,300		12,000		—		—		333,216		28,111		1,037,627
	2012		493,510		111,600		—		—		—		214,422		23,964		843,496
Martin J. Gerrety(4)	2014		200,712		60,300		37,105		—		—		161,241		6,361		465,719
Treasurer and	2013		193,500		52,245		12,000		—		—		55,595		6,228		319,568
Assistant	2012		187,692		42,300		—		—		—		70,941		4,683		305,616

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(1)     Assumptions used in calculating the change in actuarial value of the defined benefit above include a discount rate of 4.10% for December 31, 2014, 4.0% for December 31, 2013, and 2012.

(2) The amounts specified in the “All Other Compensation” column for 2014 include the following:

Name	Perquisites & Other Personal Benefits (a) ($)		Bank Contributions to Profit Sharing Plan ($)		Bank Matching Contributions to 401(k) Plan ($)		Life Insurance Premiums ($)		Total All Other Compensation ($)
Robert W. Zapp		11,551		-		8,750		10,033		30,334
Martin J. Gerrety		-		-		5,335		1,026		6,361

(a) Other benefits for Mr. Zapp included $7,309 in country club dues and $4,242 for personal use of an automobile.

(3) Salary includes deferral of $20,733 at the direction of Mr. Zapp pursuant to the Contribution Plan.

(4) Salary includes deferral of $10,000 at the direction of Mr. Gerrety pursuant to the Contribution Plan.

(5) Includes 661 shares issued to Mr. Gerrety under the Long Term Incentive Plan.

Stock Option Plans

At the 1997 annual meeting of stockholders of BKFC, the stockholders approved the 1997 Stock Option Plan, providing for the award of options to purchase up to 1,080,000 Shares. Options to purchase 44,450 Shares were outstanding as of December 31, 2014 under the 1997 Stock Option Plan. The outstanding options have exercise prices ranging from $25.00 to $26.25 and were granted to officers and employees of BKFC and the Bank. In fiscal year 2014, options to purchase a total of 1,800 Shares were forfeited and 54,505 Shares were acquired upon the exercise of options. All of the numbers of Shares contained in this paragraph are adjusted for stock dividends issued in 1997, 1998 and 1999. The 1997 Stock Option Plan expired on March 21, 2007.

On March 16, 2007, upon the recommendation of the Compensation Committee, the Board of Directors of BKFC adopted the 2007 Stock Option Plan, which was approved by BKFC stockholders at BKFC’s 2007 annual meeting on April 20, 2007, replacing the 1997 Stock Option Plan. The 2007 Stock Option Plan provides that up to a maximum of 1,200,000 Shares of BKFC’s common stock (subject to certain adjustments such as stock splits, stock dividends or recapitalizations) are available for issuance thereunder. There were 26,230 options to purchase Shares outstanding as of December 31, 2014 under the 2007 Stock Option Plan. The outstanding options have exercise prices ranging from $20.25 to $22.51 and were granted to officers and employees of BKFC and the Bank. In fiscal year 2014, options to purchase a total of 2,430 Shares were forfeited and 32,604 Shares were acquired upon the exercise of options.

On March 16, 2012, the Board of Directors of BKFC adopted the 2012 Stock Incentive Plan, which was approved by BKFC stockholders at BKFC’s 2012 annual meeting on April 20, 2012, replacing the 2007 Stock Option Plan. No options were awarded under the 2012 Stock Option Plan in 2012. The 2012 Stock Incentive Plan provides that up to a maximum of 1,000,000 Shares of BKFC’s common stock (subject to certain adjustments such as stock splits, stock dividends or recapitalizations) are available for issuance thereunder. There were no options to purchase Shares outstanding as of December 31, 2014 under the 2012 Stock Incentive Plan. There were 10,820 restricted stock units outstanding as of December 31, 2014 under the 2012 Stock Incentive Plan. In fiscal year 2014, restricted stock units granted and vested totaled 19,094 and 12,655 respectively and 113 restricted stock units were forfeited. The material terms of the 1997 Stock Option Plan, the 2007 Stock Option Plan and the 2012 Stock Incentive Plan are outlined below.

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Material Terms of the 1997 and 2007 Stock Option Plans

The material terms of both the 1997 Stock Option Plan and the 2007 Stock Option Plan (collectively, the “Old Plans”) are substantially similar and are therefore discussed together. Options granted under the Old Plans may have been either ISOs within the meaning of Section 422 of the Code, or “Non-qualified Stock Options.” The option exercise price for ISOs and Non-qualified Stock Options granted to employees may be determined by the Stock Option Committee at the time of the grant, but could not be less than 100% of the fair market value of the Shares on the date of the grant. The exercise price for options granted to non-employee directors and non-employee officers was the fair market value of the Shares on the date of the grant. No option will be exercisable after the expiration of ten years from the date of the grant. However, if an ISO was granted to a participant owning more than 10% of BKFC’s outstanding Shares at the time the ISO is granted, the exercise price of the ISO could not be less than 110% of the fair market value of the Shares on the date of the grant and the ISO shall not be exercisable after the expiration of five years from the date of the grant.

An option may not be transferred or assigned other than by will or in accordance with the laws of descent and distribution. If a participant is “terminated for cause,” as defined in the Old Plans, any option which has not been exercised shall terminate as of the date of such termination for cause.

BKFC received no monetary consideration for the granting of options under the Old Plans. Upon the exercise of options, BKFC will receive payment in cash or, if acceptable to the Stock Option Committee, Shares of BKFC or surrendered outstanding options.

Material Terms of the 2012 Stock Incentive Plan

The 2012 Stock Incentive Plan authorizes the grant of ISOs, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares and performance units.

Options granted under the 2012 Stock Incentive Plan may be ISOs or nonqualified stock options. A stock option entitles the participant upon exercise to purchase Shares from BKFC at the option price. The option price is determined by the Compensation Committee at the time of grant and must not be less than (a) 100% of the closing price of BKFC Shares on the date of grant (110% of the closing price in the case of ISOs for more than 10% stockholders) and (b) the par value per share of BKFC Shares. Unless an individual award agreement provides otherwise, the option price may be paid by the participant in cash or cash equivalents, and, when permitted by the Compensation Committee and applicable law and regulations, with Shares, or with a combination of cash and Shares. Options are subject to restrictions on exercise following termination of employment or service. The option term may not exceed ten (10) years (or five (5) years with respect to ISOs for more than 10% stockholders). The maximum compensation payable pursuant to an option is equal to the number of shares granted (or exercised) multiplied by the difference between the fair market value of the Shares on the date of exercise and the option price.

Stock appreciation rights (“SARs”) may be granted under the 2012 Stock Incentive Plan to the holder of an option with respect to all or a portion of the Shares subject to the related option (a “Tandem SAR”) or may be granted separately to a participant. The consideration to be received by the holder of a SAR may be paid in cash, Shares (valued at fair market value on the date of the SAR exercise), or a combination of cash and Shares, as determined by the Compensation Committee. Upon exercise of a SAR, the holder of the SAR is entitled to receive payment from BKFC in an amount determined by multiplying (a) the difference between the fair market value of a Share on the date of exercise over the base price per share of such SAR by (b) the number of Shares with respect to which the SAR is being exercised. The base price may be no less than 100% of the fair market value per share of the BKFC Shares on the date the SAR is granted. No SAR may be exercised more than 10 years after it was granted, or such shorter period as may apply to related options in the case of Tandem SARs.

The Compensation Committee may also grant awards to eligible participants consisting of restricted stock or restricted stock units that are subject to certain conditions, which conditions must be met in order for the restricted award to vest and be earned (in whole or in part), and no longer be subject to forfeiture. These conditions may include, but are not limited to, attainment of performance objectives during a certain period of time. Restricted stock awards are payable in Shares. Restricted stock units may be payable in cash or whole Shares, or partly in cash and partly in whole Shares, as determined by the Compensation Committee.

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The Compensation Committee may also grant awards, consisting of performance shares and/or performance units, to participants. An award of a performance share is a grant of a right to receive Shares or the cash value thereof, or a combination thereof, which is contingent upon the achievement of performance or other objectives during a specified period and which has a value on the date of grant equal to the fair market value of a Share. An award of a performance unit is a grant of a right to receive Shares or a designated dollar value amount of Shares, or a combination thereof, which is contingent upon the achievement of performance or other objectives during a specified period, and which has an initial value established by the Compensation Committee at the time of grant. A performance award may be settled in cash, Shares or a combination thereof, as determined by the Compensation Committee.

The Compensation Committee may, in its sole discretion, provide that awards (other than options and SARs) granted under the 2012 Stock Incentive Plan earn dividends or dividend equivalents. Such dividends or dividend equivalents may be paid currently or may be credited to a participant’s account, subject to such restrictions and conditions as the Compensation Committee may establish.

ISOs are not transferable other than by will or the laws of intestate succession or, in the Compensation Committee’s discretion, as may otherwise be permitted in accordance with Code Section 422 and related regulations. Nonqualified options and SARs are not transferable other than by will or the laws of intestate succession, except as may be permitted by the Compensation Committee in a manner consistent with applicable law, including the registration provisions of the Securities Act of 1933, as amended. Restricted stock and restricted stock units that have not vested are not transferable, and performance units and performance shares that have not been earned are not transferable other than by will or the laws of intestate succession.

Outstanding Equity Awards at December 31, 2014

The following table provides information as of December 31, 2014 regarding BKFC’s option awards under the 1997 and 2007 Stock Option Plans and 2012 Stock Incentive Plan. There were no other outstanding equity awards.

Option Awards

Name(1)	Grant Date	Number of Securities Underlying Unexercised Options(#)  Exercisable(2)		Number of Securities Underlying Unexercised Options(#)  Unexercisable(3)		Option Exercise  Price ($)(4)		Option Expiration Date(5)
Robert W. Zapp
	1/21/05(6)		—		4,800		26.45	1/21/15
	1/20/06(7)		—		4,000		25.00	1/20/16
	1/19/07(8)		—		3,800		26.25	1/19/17
	1/18/08(9)		—		4,440		22.51	1/18/18
	1/19/09(10)		—		4,760		20.98	1/16/19
Martin J. Gerrety
	1/20/06(11)		3,000		—		25.00	1/20/16
	1/19/07(11)		3,000		—		26.25	1/19/17
	1/18/08(12)		2,700		—		22.51	1/18/18
	1/16/09(12)		2,200		—		20.98	1/16/19

(1) The grant date of each award is noted to the right of the name of each Named Executive Officer.

(2) Shows the number of Shares underlying vested (exercisable) but not exercised stock options at the fiscal year ended December 31, 2014.

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(3) Shows the number of Shares underlying unexercised options that are unexercisable because they had not vested at the end of the fiscal year.

(4) Shows the exercise price to be paid by the Named Executive Officer in order to acquire the shares subject to the option.

(5) Shows the date that each option expires, if not previously exercised. Under the 1997 Stock Option Plan, the option expiration date is accelerated for officers whose employment is terminated upon death or disability of the Named Executive Officer.

(6) Granted pursuant to the 1997 Stock Option Plan and vest as follows: 1,420 shares on 1/21/13; 3,780 shares on 1/21/14; 4,800 shares on 1/1/15.

(7) Granted pursuant to the 1997 Stock Option Plan and vest as follows: 4,000 shares on 1/1/16.

(8) Granted pursuant to the 1997 Stock Option Plan and vest as follows: 6,200 shares on 1/19/07; 3,800 shares on 1/1/17.

(9) Granted pursuant to the 2007 Stock Option Plan and vest as follows: 4,440 shares on 1/1/18.

(10) Granted pursuant to the 2007 Stock Option Plan and vest as follows: 4,760 shares on 1/1/19.

(11) Granted pursuant to the 1997 Stock Option Plan and vest in five equal annual installments, beginning on the anniversary of the date of grant.

(12) Granted pursuant to the 2007 Stock Option Plan and vest in five equal annual installments, beginning on the anniversary of the date of grant.

Option Exercises and Stock Vested in Fiscal Year 2014

The following table provides information about the exercise of stock options and vesting of restricted stock held by our Named Executive Officers during fiscal year 2014.

	Option Awards				Stock Awards
Name	Number of shares acquired on exercise		Value realized on exercise ($)		Number of shares acquired on vesting		Value realized on vesting ($)
Robert W. Zapp		11,400		300,290		455		21,221
Martin J. Gerrety		3,000		79,350		341		15,904

Pension Benefits

The following table presents an estimation of the present value of the benefits payable under the Pension Plan in which an executive officer named in the Summary Compensation Table participates along with his applicable years of service.

Name	Plan Name	Number of Years Credited Service		Present Value of Accumulated Benefit ($)(1)		Payments During Last Fiscal Year($)
Robert W. Zapp	Executive Private Pension Plan		18		1,724,345		0
Martin J. Gerrety	Executive Private Pension Plan		12		410,707		0

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(1) The calculation of present value of accumulated benefit assumes a discount rate of 4.10% until age 65. It further assumes that the executive officer will receive the present value of his retirement benefit at age 65 in the form of a lump sum payment in accordance with Financial Standards Accounting Board (FASB) Accounting Standards Codification (ASC), Topic 470 (formerly, FASB Statement of Financial Accounting Standard No. 87).

The Pension Plan provides a member of a select group of management or highly compensated employees with a retirement benefit. The Pension Plan is a defined benefit pension plan within the meaning of Section 414(j) of the Code. The Pension Plan currently has 15 active participants, including Messrs. Zapp and Gerrety. The Pension Plan provides participants with a plan benefit which equals up to 30% of the participant’s “final average compensation” when the Pension Plan benefit is not combined with the participant’s pension plan benefit and age 65 social security benefit. For purposes of the Pension Plan, the term “final average compensation” is defined to mean the annual “adjusted compensation” (as defined in the Pension Plan) of a participant averaged over the five consecutive plan years from the date of participation which produces the highest annual average, provided that if the participant has less than five consecutive plan years of service, final average compensation will be based on adjusted compensation for those years of service from the date of employment to the date of termination. The term “adjusted compensation” means the total compensation paid or accrued (including any accrual under the Contribution Plan) to the participant for services rendered to the Bank as an employee as reflected on IRS Form W-2, increased by salary reductions under a Section 401(k) plan or Section 125 plan. However, amounts attributable, for example, to exercise of stock options, noncash remuneration, moving expenses, relocation bonuses, fringe benefits, lump sum severance payments or any funds paid following termination or retirement from the Bank are excluded from the Pension Plan’s definition of adjusted compensation. The benefits under the Pension Plan shall be paid in the form of an immediate 15-year term annuity. Any other form of benefit payment is permissible only upon satisfying the rules relating to changes in the time and form of distributions contained in Section 409A(a)(4)(C) of the Code and Treasury Regulations promulgated thereunder.

If a participant is terminated before death or age 65 with five “years of service” (as defined in the Pension Plan), he shall be eligible for a deferred retirement pension and the payment of a deferred pension benefit commences when the participant reaches 65 years of age. A participant meeting the eligibility requirements and not requesting an early retirement benefit under the Pension Plan shall receive deferred pension benefits in accordance with the following vested percentages:

· 50% of “accrued benefit” (as defined in the Pension Plan) with five but less than six years of service;

· 60% of “accrued benefit” with six but less than seven years of service;

· 70% of “accrued benefit” with seven but less than eight years of service;

· 80% of “accrued benefit” with eight but less than nine years of service;

· 90% of “accrued benefit” with nine but less than 10 years of service; and

· 100% of “accrued benefit” with 10 or more years of service.

A participant who has not reached age 65 shall be eligible for a deferred pension benefits if his employment is terminated before death or age 65 and if he has completed at least five “years of service.” The payment of his deferred pension, which shall be in the form of a term annuity (for a term not to exceed 15 years), shall commence on the later of (i) the date determined in writing on or before October 31, 2014, or (ii) the date which is five (5) years from the participants “separation from service,” and shall be equal to the actuarial equivalent of the vested percentage of his accrued benefit in accordance with the table listed above.

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Nonqualified Deferred Compensation

The following table shows the deferred compensation activity for the executives named in the Summary Compensation Table under the Contribution Plan. All executive nonqualified contributions to the Contribution Plan are also included in current year compensation presented in the Summary Compensation Table.

Name	Executive Contributions in Last Fiscal Year($)(1)		Registrant Contributions in Last Fiscal Year ($)		Aggregate Earnings in Last Fiscal Year ($)(1)		Aggregate Withdrawals/ Distributions ($)	Aggregate Balance at Last Fiscal Year End ($)(2)
Robert W. Zapp		21,221		-		148,192			870,100
Martin J. Gerrety		10,000		-		3,210			85,016

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(1) Executive contributions to the Contribution Plan include salary deferred in 2014 at the direction of the executive officer. No aggregate earnings as reported above were reported as compensation in the Summary Compensation table because such amounts do not represent above-market or preferential earnings on compensation. Decline in market returns resulted in negative earnings.

(2) Represents deferrals of cash compensation from prior years that were reported in the Summary Compensation Table in our proxy statement for the relevant years.

BKFC offers members of a select group of management or highly compensated employees the opportunity to defer all or a portion of their annual compensation into a deferred compensation account which is deemed to be invested among such categories of investments as may be made available under the Contribution Plan, with the participant’s account being credited or debited with the increase or decrease in the realizable net asset value or credited interest, as applicable, of the designated deemed investments. Participation in the Contribution Plan is voluntary. BKFC does not provide a matching contribution under the Contribution Plan. The Contribution Plan currently maintains 13 active participants, including Messrs. Zapp and Gerrety. Participant deferred amounts, along with all earnings, gains and losses thereon, are always 100% vested.

Distribution of vested benefits commences 60 days after the closing of the plan year in which a participant retires or is terminated and shall be paid in substantially equal installments over 15 years. Any other form of benefit payment is permissible only upon satisfying the rules relating to changes in the time and form of distributions contained in Section 409A(a)(4)(C) of the Code and Treasury Regulations promulgated thereunder.

In addition, distributions may be made only for purposes described in 26 C.F.R. Section 1.409A-3(i)(3), which establishes standards deemed to satisfy the unforeseeable emergency condition for distribution of benefits from non-qualified deferred compensation arrangements.

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DIRECTOR COMPENSATION

The following table sets forth compensation information on each of the non-employee directors of BKFC and includes their services as directors of the Bank. Directors who are also compensated as employees receive no additional compensation for their services as a director.

Name(1)	Fees Earned or Paid in Cash ($)(2)			Stock Awards ($)(3)		Total ($)
Charles M. Berger		25,500			12,000		37,500
John S. Cain		25,500			12,000		37,500
Harry J. Humpert		6,000	(4)		-		6,000
Barry G. Kienzle		25,500			12,000		37,500
John E. Miracle		25,500			12,000		37,500
Mary Sue Rudicill		25,500			12,000		37,500
Ruth M. Seligman-Doering		25,500			12,000		37,500
James C. Votruba		25,500			12,000		37,500
Herbert H. Works		25,500			12,000		37,500

_____________________

(1) Charles M. Berger, John S. Cain, Barry G. Kienzle, John E. Miracle, Mary Sue Rudicill, Ruth Seligman-Doering, James C. Votruba and Herbert H. Works were the non-employee directors of BKFC on December 31, 2014.

(2) Based on $1,500 per month from January through May of 2014, and $2,250 from June through December of 2014, and a $2,250 honorarium paid in December of 2014.

(3) In 2014, each non-employee director of BKFC was awarded 349 restricted stock units, with the grant date fair value of $12,000 as computed in accordance with FASB ASC Topic 718. As of December 31, 2014, each non-employee director of BKFC had an aggregate number of 349 restricted stock units’ awards outstanding.

(4) Mr. Humpert retired from the board after the April 2014 board meeting.

Director Compensation. The entire Board of Directors annually reviews and decides compensation for BKFC’s non-employee directors. No fees are paid to directors who are also employees. As a starting point for its review, the entire Board uses the peer group compensation data prepared by management. BKFC seeks to establish Board compensation that is near the median for the peer group.

Each non-employee member of the Board of Directors received $25,500 for serving on the Bank Board of Directors during 2014. BKFC also maintains a stock incentive plan (the 1997 Stock Option Plan expired on March 21, 2007 and was replaced with the 2007 Stock Option Plan; the 2007 Stock Option Plan expired on April 20, 2012 and was replaced with the 2012 Stock Incentive Plan) which benefits BKFC’s directors. See the description of the stock option plans above. In 2014, no options were awarded to non-employee directors. However, each non-employee director was awarded 349 restricted stock units, convertible to 349 shares of restricted stock of BKFC if he or she serves as a director until the 2015 Annual Meeting, as further disclosed below.

Restrictive Stock Unit Program for Non-Employee Directors and General Counsel. In 2012, the Board of Directors established a Restrictive Stock Unit Program for Non-Employee Directors and General Counsel (the “Program”) in accordance with the 2012 Stock Incentive Plan. Pursuant to the Program, each of the non-employee directors and the general counsel, as an independent contractor, of BKFC was awarded, in accordance with the Program , for the period beginning on April 25, 2014 and ending as of the date of the 2015 Annual Meeting, 349 restricted stock units at an award price of $34.36 per share with a total grant date fair value of $11,992. The number of awarded restricted stock units was calculated as the number of whole shares of BKFC’s common stock having a total fair market value on the grant date closest to, but not in excess of, $12,000.

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Under the Program, beginning at the 2014 Annual Meeting and continuing at each annual meeting of stockholders of BKFC thereafter, unless otherwise determined by the Board of Directors, each non-employee director elected by stockholders and the general counsel, if qualified as an independent contractor, will be awarded, for his or her service period continuing until next annual meeting, the number of restricted stock units calculated in the same manner as used in calculating the award in 2012. In addition, non-employee directors elected, and general counsel appointed, by the Board of Directors will be awarded on such election or appointment date, as applicable, for the period beginning on such election or appointment date and continuing at the next annual meeting of stockholders of BKFC, restricted stock units equal to the number of whole shares of BKFC’s common stock having a total fair market value closest to, but not in excess of, a sum equal to $1,000 for each full month of his or her service period.

Under the Program, the holder of a restricted stock unit has no rights or privileges of a stockholder by reason of holding the restricted stock units and has no right to receive a dividend or dividend equivalent with reference to such units.

If the holder of a restricted stock unit does not serve continuously for the entire service period for which the restricted stock unit was awarded, such restricted stock unit is cancelled on the date of such termination of service.

Upon the expiration of the service period for which restricted stock units were awarded, if the holder has served continuously in the applicable capacity, each restricted stock unit shall be exchanged for one share of restricted stock of BKFC. Such restricted stock is subject to transfer restrictions until one year after the holder ceases to serve in the applicable capacity, or sooner dies. However, if the total fair market value of restricted stock issued under the Program to a recipient exceeds $60,000, the restriction will be cancelled on the greatest number of restricted shares held for such recipient as would not reduce the total fair market value of the remaining restricted shares to less than $60,000.

In 2014, no options were awarded to non-employee directors.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Dr. Miracle, Mr. Kienzle and Ms. Rudicill serve on the Compensation Committee. None of the members of the Compensation Committee are, or have been, an employee or officer of BKFC or the Bank, other than Dr. Miracle. Dr. Miracle has been serving as Secretary since May 18, 2012. Mr. Works served as a member of the Compensation Committee and as Secretary until May 18, 2012 when he was elected as Chairman of the Board. Neither Dr. Miracle nor Mr. Works received additional compensation for their role as Secretary. During fiscal year 2014, no member of the Compensation Committee had any relationship with BKFC or the Bank requiring disclosure under Item 404 of Regulation S-K. None of the executive officers serves on the board of directors or compensation committee of a company that has an executive officer serving on BKFC’s Board of Directors or Compensation Committee.

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COMPENSATION COMMITTEE REPORT ON EXECUTIVE AND EMPLOYEE COMPENSATION

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis, as required by Item 402(b) of Regulation S-K, with management and, based on its review and discussions with management, recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Annual Report on Form 10-K. See “Compensation Discussion and Analysis.”

COMPENSATION COMMITTEE

Barry G. Kienzle

John E. Miracle

Mary Sue Rudicill

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Item 12. Security Ownership of Certain Beneficial Owners and Management and related Stockholder Matters.

EQUITY COMPENSATION PLAN INFORMATION

The following table summarizes the equity compensation plans under which BKFC Shares may be issued as of December 31, 2014.

	Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights			Weighted Average Exercise Price of Outstanding Options , Warrants and Rights(3) ($)		Number of Securities Remaining Available for Future Issuance under Equity Compensation Plans
Equity Compensation Plans Approved by Security Holders(1)
1997 and 2007 Stock Option Plans		70,680			24.33		0
2012 Stock Incentive Plan		10,820	(2)		-		962,245
Total		81,500			24.33		962,245
Equity Compensation Plans Not Approved by Security Holders		N/A			N/A		N/A
Total		81,500			24.33		962,245

(1) The 1997 Stock Option Plan expired on March 21, 2007 and was replaced with the 2007 Stock Option Plan. The 2007 Stock Option Plan expired on April 20, 2012 and was replaced with the 2012 Stock Incentive Plan.

(2) Consists of 10,820 shares deliverable upon vesting of restricted stock units.

(3) Weighted average exercise price is based solely on securities with an exercise price.

SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information regarding beneficial ownership of BKFC’s Shares as of March 1, 2015 by:

· any person who is known to BKFC to own beneficially more than 5% of BKFC’s Shares;

· each of BKFC’s directors;

· the Chief Executive Officer and Treasurer of BKFC (together, the “Named Executive Officers,” as there were no other “executive officers” as defined by SEC regulation who received a total annual compensation package in excess of $100,000 for fiscal year 2013); and

· All current Named Executive Officers and directors as a group.

All Shares are owned with sole voting and investment power by each person listed, unless otherwise indicated by a footnote. The Shares subject to options currently exercisable or exercisable within 60 days of March 1, 2015 are deemed outstanding for calculating the percentage of outstanding Shares of the person holding those options, but are not deemed outstanding for calculating the percentage of any other person. The address of each beneficial owner is c/o BKFC, at 111 Lookout Farm Drive, Crestview Hills, Kentucky 41017, unless otherwise indicated by footnote. As of March 1, 2015, there were 7,737,398 Shares outstanding, each Share entitled to one vote.

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Name and Address	Amount and Nature of  Beneficial Ownership			Percentage of Shares Outstanding
Directors & Executive Officers
Charles M. Berger		39,711	(1)			*
John S. Cain		163,596	(2)		2.1	%
Barry G. Kienzle		17,000	(3)			*
John E. Miracle		167,577	(4)		2.2	%
Mary Sue Rudicill		80,092	(5)		1.0	%
Ruth M. Seligman-Doering		111,734	(6)		1.4	%
James C. Votruba		2,681	(7)			*
Herbert H. Works		36,537	(8)			*
Robert W. Zapp		171,753	(9)		2.2	%
Martin J Gerrety		15,534	(10)			*
All directors, nominees and executive officers of BKFC as a group (10 persons)		806,215			10.4	%
Beneficial Owners Holding More than 5%
Rodney S. Cain. (11)		528,892			6.9	%
The R.C. Durr Foundation Inc. (12)		449,264			5.8	%

____________

* Less than 1%

(1) Includes 628 Shares held jointly by Mr. Berger and his spouse; 11,639 Shares held by Mr. Berger’s spouse; 15,000 Shares held by Berger-Collins L.L.C., of which Mr. Berger is the managing member.

(2) Includes 114,561 Shares held by Mr. Cain in joint tenancy with his wife, 13,022 of which are held as collateral for a loan from the Bank.

(3) Includes 3,785 Shares owned by Mr. Kienzle’s spouse.

(4) Includes 38,378 Shares owned by Dr. Miracle’s spouse; 3,180 Shares owned jointly by Dr. Miracle and his wife; 1,220 Shares owned by Dr. Miracle’s grandchild.

(5) Includes 15,230 Shares owned jointly by Ms. Rudicill and her spouse; 13,500 Shares owned by Belleview Sand and Gravel, Inc., of which Ms. Rudicill is Chairman and which is owned by Ms. Rudicill and her spouse.

(6) Includes 4,060 Shares held in trust, of which Ms. Seligman-Doering is the trustee, 101,818 Shares owned by the Doering Family Limited Partnership, of which Ms. Seligman-Doering is managing member.

(7) Includes 2,200 shares held in trust.

(8) Includes 2,000 Shares owned by Boone-Kenton Lumber, of which Mr. Works is the President and owner.

(9) Includes 40,965 Shares owned jointly by Mr. Zapp and his spouse; 39,364 Shares owned by Mr. Zapp’s spouse; and 4,800 Shares that may be acquired upon the exercise of options.

(10) Includes 3,366 Shares held by Mr. Gerrety’s spouse and 10,900 Shares that may be acquired upon the exercise of options.

(11) This information is based on a Schedule 13G filed by Mr. Rodney S. Cain on January 9, 2015. Mr. Rodney S. Cain has shared voting power over all 528,892 of these Shares. The address of Mr. Rodney S. Cain is 445 Bristow Road, Independence, Kentucky 41051.

(12) This information is based on a Schedule 13G filed by The R.C. Durr Foundation Inc. (the “Foundation”) on January 9, 2015. The Foundation has sole voting power of all of the shares. The address of the Foundation is 541 Buttermilk Pike, Suite 544, Covington, Kentucky 41017.

Item 13. Certain Relationships and Related Transactions, and Director Independence.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Loans and Extensions of Credit. The Sarbanes-Oxley Act of 2002 generally prohibits loans by BKFC to its executive officers and directors. However, the Sarbanes-Oxley Act contains a specific exemption from such prohibition for loans by the Bank to its executive officers and directors in compliance with federal banking regulations. Under this exemption, the Bank has extended loans to certain of it’s and BKFC’s directors and executive officers, their affiliates and members of their families. In accordance with the federal banking regulations, all such loans were made in the ordinary course of business on substantially the same terms, including interest rates and collateral requirements, as those prevailing at the time for comparable transactions with persons not related to BKFC and did not present more than the normal risk of collectability or other unfavorable features. The Bank is therefore prohibited from making any new loans or extensions of credit to executive officers and directors at different rates or terms than those offered to the general public.

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The Bank has an existing lending relationship with both Mr. John Cain and Wiseway Supply established in the ordinary course of business, on substantially the same terms, including interest rates and collateral requirements, as those prevailing at the time for comparable transactions with persons not related to BKFC, which does not present more than the normal risk of collectability or other unfavorable term.

Mr. John Cain and his spouse have a home equity loan with the Bank, and Mr. John Cain is also a guarantor of a third party Erich Heinrich’s loan with the Bank. These lending relationships are established in the ordinary course of business, on substantially the same terms, including interest rates and collateral requirements, as those prevailing at the time for comparable transactions with persons not related to BKFC, which does not present more than the normal risk of collectability or other unfavorable term.

Mr. John Cain is a member of Cain Capital, LLC; Double Bogey, LLC, and Wards Corner, LLC, all of which have mortgages and/or letters of credit with the Bank of Kentucky, such arrangements having been made in the ordinary course of business, on substantially the same terms, including interest rates and collateral requirements, as those prevailing at the time for comparable transactions with persons not related to BKFC, which does not present more than the normal risk of collectability or other unfavorable term. The amount of all the above loans involving Mr. John Cain and the Bank totals about $8.8 million.

Leases. The Bank has a lease agreement for office premises located at 1065 Burlington Pike with The R.C. Durr Foundation, Inc., Mr. John S. Cain (who is a Director and is standing for re-election), and his siblings, Rodney C. Cain and David Alfred Cain, each of whom is a lessor under the lease agreement. The annual rental expense under this lease was $226,922 for each of the years ended December 31, 2014, 2013 and 2012, respectively, and $210,713 for each of the year ended December 31, 2011. Mr. John Cain’s interest in such rental expense for 2014 was $26,714. The lease had an initial term of 15 years which expired in 2006 and may, at the option of the Bank, be renewed for three successive five-year periods. The Bank is currently in the second five-year renewal period, with the total value of the lease for the five-year period being $ 1,134,610.

The Bank has a lease agreement for office premises located on Kentucky Highway 18 in Boone County, Kentucky, with William R. Rudicill, the spouse of Ms. Rudicill. The annual rental expense under this lease was $14,070 for each of the years ended December 31, 2014, 2013 and 2012, respectively, and $13,065 for each of the years ended December 31, 2011 and 2010 respectively. The lease had an initial term of 15 years expiring in 2007 and may, at the option of the Bank, be renewed for three successive five-year periods. The Bank is currently in the second five-year renewal period, with the total value of the lease for the five-year period being $70,350.

The Bank has a lease agreement for office premises located on Houston Road in Boone County, Kentucky, with Dr. Miracle, Geraldine G. Miracle, Jennifer A. Meyer, Maria A. Meyer, Leila L. Meyer, Herbert E. Works, Mark T. Wilson, Nicolette Wilson, Bryson E. Wilson and Josephina Wilson, each of whom is a lessor under the lease agreement. Geraldine Miracle is Dr. Miracle’s spouse. Jennifer Meyer, Maria Meyer and Leila Meyer are daughters-in-law of David E. Meyer, who resigned from the Board of Directors effective January 31, 2007. Herbert E. Works is the son of Mr. Works. Mark Wilson, Nicolette Wilson, Bryson Wilson and Josephina Wilson were related to Mr. Works through his former wife. The rental expense under this lease was $97,956 for the year ended December 31, 2014. The annual rental expense under this lease was $95,507 for the years ended December 31, 2013, 2012, 2011and 2010, respectively. The lease had an initial term of 15 years which expired in 2009 and was renewed by the Bank for an additional five-year period. The Bank, at its option, may renew for two additional five-year periods. The total value of the lease for the five-year period beginning in 2014 being $514,270.

The Bank has a lease agreement for office premises located on U.S. 42 in Boone County, Kentucky, with Burnett Management Company, LLC, of which Mr. Humpert, a former director who resigned effective as of April 25, 2014 and Mr. William E. Snyder, a former directors of BKFC who resigned effective as of April 19, 2002, are members. The annual rental expense under this lease was $116,343 and $107,394 for the years ended December 31, 2014 and 2013 respectively, $107,394 for the years ended December 31, 2012, 2011 and 2010 respectively. The lease was effective in May 1998 with an initial term of 15 years and may, at the option of the Bank, be renewed for three successive five-year periods.

Neither BKFC nor the Bank has formally established policies or procedures that relate to reviewing, approving or otherwise ratifying related person transactions, other than complying with all applicable laws and regulations that pertain to related person transactions for banks.

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BOARD OF DIRECTORS INDEPENDENCE

The Board of Directors has determined that each director, other than Robert W. Zapp, is independent within the meaning of Rule 5605(a)(2) of the NASDAQ Stock Market (“NASDAQ”). In making this determination, the Board of Directors was aware of and considered the loan and deposit relationships with directors and their related interests which the Bank enters into in the ordinary course of its business, and the lease and other arrangements which are disclosed under “Certain Relationships and Related Transactions” described above in this Annual Report on Form 10-K.

Item 14. Principal Accounting Fees and Services.

AUDIT FEES

The aggregate fees billed for professional services rendered for the audit of the BKFC annual consolidated financial statements as of and for the years ended December 31, 2014 and 2013, the audit of management’s assertion on internal control over financial reporting as of December 31, 2014 and 2013, and the reviews of the financial statements included in the BKFC Quarterly Reports on Form 10-Q filed during the fiscal years ended December 31, 2014 and 2013 were $294,500 and $275,900, respectively, which were paid or expected to be paid to Crowe Horwath. The 2014 audit fees included review and consents related to the Form S-4 filing and examiner review of Crowe Horwath’s working papers.  The 2013 audit fees included required Housing and Urban Development audit and examiner review of Crowe Horwath’s working papers. 

AUDIT-RELATED FEES

No audit-related fees were billed by Crowe Horwath for the fiscal year ended December 31, 2014 or December 31, 2013.

TAX FEES

No fees were billed by Crowe Horwath for tax services for the fiscal year ended December 31, 2014 and 2013.

ALL OTHER FEES

No fees were billed by Crowe Horwath for any other professional services not otherwise described above for the fiscal years ended December 31, 2014 and 2013.

PRE-APPROVAL POLICY

The Audit Committee is responsible for appointing and reviewing the work of the independent registered public accounting firm and setting the independent registered public accounting firm’s compensation. In accordance with its charter, the Audit Committee reviews and pre-approves all audit services and permitted non-audit services provided by the independent registered public accounting firm to BKFC or the Bank and ensures that the independent registered public accounting firm is not engaged to perform the specific non-audit services prohibited by law, rule or regulation. During the year ended December 31, 2014, all services were approved in advance by the Audit Committee in compliance with these procedures. No non-audit services were performed for the year ended December 31, 2014.

PART IV

Item 15. Exhibits and Financial Statement Schedules.

(a) Financial Statements. A list of Financial Statements included herein is set forth in the Index to Financial Statements appearing in Item 8 of this Form 10-K.

(b) Exhibits. See Index to Exhibits filed with this Annual Report on Form 10-K.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on this 12th day of March 2015.

THE BANK OF KENTUCKY FINANCIAL
CORPORATION
By	/s/ Robert W. Zapp
	Robert W. Zapp,
	President and Chief Executive
	Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been duly signed below on March 12, 2015, by the following persons on behalf of the registrant and in the capacities indicated.

/s/ Martin J. Gerrety	/s/ Charles M. Berger
Martin J. Gerrety	Charles M. Berger
Treasurer and Assistant Secretary (principal financial officer	Director
and principal accounting officer)

/s/ Robert W. Zapp	/s/ John S. Cain
Robert W. Zapp	John S. Cain
President, Chief Executive Officer and Director	Director
(principal executive officer)

/s/ Mary Sue Rudicill	/s/ John E. Miracle, D.M.D.
Mary Sue Rudicill	John E. Miracle, D.M.D.
Director	Director

/s/ Barry G. Kienzle	/s/ Herbert H. Works
Barry G. Kienzle	Herbert H. Works
Director	Director

/s/ James C. Votruba	Ruth Seligman Doering
James C. Votruba	Ruth Seligman-Doering
Director	Director

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INDEX TO EXHIBITS

Exhibit Number	Description
2.1	Purchase and Assumption Agreement, by and between The Bank of Kentucky, Inc., as buyer, and Peoples Bank of Northern Kentucky, Inc., as seller, and Peoples Bancorporation of Northern Kentucky, Inc., dated as of September 24, 2002(1)
2.2	Agreement and Plan of Merger, dated September 5, 2014, between BB&T Corporation and The Bank of Kentucky Financial Corporation(2)
3.1	Articles of Incorporation of The Bank of Kentucky Financial Corporation, including all amendments through February 12, 2009(3)
3.2	Second Amended and Restated By-laws of The Bank of Kentucky Financial Corporation(4)
4.1	Junior Subordinated Debt Securities Indenture between The Bank of Kentucky Financial Corporation and Wells Forgo Bank, National Association, as trustee, dated as of May 15, 2007 (16)
4.2	Amended and Restated Declaration of Trust among The Bank of Kentucky Financial Corporation, as Sponsor, the Trustees defined therein, the Administrators named therein, and the holders from time to time of undivided beneficial interest in the assets of the Trust defined therein, dated as of May 15, 2007 (16)
10.1	The Bank of Kentucky Financial Corporation 1997 Stock Option and Incentive Plan†(5)
10.2	The Bank of Kentucky Financial Corporation 2007 Stock Option and Incentive Plan†(6)
10.3	The Bank of Kentucky, Inc. Executive Deferred Contribution Plan†(7)
10.4	Amendment to the Bank of Kentucky, Inc. Executive Deferred Contribution Plan, dated November 17, 2010†(8)
10.5	The Bank of Kentucky, Inc. Executive Private Pension Plan†(9)
10.6	Amendment #2 to the Bank of Kentucky, Inc. Executive Private Pension Plan, dated November 17, 2010†(10)
10.7	Amendment #3 to the Bank of Kentucky, Inc. Executive Private Pension Plan, dated October 29, 2014†(11)
10.8	The Bank of Kentucky, Inc. Group Insurance Endorsement Plan†(12)
10.9	The Bank of Kentucky, Inc. Executive Deferred Contribution Plan Trust Agreement, dated November 17, 2010†(13)
10.10	The Bank of Kentucky Financial Corporation 2012 Stock Incentive Plan†(14)
10.11	Voting and Support Agreement, dated September 5, 2014 among BB&T Corporation, The Bank of Kentucky Financial Corporation and the individual signatories thereto(15)
21	Subsidiaries of The Bank of Kentucky Financial Corporation
23	Consent of Crowe Horwath LLP

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31.1	Section 302 Certification of Robert W. Zapp, Chief Executive Officer
31.2	Section 302 Certification of Martin J. Gerrety, Treasurer and Assistant Secretary
32.1	Section 906 of Sarbanes-Oxley Act of 2002 Certification of Robert W. Zapp
32.2	Section 906 of Sarbanes-Oxley Act of 2002 Certification of Martin J. Gerrety
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase
101.LAB	XBRL Taxonomy Extension Label Linkbase
101.PRE	XBRL Taxonomy Extension Presentation Linkbase
101.DEF	XBRL Taxonomy Extension Definition Linkbase

⁽¹⁾ Incorporated by reference to Exhibit 2 to the Quarterly Report on Form 10-Q for the period ended September 30, 2002, filed with the SEC on November 14, 2002 (000-25960).

⁽²⁾ Incorporated by reference to Exhibit 2.1 to the Form 8-K, filed with the SEC on September 11, 2014 (001-34214).

⁽³⁾ Incorporated by reference to Exhibit 3.1 the Annual Report on Form 10-K, filed with the SEC on March 13, 2009(001-34214).

⁽⁴⁾ Incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K, filed with the SEC on September 24, 2008 (000-25960).

⁽⁵⁾ Incorporated by reference to the Form S-8, filed with the SEC on October 2, 1997(333-37011).

⁽⁶⁾ Incorporated by reference to Exhibit 10.1 to the Form 8-K, filed with the SEC on April 25, 2007(000-25960).

⁽⁷⁾ Incorporated by reference to Exhibit 10.2 to the Form 10-K for the year ended December 31, 2003, filed with the SEC on March 12, 2004(000-25960).

⁽⁸⁾ Incorporated by reference Exhibit 10.1 to the Current Report on Form 8-K, filed with the SEC on November 23, 2010 (001-34214).

⁽⁹⁾ Incorporated by reference to Exhibit 10.3 to the Form 10-K for the year ended December 31, 2003, filed with the SEC on March 12, 2004 (000-25960).

⁽¹⁰⁾ Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K, filed with the SEC on November 23, 2010 (001-34214).

⁽¹¹⁾ Incorporated by reference to Exhibit 10.1 to the Form 8-K, filed with the SEC on October 31, 2014 (001-34214).

⁽¹²⁾ Incorporated by reference to Exhibit 10.4 to the Form 10-K for the year ended December 31, 2003, filed with the SEC on March 12, 2004 (000-25960).

⁽¹³⁾ Incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K, filed with the SEC on November 23, 2010 (001-34214).

⁽¹⁴⁾ Incorporated by reference to Appendix A to the Definitive Proxy Statement, filed with the SEC on March 16, 2012 ( 001-34214).

⁽¹⁵⁾ Incorporated by reference to Exhibit 10.1 to the Form 8-K, filed with the SEC on September 11, 2014 (001-34214).

⁽¹⁶⁾ The registrant hereby agrees to furnish a copy of such agreement to the SEC upon request pursuant to Item 601 (b)(4)(iii)(A) of Regulation S-K.

† Denotes management contracts and compensatory plans or arrangements.

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