UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
DC  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 June 30, 2009


OR


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


For the
transition period from 
to





Commission
file number  0-51176





KENTUCKY
FIRST FEDERAL BANCORP


(Exact
name of registrant as specified in its charter)





United States
                    
                    61-1484858(State
      or other jurisdiction of
                    
                    (I.R.S.
      Employerincorporation
      or organization)
                    
                    Identification
      No.)479 Main Street, Hazard,
      Kentucky
                    
                    41702(Address
      of principal executive offices)
                    
                    (Zip
      Code)




Registrant’s
telephone number, including area code:  (502)
223-1638




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




Common Stock (par value $0.01 per
      share)
              
              Nasdaq Stock Market, LLC(Title
      of each class)
              
              (Name
      of each exchange on which
registered)




Securities
registered pursuant to Section 12(g) of the Act:  None





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





Indicate
by check mark whether the registrant 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 during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files.   Yes  ̈ 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.  x





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 the 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  ̈Non-accelerated
      filer  ̈
              Smaller Reporting Companyx(Do
      not check if smaller reporting company)





Indicate
by a 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 common stock held by nonaffiliates was $31.2
million as of June 30, 2009.





Number of
shares of common stock outstanding as of September 20,
2009:  7,905,120.




DOCUMENTS
INCORPORATED BY REFERENCE




The
following lists the documents incorporated by reference and the Part of the Form
10-K into which the document is incorporated:




1.      Portions
of the Annual Report to Stockholders for the fiscal year ended June 30, 2009.
(Part II)


2.      Portions
of Proxy Statement for the 2009 Annual Meeting of Stockholders.  (Part
III)









INDEX





PAGEPART
      IItem
      1.
                  Business
                  
                  1Item
      1A.
                  Risk
      Factors
                  
                  17Item
      1B.
                  Unresolved
      Staff Comments
                  
                  21Item
      2.
                  Properties
                  
                  21Item
      3.
                  Legal
      Proceedings
                  
                  21Item
      4.
                  Submission
      of Matters to a Vote of Security Holders
                  
                  21PART
      IIItem
      5.
                  Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                  
                  22Item
      6.
                  Selected
      Financial Data
                  
                  22Item
      7.
                  Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operation
                  
                  22Item
      7A.
                  Quantitative
      and Qualitative Disclosures About Market Risk
                  
                  22Item
      8.
                  Financial
      Statements and Supplementary Data
                  
                  23Item
      9.
                  Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                  
                  23Item
      9A(T).
                  Controls
      and Procedures
                  
                  23Item
      9B.
                  Other
      Information
                  
                  25PART
      IIIItem
      10.
                  Directors,
      Executive Officers and Corporate Governance
                  
                  25Item
      11.
                  Executive
      Compensation
                  
                  25Item
      12.
                  Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                  
                  26Item
      13.
                  Certain
      Relationships and Related Transactions, and Director
      Independence
                  
                  26Item
      14.
                  Principal
      Accountant Fees and Services
                  
                  26PART
      IVItem
      15.
                  Exhibits
      and Financial Statement Schedules
                  
                  27SIGNATURES
                  
                  
                  29


i


PART
I




Item
1.Business




Forward-looking
Statements




This
report contains certain “forward-looking statements” within the meaning of the
federal securities laws.  These statements are not historical facts,
rather statements based on Kentucky First Federal Bancorp’s current expectations
regarding its business strategies, intended results and future
performance.  Forward-looking statements are preceded by terms such as
“expects,” “believes,” “anticipates,” “intends” and similar
expressions.





Management’s ability to predict results
or the effect of future plans or strategies is inherently
uncertain.  Factors which could affect actual results include the
following:  interest rate trends; the general economic climate in the
market areas in which Kentucky First Federal Bancorp operates, as well as
nationwide; Kentucky First Federal Bancorp’s ability to control costs and
expenses; competitive products and pricing; loan delinquency rates; and changes
in federal and state legislation and regulation.  These factors should
be considered in evaluating the forward-looking statements and undue reliance
should not be placed on such statements.  Kentucky First Federal
Bancorp assumes no obligation to update any forward-looking
statements.




General




References in this Annual Report on
Form 10-K to “we,” “us” and “our” refer to Kentucky First, and where
appropriate, collectively to Kentucky First, First Federal of Hazard and First
Federal of Frankfort.




Kentucky First
Federal Bancorp.Kentucky First Federal Bancorp (“Kentucky
First” or the “Company”) was incorporated as a mid-tier holding company under
the laws of the United States on March 2, 2005 upon the completion of the
reorganization of First Federal Savings and Loan Association of Hazard (“First
Federal of Hazard”) into a federal mutual holding company form of organization
(the “Reorganization”).  On that date, Kentucky First completed its
minority stock offering and issued a total of 8,596,064 shares of common stock,
of which 4,727,938 shares, or 55%, were issued to First Federal MHC, a federally
chartered mutual holding company formed in connection with the Reorganization,
in exchange for the transfer of all of First Federal of Hazard’s capital stock,
and 2,127,572 shares were sold at a cash price of $10.00 per
share.  Also on March 2, 2005, Kentucky First completed its
acquisition of Frankfort First Bancorp, Inc. (“Frankfort First Bancorp”) and its
wholly owned subsidiary First Federal Savings Bank of Frankfort, Frankfort,
Kentucky (“First Federal of Frankfort”) (the “Merger”).  Under the
terms of the agreement of merger, shareholders of Frankfort First Bancorp
received approximately 1,740,554 shares of Kentucky First’s common stock and
approximately $13.7 million in cash (including payments to holders of Frankfort
First stock options).  Following the Reorganization and Merger, the
Company retained Frankfort First Bancorp as a wholly owned subsidiary and holds
all of the capital stock of First Federal of Hazard and First Federal of
Frankfort.  The Company is operating First Federal of Hazard and First
Federal of Frankfort as two independent, community-oriented savings
institutions.




Kentucky
First’s and First Federal of Hazard’s executive offices are located at 479Main Street, Hazard,
Kentucky, 41702 and their main telephone number is (606) 436-3860.




At June
30, 2009, Kentucky First had total assets of $240.9 million, deposits of $139.7
million and stockholders’ equity of $58.4 million.  The discussion in
this Annual Report on Form 10-K relates primarily to the businesses of First
Federal of Hazard and First Federal of Frankfort (collectively, the “Banks”), as
Kentucky First’s operations consist primarily of operating the Banks and
investing funds retained in the Reorganization.




First
Federal of Hazard and First Federal of Frankfort are subject to examination and
comprehensive regulation by the Office of Thrift Supervision and their savings
deposits are insured up to applicable limits by the Deposit Insurance Fund,
which is administered by the Federal Deposit Insurance
Corporation.  Both of the Banks are members of the Federal Home Loan
Bank of Cincinnati, which is one of the 12 regional banks in the FHLB
System.  See “Regulation and Supervision.”




1




First Federal
Savings and Loan Association of Hazard.First Federal of Hazard
was formed as a federally chartered mutual savings and loan association in
1960.  First Federal of Hazard operates from a single office in
Hazard, Kentucky as a community-oriented savings and loan association offering
traditional financial services to consumers in Perry and surrounding counties in
eastern Kentucky.  It engages primarily in the business of attracting
deposits from the general public and using such funds to originate, when
available, loans secured by first mortgages on owner-occupied, residential real
estate and occasionally other loans secured by real estate.  To the
extent there is insufficient loan demand in its market area, and where
appropriate under its investment policies, First Federal of Hazard has
historically invested in mortgage-backed and investment securities, although
since the reorganization, First Federal of Hazard has been purchasing whole
loans and participations in loans originated at First Federal of
Frankfort.  At June 30, 2009, First Federal of Hazard had total assets
of $114.2 million, net loans receivable of $86.4 million, total mortgage-backed
and investment securities of $17.1 million, deposits of $77.7 million and total
capital of $22.9 million.




First Federal
Savings Bank of Frankfort.First Federal of Frankfort is a
federally chartered savings bank, which is primarily engaged in the business of
attracting deposits from the general public and originating primarily
adjustable-rate loans secured by first mortgages on owner-occupied and
nonowner-occupied one- to four-family residences in Franklin, Anderson, Scott,
Shelby, Woodford and other counties in Kentucky.  First Federal of
Frankfort also originates, to a lesser extent, home equity loans and loans
secured by churches, multi-family properties, professional office buildings and
other types of property.  At June 30, 2009, First Federal of Frankfort
had total assets of $130.4 million, net loans receivable of $103.3 million,
deposits of $66.4 million and total capital of $32.3 million.




First
Federal of Frankfort’s main office is located at 216 W. Main Street, Frankfort,
Kentucky 40602 and its main telephone number is (502) 223-1638.




Market
Areas




First
Federal of Hazard and First Federal of Frankfort operate in two distinct market
areas.




First
Federal of Hazard’s market area consists of Perry County, where the business
office is located, as well as the surrounding counties of Letcher, Knott,
Breathitt, Leslie and Clay Counties in eastern Kentucky.  The economy
in its market area has been distressed in recent years.   The
local economy depends on the coal industry and other industries, such as health
care and manufacturing.  Still, the economy in First Federal of
Hazard’s market area continues to lag behind the economies of Kentucky and the
United States.  In the most recent available data, using information
from the State of Kentucky Economic Development Information System
(www.thinkkentucky.com), per capita personal income in Perry County averaged
$26,175 in 2007, compared to personal income of $31,826 in Kentucky and $39,751
in the United States.  Total population in Perry County has remained
stable over the last five years at approximately 30,000.  However, as
a regional economic center, Hazard tends to draw consumers and workers who
commute from surrounding counties. Employment in the market area, particularly
in Perry County, consists primarily of the services sector, including health
care (34.8%), trade, transportation and utilities industry (21.3%), state and
local government (17.6%) and the mining industry
(16.2%).   During the last five years, the unemployment rate has
exceeded 6% and in June 2009, was 12.7%, compared to 6.4% in Kentucky and 5.8%
in the United States at June 2008.





First
Federal of Frankfort’s primary lending area includes the Kentucky counties of
Franklin, Anderson, Scott, Shelby and Woodford, with the majority of lending
originated on properties located in Franklin County.  Franklin County
has a population of approximately 48,000, of which approximately 27,000 live
within the city of Frankfort, which serves as the capital of
Kentucky.  The primary employer in the area is the state government,
which employs about 47% of the work force.  In addition, there are
several large industrial, financial and government employers in the
community.  Despite this large, relatively stable source of
employment, the unemployment rate was 9.6% in June 2009 after having experienced
a generally stable unemployment rate which had ranged from 3 to 6% in prior
years.




2


Lending
Activities





General.Our loan
portfolio consists primarily of one- to four-family residential mortgage
loans.  As opportunities arise, we also offer loans secured by
churches, commercial real estate, and multi-family real estate, although there
is little demand for such loans in our market areas.  We also offer
loans secured by deposit accounts and, through First Federal of Frankfort, home
equity loans.  Substantially all of our loans are made within the
Banks’ respective market areas.





Residential
Mortgage Loans.  Our primary
lending activity is the origination of mortgage loans to enable borrowers to
purchase or refinance existing homes in the Banks’ respective market
areas.  At June 30, 2009, residential mortgage loans totaled $163.1
million, or 85.8% of our total loan portfolio.  We offer a mix of
adjustable-rate and fixed-rate mortgage loans with terms up to 40
years.  Adjustable-rate loans have an initial fixed term of one,
three, five or seven years.  After the initial term, the rate
adjustments on First Federal of Frankfort’s adjustable-rate loans are indexed to
the National Average Contract Interest Rate for Major Lenders on the Purchase of
Previously Occupied Homes.  The interest rates on these mortgages are
adjusted once a year, with limitations on adjustments of one percentage point
per adjustment period, and a lifetime cap of five percentage points. We
determine loan fees charged, interest rates and other provisions of mortgage
loans on the basis of our own pricing criteria and competitive market
conditions.  Some loans originated by the Banks have an additional
advance clause which allows the borrower to obtain additional funds at
prevailing interest rates, subject to managements’ approval.





At June 30, 2009, the Company’s loan
portfolio included $113.0 million in adjustable-rate one- to four-family
residential mortgage loans, or 69.3%, of the Company’s one- to four-family
residential mortgage loan portfolio.





The retention of adjustable-rate loans
in the portfolio helps reduce our exposure to increases in prevailing market
interest rates.  However, there are unquantifiable credit risks
resulting from potential increases in costs to borrowers in the event of upward
repricing of adjustable-rate loans.  It is possible that during
periods of rising interest rates, the risk of default on adjustable-rate loans
may increase due to increases in interest costs to
borrowers.  However, despite their popularity in some parts of the
country, neither bank offers adjustable-rate loans that contractually allow for
negative amortization.  Such loans, under some circumstances, can
cause the balance of a closed-end loan to exceed the original balance and
perhaps surpass the value of the collateral.  Further, although
adjustable-rate loans allow us to increase the sensitivity of our
interest-earning assets to changes in interest rates, the extent of this
interest sensitivity is limited by the initial fixed-rate period before the
first adjustment and the periodic and lifetime interest rate adjustment
limitations.  Accordingly, there can be no assurance that yields on
our adjustable-rate loans will fully adjust to compensate for increases in our
cost of funds.  Finally, adjustable-rate loans may decrease at a pace
faster than decreases in our cost of funds, resulting in reduced net
income.





While one- to four-family residential
real estate loans are normally originated with up to 30-year terms, (with terms
up to 40 years available for some products) such loans typically remain
outstanding for substantially shorter periods because borrowers often prepay
their loans in full upon sale of the mortgaged property or upon refinancing the
original loan.  Therefore, average loan maturity is a function of,
among other factors, the level of purchase and sale activity in the real estate
market, prevailing interest rates and the interest rates payable on outstanding
loans.  As interest rates declined and remained low over the past few
years, we have experienced high levels of loan repayments and
refinancings.





The Banks offer various programs for
the purchase and refinance of one- to four-family loans.  Most of
these loans have loan-to-value ratios of 80% or less, based on an appraisal
provided by a state licensed or certified appraiser.  For
owner-occupied properties, the borrower may be able to borrow up to 95% of the
value if they secure and pay for private mortgage insurance or they may be able
to obtain a second mortgage (at a higher interest rate) in which they borrow up
to 90% of the value.  On a rare case-by-case basis, the Boards of
Directors of the Banks may approve a loan above the 80% loan-to-value ratio
without such enhancements.


3


Construction
Loans.  We originate
loans to individuals to finance the construction of residential dwellings for
personal use.  On limited occasions we have made construction loans to
builders for the construction of a single-family residence for subsequent
sale.  At June 30, 2009, construction loans totaled $735,000, or 0.4%,
of our total loan portfolio.  Our construction loans generally provide
for the payment of interest only during the construction phase, which is usually
less than one year.  Loans generally can be made with a maximum loan
to value ratio of 80% of the appraised value.  Funds are disbursed as
progress is made toward completion of the construction.





Construction financing is generally
considered to involve a higher degree of risk of loss than long-term financing
on improved, occupied real estate.  Risk of loss on a construction
loan depends largely upon the accuracy of the initial estimate of the property’s
value at completion of construction or development and the estimated cost
(including interest) of construction.  During the construction phase,
a number of factors could result in delays and cost overruns.  If the
estimate of construction costs proves to be inaccurate, we may be required to
advance funds beyond the amount originally committed to permit completion of the
development.  If the estimate of value proves to be inaccurate, we may
be confronted, at or before the maturity of the loan, with a project having a
value which is insufficient to assure full repayment.  As a result of
the foregoing, construction lending often involves the disbursement of
substantial funds with repayment dependent, in part, on the success of the
ultimate project rather than the ability of the borrower or guarantor to repay
principal and interest.  If we are forced to foreclose on a project
before or at completion due to a default, there can be no assurance that we will
be able to recover the unpaid balance and accrued interest on the loan, as well
as related foreclosure and holding costs.





Multi-Family and
Nonresidential Loans.  As opportunities
arise, we offer mortgage loans secured by multi-family (residential property
comprised of five or more units) or nonresidential real estate, which is
generally secured by commercial office buildings, churches, condominiums and
properties used for other purposes.  At June 30, 2009, multi-family
and nonresidential loans totaled $7.3 million and $11.5 million, respectively,
or 3.8% and 6.1%, respectively, of our total loan portfolio.  We
originate multi-family and nonresidential real estate loans for terms of
generally 25 years or less.  Loan amounts generally do not exceed 80%
of the appraised value and tend to range much lower.





Loans secured by multi-family and
commercial real estate generally have larger balances and involve a greater
degree of risk than one- to four-family residential mortgage
loans.  Of primary concern in multi-family and commercial real estate
lending is the borrower’s creditworthiness and the feasibility and cash flow
potential of the project.  Payments on loans secured by income
properties often depend on successful operation and management of the
properties.  As a result, repayment of such loans may be subject to a
greater extent than residential real estate loans to adverse conditions in the
real estate market or the economy.  To monitor cash flows on income
properties, we require borrowers and/or loan guarantors to provide annual
financial statements on larger multi-family and commercial real estate
loans.  In reaching a decision on whether to make a multi-family or
commercial real estate loan, we consider the net cash flow of the project, the
borrower’s expertise, credit history and the value of the underlying
property.





Consumer
Lending.  Our consumer loans include home equity lines of
credit and loans secured by savings deposits.  At June 30, 2009, our
consumer loan balance totaled $7.4 million, or 3.9%, of our total loan
portfolio.  Of the consumer loan balance at June 30, 2009, $4.5
million were home equity loans and $2.9 million were loans secured by savings
deposits.





Our home equity loans are made at First
Federal of Frankfort and are made on the security of residential real estate and
have terms of up to 10 years.  Most of First Federal of Frankfort’s
home equity loans do not exceed 80% of the estimated value of the property, less
the outstanding principal of the first mortgage.  First Federal of
Frankfort does offer home equity loans up to 90% of the value less the balance
of the first mortgage at a premium rate to qualified borrowers.  These
loans are not secured by private mortgage insurance.  First Federal of
Frankfort’s home equity loans require the monthly payment of 2% of the unpaid
principal until maturity, when the remaining unpaid principal, if any, is
due.  First Federal of Frankfort’s home equity loans bear variable
rates of interest indexed to the prime rate for loans with 80% or less
loan-to-value ratio, and 2% above the prime rate for loans with a loan-to-value
ratio in excess of 80%.  Interest rates on these loans can be adjusted
monthly.  At June 30, 2009, the total outstanding home equity loans
amounted to 2.4% of the Company’s total loan portfolio.




4




Loans secured by savings are originated
for up to 90% of the depositor’s savings account balance.  The
interest rate is normally two percentage points above the rate paid on the
savings account, and the account must be pledged as collateral to secure the
loan.  At June 30, 2009, loans on savings accounts totaled 1.5% of the
Company’s total loan portfolio.





Consumer loans generally entail greater
risk than do residential mortgage loans, particularly in the case of consumer
loans which are unsecured or secured by rapidly depreciable assets. However,
these risks are considerably reduced in our case, since all of our consumer
loans are secured loans.





Loan
Originations, Purchases and Sales.  Loan originations
come from a number of sources.  The primary source of loan
originations are our in-house loan originators, and to a lesser extent,
advertising and referrals from customers and real estate agents.  We
currently do not purchase loans.  First Federal of Frankfort began
selling fixed-rate loans in April 2004 to the Federal Home Loan Bank of
Cincinnati (“FHLB-Cincinnati”).  Loan servicing rights are retained on
such loans.  At June 30, 2009, $10.4 million in loans were being
serviced by First Federal of Frankfort for the FHLB-Cincinnati.





Loan Approval
Procedures and Authority.  Our lending
activities follow written, nondiscriminatory, underwriting standards and loan
origination procedures established by each Bank’s Board of Directors and
management.  First Federal of Hazard’s loan committee, consisting of
its two senior officers, has authority to approve loans of up to
$275,000.  Loans above this amount and loans with non-standard terms
such as longer repayment terms or high loan-to-value ratios, must be approved by
our Board of Directors.  First Federal of Frankfort’s loan approval
process allows for various combinations of experienced bank officers to approve
or deny loans which are one- to four-family properties totaling $275,000 or
less, church loans of under $150,000, home equity lines of credit of $100,000 or
less and loans to individuals whose aggregate borrowings with the Bank is less
than $500,000. Loans that do not conform to these criteria must be submitted to
the Board of Directors or Executive Committee composed of at least three
directors, for approval.





It is the Company’s practice to record
a lien on the real estate securing a loan.  The Banks generally do not
require title insurance, although it may be required for loans made in certain
programs.  The Banks do require fire and casualty insurance on all
security properties and flood insurance when the collateral property is located
in a designated flood hazard area.  First Federal of Frankfort also
requires an earthquake provision in all policies for new loans.





Loans to One
Borrower.  The maximum
amount either Bank may lend to one borrower and the borrower’s related entities
is limited, by regulation, to generally 15% of that Bank’s stated capital and
the allowance for loan losses.  At June 30, 2009, the regulatory limit
on loans to one borrower was $3.5 million for First Federal of Hazard and $2.6
million for First Federal of Frankfort.  Neither of the banks had
lending relationships in excess of their respective lending
limits.  However, loans or participations in loans may be sold among
the Banks, which may allow a borrower’s total loans with the Company to exceed
the limit of either individual bank.





Loan
Commitments.  The Banks issue
commitments for the funding of mortgage loans.  Generally, these
commitments exist from the time the underwriting of the loan is completed and
the closing of the loan.  Generally, these commitments are for a
maximum of 30 or 60 days but management routinely extends the commitment if
circumstances delay the closing.  Management reserves the right to
verify or re-evaluate the borrower’s qualifications and to change the rates and
terms of the loan at that time.





If conditions exist whereby either Bank
experiences a significant increase in loans outstanding or commits to originate
loans that are riskier than a typical one- to four-family mortgage, management
and the boards will consider reflecting the anticipated loss exposure in a
separate liability.  As residential loans are approved in the normal
course of business, and those loans are underwritten to the standards of the
Banks, management does not believe alteration of the allowance for loan losses
is warranted.  At June 30, 2009, no commitment losses were reflected
in a separate liability.





First Federal of Frankfort offers
construction loans in which the borrower obtains the loan for a short term, less
than one year, and simultaneously extends a commitment for permanent
financing.  First Federal of Hazard offers a construction loan that is
convertible to permanent financing, thus no additional commitment is
made.




5




Interest Rates
and Loan Fees.Interest rates charged on mortgage loans are
primarily determined by competitive loan rates offered in our market areas and
our yield objectives.  Mortgage loan rates reflect factors such as
prevailing market interest rate levels, the supply of money available to the
savings industry and the demand for such loans.  These factors are in
turn affected by general economic conditions, the monetary policies of the
federal government, including the Board of Governors of the Federal Reserve
System, the general supply of money in the economy, tax policies and
governmental budget matters.





We receive fees in connection with late
payments on our loans.  Depending on the type of loan and the
competitive environment for mortgage loans, we may charge an origination fee on
all or some of the loans we originate.  We may also offer a menu of
loans whereby the borrower may pay a higher fee to receive a lower rate or to
pay a smaller or no fee for a higher rate.





Delinquencies.  When a borrower
fails to make a required loan payment, we take a number of steps to have the
borrower cure the delinquency and restore the loan to current
status.  We make initial contact with the borrower when the loan
becomes 15 days past due.  Subsequently, bank staff under the direct
supervision of senior management and with consultation by the Banks’ attorneys,
attempt to contact the borrower and determine their status and plans for
resolving the delinquency.  However, once a delinquency reaches 90
days, management considers foreclosure and, if the borrower has not provided a
reasonable plan (such as selling the collateral, a commitment from another
lender to refinance the loan or a plan to repay the delinquent principal,
interest, escrow, and late charges) the foreclosure suit may be
initiated.  In some cases, management may delay initiating the
foreclosure suit if, in management’s opinion, the Banks’ chance of loss is
minimal (such as with loans where the estimated value of the property greatly
exceeds the amount of the loan) or if the original borrower is deceased or
incapacitated.  If a foreclosure action is initiated and the loan is
not brought current, paid in full, or refinanced with another lender before the
foreclosure sale, the real property securing the loan is sold at
foreclosure.  The Banks are represented at the foreclosure sale and in
most cases will bid an amount equal to the Banks’ investment (including
interest, advances for taxes and insurance, foreclosure costs, and attorney’s
fees).  If another bidder outbids the Bank, the Bank’s investment is
received in full.  If another bidder does not outbid the Banks, the
Banks acquire the property and attempt to sell it to recover their
investment.





A borrower’s filing for bankruptcy can
alter the methods available to the Banks to seek collection.  In such
cases, the Banks work closely with legal counsel to resolve the delinquency as
quickly as possible.





We may consider loan workout
arrangements with certain borrowers under certain
conditions.  Management of each bank provides a report to its board of
directors on a monthly basis of all loans more than 60 days delinquent,
including loans in foreclosure, and all property acquired through
foreclosure.





Investment
Activities





We have legal authority to invest in
various types of liquid assets, including U.S. Treasury obligations, securities
of various federal agencies and state and municipal governments, mortgage-backed
securities and certificates of deposit of federally insured
institutions.  We also are required to maintain an investment in
FHLB-Cincinnati stock, the level of which is largely dependent on our level of
borrowings from the FHLB.





At June 30, 2009, our investment
portfolio consisted primarily of U.S. Government agency securities with
maturities of five years or less and mortgage-backed securities issued and
guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae with stated final
maturities of 30 years or less.  The Company held no equity position
with Fannie Mae or Freddie Mac.





Our investment objectives are to
provide an alternate source of low-risk investments when loan demand is
insufficient, to provide and maintain liquidity, to maintain a balance of high
quality, diversified investments to minimize risk, to provide collateral for
pledging requirements, to establish an acceptable level of interest rate risk,
and to generate a favorable return.  The Banks’ Board of Directors has
the overall responsibility for each institution’s investment portfolio,
including approval of investment policies.  The management of
each Bank may authorize investments as prescribed in each of the Bank’s
investment policies.




6




Bank
Owned Life Insurance





First
Federal of Frankfort owns several Bank Owned Life Insurance policies totaling
$2.4 million at June 30, 2009.  The purpose of these policies is to
offset future escalation of the costs of non-salary employee benefit plans such
as First Federal of Frankfort’s defined benefit retirement plan and First
Federal of Frankfort’s health insurance plan.  The lives of certain
key Bank employees are insured, and First Federal of Frankfort is the sole
beneficiary and will receive any benefits upon the employee’s
death.  The policies were purchased from four highly-rated life
insurance companies.  The design of the plan allows for the cash value
of the policy to be designated as an asset of First Federal of
Frankfort.  The asset’s value will increase by the crediting rate,
which is a rate set by each insurance company and is subject to change on an
annual basis.  The growth of the value of the asset will be recorded
as other operating income.  Management does not foresee any expense
associated with the plan.  Because this is a life insurance product,
current federal tax laws exempt the income from federal income
taxes.





Bank owned life insurance is not
secured by any government agency nor are the policies’ asset values or death
benefits secured specifically by tangible property.  Great care was
taken in selecting the insurance companies, and the bond ratings and financial
condition of these companies are monitored on a quarterly basis.  The
failure of one of these companies could result in a significant loss to First
Federal of Frankfort.  Other risks include the possibility that the
favorable tax treatment of the income could change, that the crediting rate will
not be increased in a manner comparable to market interest rates, or that this
type of plan will no longer be permitted by First Federal of Frankfort’s
regulators.  This asset is considered illiquid because, although First
Federal of Frankfort may terminate the policies and receive the original premium
plus all earnings, such an action would require the payment of federal income
taxes on all earnings since the policies’ inception.





Deposit
Activities and Other Sources of Funds





General.  Deposits, loan
repayments and maturities, redemptions, sales and repayments of investment and
mortgage-backed securities are the major sources of our funds for lending and
other investment purposes.  Loan repayments are a relatively stable
source of funds, while deposit inflows and outflows and loan prepayments are
significantly influenced by general interest rates and money market
conditions.





Deposit
Accounts.  The vast majority
of our depositors are residents of the Banks’ respective market
areas.  Deposits are attracted from within our market areas through
the offering of passbook savings and certificate accounts, and, at First Federal
of Frankfort, checking accounts and individual retirement accounts
(“IRAs”).  We do not utilize brokered funds.  Deposit
account terms vary according to the minimum balance required, the time periods
the funds must remain on deposit and the interest rate, among other
factors.  In determining the terms of our deposit accounts, we
consider the rates offered by our competition, profitability to us, asset
liability management and customer preferences and concerns.  We review
our deposit mix and pricing on an ongoing basis as needed.





Borrowings.  First Federal of
Hazard and First Federal of Frankfort borrow from the FHLB-Cincinnati to
supplement their supplies of investable funds and to meet deposit withdrawal
requirements.  The Federal Home Loan Bank functions as a central
reserve bank providing credit for member financial institutions.  As
members, each Bank is required to own capital stock in the FHLB-Cincinnati and
is authorized to apply for advances on the security of such stock and certain of
our mortgage loans and other assets (principally securities which are
obligations of, or guaranteed by, the United States), provided certain standards
related to creditworthiness have been met.  Advances are made under
several different programs, each having its own interest rate and range of
maturities.  Depending on the program, limitations on the amount of
advances are based either on a fixed percentage of an institution’s net worth or
on the Federal Home Loan Bank’s assessment of the institution’s
creditworthiness.


7


Subsidiary
Activities




The
Company has no other wholly owned subsidiaries other than First Federal of
Hazard and Frankfort First Bancorp.Frankfort First Bancorp
has one subsidiary, First Federal of Frankfort.





As
federally chartered savings institutions, the Banks are permitted to invest an
amount equal to 2% of assets in subsidiaries, with an additional investment of
1% of assets where such investment serves primarily community, inner-city and
community-development purposes.  Under such limitations, as of June
30, 2009, First Federal of Hazard and First Federal of Frankfort were authorized
to invest up to $3.4 million and $3.9 million, respectively, in the stock of or
loans to subsidiaries, including the additional 1% investment for community,
inner-city and community development purposes.





Competition





We face significant competition for the
attraction of deposits and origination of loans.  Our most direct
competition for deposits has historically come from the banks and credit unions
operating in our market areas and, to a lesser extent, from other financial
services companies, such as investment brokerage firms.  We also face
competition for depositors’ funds from money market funds and other corporate
and government securities.  Several of our competitors are
significantly larger than us and, therefore, have significantly greater
resources.  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.  Technological advances, for example, have lowered the
barriers to enter new market areas, allowed banks to expand their geographic
reach by providing services over the Internet and made it possible for
non-depository institutions to offer products and services that traditionally
have been provided by banks.  Changes in federal law permit
affiliation among banks, securities firms and insurance companies, which
promotes a competitive environment in the financial services
industry.  Competition for deposits and the origination of loans could
limit our growth in the future.





According
to the Federal Deposit Insurance Corporation (“FDIC”), at June 30, 2008, First
Federal of Hazard had a deposit market share of 14.8% in Perry
County.  Its largest competitors, Peoples Bank & Trust Company of
Hazard (approximately $282.0 million in assets), Community Trust Bank, Inc.
(approximately $1.9 billion in assets) and 1st Trust
Bank (approximately $99.9 million in assets), have Perry County deposit market
shares of 46.4%, 16.6% and 13.4%, respectively.  First Federal of
Hazard’s competition for loans comes primarily from financial institutions in
its market area and, to a lesser extent, from other financial services
providers, such as mortgage companies and mortgage
brokers.  Competition for loans also comes from the increasing number
of non-depository financial services companies entering the mortgage market,
such as insurance companies, securities companies and specialty finance
companies.





First Federal of Frankfort’s principal
competitors for deposits in its market area are other banking institutions, such
as commercial banks and credit unions, as well as mutual funds and other
investments.  First Federal of Frankfort principally competes for
deposits by offering a variety of deposit accounts, convenient business hours
and branch locations, customer service and a well-trained
staff.  According to the FDIC, at June 30, 2009, First Federal of
Frankfort had a deposit market share of 7.4%.  Its largest competitors
for depositors are the Farmers Bank and Capital Trust ($648.6 million in assets)
at a 48.2% market share, Mainsource Bank (formerly American Founders Bank ($2.5
billion in assets) at 13.4%, Whitaker Bank ($1.4 billion in assets) at 12.1%,
Fifth Third Bank ($64.6 billion in assets) at 6.4%, and Republic Bank ($3.0
billion in assets) at 4.7%.   The Bank also faces considerable
competition from credit unions including the Commonwealth Credit Union ($834
million in assets) and the Kentucky Employees Credit Union ($48 million in
assets).  First Federal of Frankfort competes for loans with other
depository institutions, as well as specialty mortgage lenders and brokers and
consumer finance companies.  First Federal of Frankfort principally
competes for loans on the basis of interest rates and the loan fees it charges,
the types of loans it originates and the convenience and service it provides to
borrowers.  In addition, First Federal of Frankfort believes it has
developed strong relationships with the businesses, real estate agents, builders
and general public in its market area.  Despite First Federal of
Frankfort’s small size relative to the many and various other depository and
lending institutions in its market area, First Federal of Frankfort usually
ranks first with respect to the origination of single-family purchase mortgages
made on properties located in Franklin County.  Nevertheless, the
level of competition in First Federal of Frankfort’s market area has limited, to
a certain extent, the lending opportunities in its market area.


8


Personnel




At June 30, 2009, we had 38 full-time
employees and two part-time employees, none of whom is represented by a
collective bargaining unit.  We believe our relationship with our
employees is good.





Regulation
and Supervision





General.  First
Federal of Hazard and First Federal of Frankfort are subject to extensive
regulation, examination and supervision by the Office of Thrift Supervision, as
their primary federal regulator, and the Federal Deposit Insurance Corporation,
as insurer of deposits.  First Federal of Hazard and First Federal of
Frankfort are each members of the Federal Home Loan Bank System and their
deposit accounts are insured up to applicable limits by the Deposit Insurance
Fund managed by the Federal Deposit Insurance Corporation.  First
Federal of Hazard and First Federal of Frankfort must each file reports with the
Office of Thrift Supervision and the Federal Deposit Insurance Corporation
concerning their activities and financial condition in addition to obtaining
regulatory approvals before entering into certain transactions such as mergers
with, or acquisitions of, other financial institutions.  There are
periodic examinations by the Office of Thrift Supervision and, under certain
circumstances, the Federal Deposit Insurance Corporation to evaluate First
Federal of Hazard’s and First Federal of Frankfort’s safety and soundness and
compliance with various regulatory requirements.  This regulatory
structure is intended primarily for the protection of the insurance fund and
depositors.





Kentucky
First and First Federal MHC, as savings and loan holding companies, are required
to file certain reports with, and are subject to examination by, and otherwise
are required to comply with the rules and regulations of the Office of Thrift
Supervision.  Certain of the regulatory requirements that are
applicable to First Federal of Hazard, First Federal of Frankfort, Kentucky
First and First Federal MHC are described below.  This discussion does
not purport to be a complete description of the laws and regulations involved,
and is qualified in its entirety by the actual laws and
regulations.  Moreover, laws and regulations are subject to changes by
the U.S. Congress or the regulatory agencies as applicable.





Regulation
of Federal Savings Institutions





Business
Activities.  Federal law and regulations, primarily the Home
Owners’ Loan Act and the regulations of the Office of Thrift Supervision, govern
the activities of federal savings institutions, such as First Federal of Hazard
and First Federal of Frankfort.  These laws and regulations delineate
the nature and extent of the activities in which federal savings banks may
engage.  In particular, certain lending authority for federal savings
institutions, e.g.,
commercial, nonresidential real property loans and consumer loans, is limited to
a specified percentage of the institution’s capital or assets.





Branching.  Federal
savings institutions are authorized to establish branch offices in any state or
states of the United States and its territories, subject to the approval of the
Office of Thrift Supervision.





Capital
Requirements.The
Office of Thrift Supervision’s capital regulations require federal savings
institutions to meet three minimum capital standards:  a 1.5% tangible
capital to total assets ratio, a 4% leverage ratio (3% for institutions
receiving the highest examination rating under the Office of Thrift
Supervision’s examination rating system) and an 8% risk-based capital
ratio.  In addition, the prompt corrective action standards discussed
below also establish, in effect, a minimum 2% tangible capital standard, a 4%
leverage ratio (3% for institutions receiving the highest examination rating)
and, together with the risk-based capital standard itself, a 4% Tier 1
risk-based capital standard.  The Office of Thrift Supervision
regulations also require that, in meeting the tangible, leverage and risk-based
capital standards, institutions must generally deduct investments in and loans
to subsidiaries engaged in activities as principal that are not permissible for
a national bank.


9


The risk-based capital standard
requires federal savings institutions to maintain Tier 1 (core) and total
capital (which is defined as core capital and supplementary capital) to
risk-weighted assets of at least 4% and 8%, respectively.  In
determining the amount of risk-weighted assets, all assets, including certain
off-balance sheet assets, recourse obligations, residual interests and direct
credit substitutes, are multiplied by a risk-weight factor assigned by the
Office of Thrift Supervision capital regulation based on the risks believed
inherent in the type of asset.  Core (Tier 1) capital is defined as
common stockholders’ equity (including retained earnings), certain noncumulative
perpetual preferred stock and related surplus and minority interests in equity
accounts of consolidated subsidiaries, less intangibles other than certain
mortgage servicing rights and credit card relationships.  The
components of supplementary capital currently include cumulative preferred
stock, long-term perpetual preferred stock, mandatory convertible securities,
subordinated debt and intermediate preferred stock, the allowance for loan and
lease losses limited to a maximum of 1.25% of risk-weighted assets and up to 45%
of unrealized gains on available-for-sale equity securities with readily
determinable fair market values.  Overall, the amount of supplementary
capital included as part of total capital cannot exceed 100% of core
capital.





The Office of Thrift Supervision also
has authority to establish individual minimum capital requirements in
appropriate cases upon a determination that an institution’s capital level is or
may become inadequate in light of the particular circumstances.  At
June 30, 2009, First Federal of Hazard and First Federal of Frankfort each met
each of these capital requirements.





Prompt Corrective
Regulatory Action. The Office of Thrift
Supervision is required to take certain supervisory actions against
undercapitalized institutions, the severity of which depends upon the
institution’s degree of undercapitalization.  Generally, a savings
institution that has a ratio of total capital to risk weighted assets of less
than 8%, a ratio of Tier 1 (core) capital to risk-weighted assets of less than
4% or a ratio of core capital to total assets of less than 4% (3% or less for
institutions with the highest examination rating) is considered to be
“under-capitalized.”  A savings institution that has a total
risk-based capital ratio of less than 6%, a Tier 1 capital ratio of less than 3%
or a leverage ratio that is less than 3% is considered to be “significantly
undercapitalized” and a savings institution that has a tangible capital to
assets ratio equal to or less than 2% is deemed to be “critically
undercapitalized.”  Subject to a narrow exception, the Office of
Thrift Supervision is required to appoint a receiver or conservator within
specified time frames for an institution that is “critically
undercapitalized.”  An institution must file a capital restoration
plan with the Office of Thrift Supervision within 45 days of the date it
receives notice that it is “undercapitalized,” “significantly undercapitalized,”
or “critically undercapitalized.”  Compliance with the plan must be
guaranteed by any parent holding company.  In addition, numerous
mandatory supervisory actions become immediately applicable to an
undercapitalized institution, including, but not limited to, increased
monitoring by regulators and restrictions on growth, capital distributions and
expansion.  “Significantly undercapitalized” and “critically
undercapitalized” institutions are subject to more extensive mandatory
regulatory actions.  The Office of Thrift Supervision could also take
any one of a number of discretionary supervisory actions, including the issuance
of a capital directive and the replacement of senior executive officers and
directors.





Loans to One
Borrower.  Federal law provides that savings institutions are
generally subject to the limits on loans to one borrower applicable to national
banks.  A savings institution may not make a loan or extend credit to
a single or related group of borrowers in excess of 15% of its unimpaired
capital and surplus.  An additional amount may be lent, equal to 10%
of unimpaired capital and surplus, if secured by specified readily-marketable
collateral.





Standards for
Safety and Soundness.  As required by statute, the federal
banking agencies have adopted Interagency Guidelines prescribing Standards for
Safety and Soundness.  The guidelines set forth the safety and
soundness standards that the federal banking agencies use to identify and
address problems at insured depository institutions before capital becomes
impaired.  If the Office of Thrift Supervision determines that a
savings institution fails to meet any standard prescribed by the guidelines, the
Office of Thrift Supervision may require the institution to submit an acceptable
plan to achieve compliance with the standard.


10


Limitation on
Capital Distributions.  Office of Thrift Supervision
regulations impose limitations upon all capital distributions by a savings
institution, including cash dividends, payments to repurchase its shares and
payments to shareholders of another institution in a cash-out
merger.  Under the regulations, an application to and the prior
approval of the Office of Thrift Supervision is required before any capital
distribution if the institution does not meet the criteria for “expedited
treatment” of applications under Office of Thrift Supervision regulations (i.e., generally, examination
and Community Reinvestment Act ratings in the two top categories), the total
capital distributions for the calendar year exceed net income for that year plus
the amount of retained net income for the preceding two years, the institution
would be undercapitalized following the distribution or the distribution would
otherwise be contrary to a statute, regulation or agreement with the Office of
Thrift Supervision.  If an application is not required, the
institution must still provide prior notice to the Office of Thrift Supervision
of the capital distribution if, like First Federal of Hazard and First Federal
of Frankfort, it is a subsidiary of a holding company.  If First
Federal of Hazard’s or First Federal of Frankfort’s capital were ever to fall
below its regulatory requirements or the Office of Thrift Supervision notified
it that it was in need of increased supervision, its ability to make capital
distributions could be restricted.  In addition, the Office of Thrift
Supervision could prohibit a proposed capital distribution that would otherwise
be permitted by the regulation, if the agency determines that such distribution
would constitute an unsafe or unsound practice.





Qualified Thrift
Lender Test.  Federal law requires savings institutions to meet
a qualified thrift lender test.  Under the test, a savings association
is required to either qualify as a “domestic building and loan association”
under the Internal Revenue Code or maintain at least 65% of its “portfolio
assets” (total assets less: (i) specified liquid assets up to 20% of total
assets; (ii) intangibles, including goodwill; and (iii) the value of property
used to conduct business) in certain “qualified thrift investments” (primarily
residential mortgages and related investments, including certain mortgage-backed
securities) in at least 9 months out of each 12-month period.  A
savings institution that fails the qualified thrift lender test is subject to
certain operating restrictions and may be required to convert to a bank
charter.





At June 30, 2009, First Federal of
Hazard and First Federal of Frankfort each met the qualified thrift lender
test.





Transactions with
Related Parties.  Federal law limits the authority of First
Federal of Hazard and First Federal of Frankfort to lend to, and engage in
certain other transactions with (collectively, “covered transactions”),
“affiliates” (e.g., any
company that controls or is under common control with an institution, including
Kentucky First, First Federal MHC and their non-savings institution
subsidiaries).  The aggregate amount of covered transactions with any
individual affiliate is limited to 10% of the capital and surplus of the savings
institution.  The aggregate amount of covered transactions with all
affiliates is limited to 20% of the savings institution’s capital and
surplus.  Loans and other specified transactions with affiliates are
required to be secured by collateral in an amount and of a type described in
federal law.  The purchase of low quality assets from affiliates is
generally prohibited.  Transactions with affiliates must be on terms
and under circumstances that are at least as favorable to the institution as
those prevailing at the time for comparable transactions with non-affiliated
companies.  In addition, savings institutions are prohibited from
lending to any affiliate that is engaged in activities that are not permissible
for bank holding companies and no savings institution may purchase the
securities of any affiliate other than a subsidiary.  Transactions
between sister depository institutions that are 80% or more owned by the same
holding company are exempt from the quantitative limits and collateral
requirements.





The Sarbanes-Oxley Act of 2002
generally prohibits a company from making loans to its executive officers and
directors.  However, that act contains a specific exception for loans
by a depository institution to its executive officers and directors in
compliance with federal banking laws.  Under such laws, First Federal
of Hazard’s and First Federal of Frankfort’s authority to extend credit to
executive officers, directors and 10% shareholders (“insiders”), as well as
entities such persons control, is limited.  The law restricts both the
individual and aggregate amount of loans First Federal of Hazard and First
Federal of Frankfort may make to insiders based, in part, on First Federal of
Hazard’s and First Federal of Frankfort’s respective capital positions and
requires certain board approval procedures to be followed.  Such loans
must be made on terms substantially the same as those offered to unaffiliated
individuals and not involve more than the normal risk of
repayment.  There is an exception for loans made pursuant to a benefit
or compensation program that is widely available to all employees of the
institution and does not give preference to insiders over other
employees.  There are additional restrictions applicable to loans to
executive officers.




11




Enforcement.  The
Office of Thrift Supervision has primary enforcement responsibility over federal
savings institutions and has the authority to bring actions against the
institution and all institution-affiliated parties, including stockholders, and
any attorneys, appraisers and accountants who knowingly or recklessly
participate in wrongful action likely to have an adverse effect on an insured
institution.  Formal enforcement action may range from the issuance of
a capital directive or cease and desist order to removal of officers and/or
directors to appointment of a receiver or conservator or termination of deposit
insurance.  Civil penalties cover a wide range of violations and can
amount to $25,000 per day, or even $1 million per day in especially egregious
cases.  The Federal Deposit Insurance Corporation has authority to
recommend to the Director of the Office of Thrift Supervision that enforcement
action to be taken with respect to a particular savings
institution.  If action is not taken by the Director, the Federal
Deposit Insurance Corporation has authority to take such action under certain
circumstances.  Federal law also establishes criminal penalties for
certain violations.





Assessments.  Federal
savings banks are required to pay assessments to the Office of Thrift
Supervision to fund its operations.  The general assessments, paid on
a semi-annual basis, are based upon the savings institution’s total assets,
including consolidated subsidiaries, as reported in the institution’s latest
quarterly thrift financial report, its financial condition and the complexity of
its portfolio.





Insurance of
Deposit Accounts.  The Banks’ deposits are insured up to
applicable limits by the Deposit Insurance Fund of the FDIC.  The
Deposit Insurance Fund is the successor to the Bank Insurance Fund and the
Savings Association Insurance Fund, which were merged in 2006.  Under
the FDIC’s risk-based assessment system, insured institutions are assigned to
one of four risk categories based on supervisory evaluations, regulatory capital
levels and certain other factors with less risky institutions paying lower
assessments.  For 2008, assessments ranged from five to forty-three
basis points of assessable deposits.  Due to losses incurred by the
Deposit Insurance Fund in 2008 from failed institutions, and anticipated future
losses, the FDIC, pursuant to a Restoration Plan to replenish the fund, adopted
an across the board seven basis point increase in the assessment range for the
first quarter of 2009.  The FDIC has adopted further refinements to
its risk-based assessment that were effective April 1, 2009 and effectively make
the range 7 to 771/2 basis
points.  The FDIC has imposed on all insured institutions a special
emergency assessment of 5 basis points of total assets less Tier 1 capital as of
June 30, 2009 (capped at 10 basis points of the institution’s deposit assessment
base on the same date) in order to cover losses to the Deposit Insurance Fund
and has alluded to the possibility of additional special assessments of up to 5
basis points of total assets less Tier 1 capital per quarter (subject to the
same cap) for the remaining two quarters of 2009 if deemed
necessary.  The FDIC may adjust the assessment scale uniformly from
one quarter to the next, except that no adjustment can deviate more than three
basis points from the base scale without notice and comment
rulemaking.  No institution may pay a dividend if in default of the
federal deposit insurance assessment.




Due to
the recent difficult economic conditions, deposit insurance per account owner
has been raised to $250,000 for all types of accounts until January 1,
2014.  In addition, the FDIC adopted an optional Temporary Liquidity
Guarantee Program by which, for a fee, noninterest-bearing transaction accounts
would receive unlimited insurance coverage until December 31, 2009 and certain
senior unsecured debt issued by institutions and their holding companies would
be temporarily guaranteed by the FDIC.  The Banks made the business
decision to not participate in the unlimited noninterest-bearing transaction
account coverage and the Banks and the Company opted to not participatein the unsecured debt
guarantee program.




The
Reform Act also provided for the possibility that the FDIC may pay dividends to
insured institutions once the Deposit Insurance Fund reserve ratio equals or
exceeds 1.35% of estimated insured deposits.




In addition to the assessment for
deposit insurance, institutions are required to make payments on bonds issued in
the late 1980s by the Financing Corporation to recapitalize a predecessor
deposit insurance fund.  This payment is established quarterly and
during the four quarters ended June 30, 2009 averaged 1.1 basis points of
assessable deposits.





The FDIC has authority to increase
insurance assessments.  A significant increase in insurance premiums
would likely have an adverse effect on the operating expenses and results of
operations of the Banks.  Management cannot predict what insurance
assessment rates will be in the future.  However, the recent failure
of FDIC-insured institutions may increase the likelihood that insurance
assessments will increase in the future.




12


Insurance of deposits may be terminated
by the FDIC upon a finding that the institution has engaged in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations or has
violated any applicable law, regulation, rule, order or condition imposed by the
FDIC.  Management does not know of any practice, condition or
violation that might lead to termination of deposit insurance.





Federal Home Loan
Bank System.  First Federal of Hazard and First Federal of
Frankfort are members of the Federal Home Loan Bank System, which consists of 12
regional Federal Home Loan Banks.  The Federal Home Loan Bank provides
a central credit facility primarily for member institutions.  As
members of the Federal Home Loan Bank of Cincinnati, First Federal of Hazard and
First Federal of Frankfort are each required to acquire and hold shares of
capital stock in that Federal Home Loan Bank.  First Federal of Hazard
and First Federal of Frankfort were in compliance with this requirement with
investments in Federal Home Loan Bank of Cincinnati stock at June 30, 2009, of
$2.1 million and $3.5 million, respectively.





Community
Reinvestment Act.Under the Community
Reinvestment Act, as implemented by Office of Thrift Supervision regulations, a
savings institution has a continuing and affirmative obligation consistent with
its safe and sound operation to help meet the credit needs of its entire
community, including low and moderate income neighborhoods.  The
Community Reinvestment Act does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution’s
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the Community
Reinvestment Act.  The Community Reinvestment Act requires the Office
of Thrift Supervision, in connection with its examination of a savings
association, to assess the institution’s record of meeting the credit needs of
its community and to take such record into account in its evaluation of certain
applications by such institution.





The Community Reinvestment Act requires
public disclosure of an institution’s rating and requires the Office of Thrift
Supervision to provide a written evaluation of an institution’s Community
Reinvestment Act performance utilizing a four-tiered descriptive rating
system.  First Federal of Hazard and First Federal of Frankfort each
received a “Satisfactory” rating as a result of their most recent Community
Reinvestment Act assessments.





Holding
Company Regulation





General.Kentucky
First and First Federal MHC are savings and loan holding companies within the
meaning of federal law.  As such, they are registered with the Office
of Thrift Supervision and are subject to Office of Thrift Supervision
regulations, examinations, supervision, reporting requirements and regulations
concerning corporate governance and activities.  In addition, the
Office of Thrift Supervision has enforcement authority over Kentucky First and
First Federal MHC and their non-savings institution
subsidiaries.  Among other things, this authority permits the Office
of Thrift Supervision to restrict or prohibit activities that are determined to
be a serious risk to First Federal of Hazard and/or First Federal of
Frankfort.





Restrictions
Applicable to Mutual Holding Companies.According to federal
law and Office of Thrift Supervision regulations, a mutual holding company, such
as First Federal MHC, may generally engage in the following
activities:  (1) investing in the stock of insured depository
institutions and acquiring them by means of a merger or acquisition; (2)
investing in a corporation the capital stock of which may be lawfully purchased
by a savings association under federal law; (3) furnishing or performing
management services for a savings association subsidiary of a savings and loan
holding company; (4) conducting an insurance agency or escrow business;
(5) holding, managing or liquidating assets owned or acquired from a
savings association subsidiary of the savings and loan holding company; (6)
holding or managing properties used or occupied by a savings association
subsidiary of the savings and loan holding company; (7) acting as trustee under
deed or trust; (8) any activity permitted for multiple savings and loan holding
companies by Office of Thrift Supervision regulations; (9) any activity
permitted by the Board of Governors of the Federal Reserve System for bank
holding companies and financial holding companies; and (10) any activity
permissible for service corporations.  Legislation, which authorized
mutual holding companies to engage in activities permitted for financial holding
companies, expanded the authorized activities.  Financial holding
companies may engage in a broad array of financial services activities,
including insurance and securities.


13


Federal law prohibits a savings and
loan holding company, including a federal mutual holding company, from directly
or indirectly, or through one or more subsidiaries, acquiring more than 5% of
the voting stock of another savings institution, or its holding company, without
prior written approval of the Office of Thrift Supervision.  Federal
law also prohibits a savings and loan holding company from acquiring or
retaining control of a depository institution that is not insured by the Federal
Deposit Insurance Corporation.  In evaluating applications by holding
companies to acquire savings institutions, the Office of Thrift Supervision must
consider the financial and managerial resources and future prospects of the
company and institution involved, the effect of the acquisition on the risk to
the insurance funds, the convenience and needs of the community and competitive
factors.





The Office of Thrift Supervision is
prohibited from approving any acquisition that would result in a multiple
savings and loan holding company controlling savings institutions in more than
one state, except:  (1) the approval of interstate supervisory
acquisitions by savings and loan holding companies, and (2) the acquisition
of a savings institution in another state if the laws of the state of the target
savings institution specifically permit such acquisitions.  The states
vary in the extent to which they permit interstate savings and loan holding
company acquisitions.





If a savings institution subsidiary of
a savings and loan holding company fails to meet the qualified thrift lender
test set, the holding company must register with the Federal Reserve Board as a
bank holding company within one year of the savings institution’s failure to so
qualify.





Stock Holding
Company Subsidiary Regulation.The Office of Thrift
Supervision has adopted regulations governing the two-tier mutual holding
company form of organization and subsidiary stock holding companies that are
controlled by mutual holding companies.  Kentucky First is the stock
holding company subsidiary of First Federal MHC.  Kentucky First is
only permitted to engage in activities that are permitted for First Federal MHC
subject to the same restrictions and conditions.





Waivers of
Dividends by First Federal MHC.Office of Thrift
Supervision regulations require First Federal MHC to notify the Office of Thrift
Supervision if it proposes to waive receipt of our dividends from Kentucky
First.  The Office of Thrift Supervision reviews dividend waiver
notices on a case-by-case basis, and, in general, does not object to any such
waiver if: (i) the waiver would not be detrimental to the safe and sound
operation of the savings association; and (ii) the mutual holding company’s
board of directors determines that such waiver is consistent with such
directors’ fiduciary duties to the mutual holding company’s members. The Office
of Thrift Supervision will not consider the amount of dividends waived by the
mutual holding company in determining an appropriate exchange ratio in the event
of a full conversion to stock form.  Kentucky First has been granted
such a waiver.  Dividends paid to shareholders on November 12, 2008,
February 14, May 26 and August 24, 2009 were waived by First Federal
MHC.





Conversion of
First Federal MHC to Stock Form.Office of Thrift Supervision
regulations permit First Federal MHC to convert from the mutual form of
organization to the capital stock form of organization.  In a
conversion transaction, a new holding company would be formed as successor to
First Federal MHC, its corporate existence would end, and certain depositors of
First Federal of Hazard would receive the right to subscribe for additional
shares of the new holding company. In a conversion transaction, each share of
common stock held by stockholders other than First Federal MHC would be
automatically converted into a number of shares of common stock of the new
holding company based on an exchange ratio determined at the time of conversion
that ensures that stockholders other than First Federal MHC own the same
percentage of common stock in the new holding company as they owned in us
immediately before conversion. Under Office of Thrift Supervision regulations,
stockholders other than First Federal MHC would not be diluted because of any
dividends waived by First Federal MHC (and waived dividends would not be
considered in determining an appropriate exchange ratio), in the event First
Federal MHC converts to stock form. The total number of shares held by
stockholders other than First Federal MHC after a conversion transaction also
would be increased by any purchases by stockholders other than First Federal MHC
in the stock offering conducted as part of the conversion
transaction.


14


Acquisition of
Control.Under the federal Change in Bank Control Act, a
notice must be submitted to the Office of Thrift Supervision if any person
(including a company), or group acting in concert, seeks to acquire “control” of
a savings and loan holding company or savings association.  An
acquisition of “control” can occur upon the acquisition of 10% or more of the
voting stock of a savings and loan holding company or savings institution or as
otherwise defined by the Office of Thrift Supervision.  Under the
Change in Bank Control Act, the Office of Thrift Supervision has 60 days from
the filing of a complete notice to act, taking into consideration certain
factors, including the financial and managerial resources of the acquirer and
the anti-trust effects of the acquisition.  Any company that so
acquires control would then be subject to regulation as a savings and loan
holding company.





Federal
and State Taxation





General.  We
report our income on a fiscal year basis using the accrual method of
accounting.





Federal
Taxation.The federal income tax laws apply to us in the same
manner as to other corporations with some exceptions, including particularly the
reserve for bad debts discussed below. The following discussion of tax matters
is intended only as a summary and does not purport to be a comprehensive
description of the tax rules applicable to us.  Each of our federal
income tax returns have been either audited or closed under the statute of
limitations through tax year 2003. For the 2009 fiscal year, First Federal of
Hazard’s and Frankfort First’s maximum federal income tax rate was
34.0%.





For fiscal years beginning before
June 30, 1996, thrift institutions that qualified under certain
definitional tests and other conditions of the Internal Revenue Code were
permitted to use certain favorable provisions to calculate their deductions from
taxable income for annual additions to their bad debt reserve. A reserve could
be established for bad debts on qualifying real property loans, generally
secured by interests in real property improved or to be improved, under the
percentage of taxable income method or the experience method. The reserve for
nonqualifying loans was computed using the experience method.  Federal
legislation enacted in 1996 repealed the reserve method of accounting for bad
debts and the percentage of taxable income method for tax years beginning after
1995 and require savings institutions to recapture or take into income certain
portions of their accumulated bad debt reserves.  First Federal of
Hazard did not qualify for such favorable tax treatment for any years through
1996.  Approximately $5.4 million of First Federal of Frankfort
First’s accumulated bad debt reserves would not be recaptured into taxable
income unless Frankfort First makes a “non-dividend distribution” to Kentucky
First as described below.





If First Federal of Hazard or First
Federal of Frankfort makes “non-dividend distributions” to us, the distributions
will be considered to have been made from First Federal of Hazard’s and First
Federal of Frankfort’s unrecaptured tax bad debt reserves, including the balance
of their reserves as of December 31, 1987, to the extent of the
“non-dividend distributions,” and then from First Federal of Frankfort’s
supplemental reserve for losses on loans, to the extent of those reserves, and
an amount based on the amount distributed, but not more than the amount of those
reserves, will be included in First Federal of Frankfort’s taxable
income.  Non-dividend distributions include distributions in excess of
First Federal of Frankfort’s current and accumulated earnings and profits, as
calculated for federal income tax purposes, distributions in redemption of
stock, and distributions in partial or complete
liquidation.  Dividends paid out of First Federal of Frankfort’s
current or accumulated earnings and profits will not be so included in First
Federal of Frankfort’s taxable income.





The
amount of additional taxable income triggered by a non-dividend is an amount
that, when reduced by the tax attributable to the income, is equal to the amount
of the distribution. Therefore, if First Federal of Frankfort makes a
non-dividend distribution to us, approximately one and one-half times the amount
of the distribution not in excess of the amount of the reserves would be
includable in income for federal income tax purposes, assuming a 34% federal
corporate income tax rate. First Federal of Frankfort does not intend to pay
dividends that would result in a recapture of any portion of its bad debt
reserves.


15


State
Taxation.Although First Federal
MHC and Kentucky First are subject to the Kentucky corporation income tax and
state corporation license tax (franchise tax), the corporation license tax is
repealed effective for tax periods ending on or after December 31,
2005.  Gross income of corporations subject to Kentucky income tax is
similar to income reported for federal income tax purposes except that dividend
income, among other income items, is exempt from taxation.  For First
Federal MHC and Kentucky First tax years beginning July 1, 2005, the
corporations are subject to an alternative minimum income
tax.  Corporations must pay the greater of the income tax, the
alternative tax or $175.  The corporations can choose between two
methods to calculate the alternative minimum; 9.5 cents per $100 of the
corporation’s gross receipts, or 75 cents per $100 of the corporation’s Kentucky
gross profits.  Kentucky gross profits means Kentucky gross receipts
reduced by returns and allowances attributable to Kentucky gross receipts, less
Kentucky cost of goods sold.  The corporations, in their capacity as
holding companies for financial institutions, do not have a material amount of
cost of good sold.  Although the corporate license tax rate is 0.21%
of total capital employed in Kentucky, a bank holding company, as defined in
Kentucky Revised Statutes 287.900, is allowed to deduct from its taxable
capital, the book value of its investment in the stock or securities of
subsidiaries that are subject to the bank franchise tax.





First Federal of Hazard and First
Federal of Frankfort are exempt from both the Kentucky corporation income tax
and corporation license tax.  However, both institutions are instead
subject to the bank franchise tax, an annual tax imposed on federally or state
chartered savings and loan associations, savings banks and other similar
institutions operating in Kentucky.  The tax is 0.1% of taxable
capital stock held as of January 1 each year.  Taxable capital
stock includes an institution’s undivided profits, surplus and general reserves
plus savings accounts and paid-up stock less deductible
items.  Deductible items include certain exempt federal obligations
and Kentucky municipal bonds.  Financial institutions which are
subject to tax both within and without Kentucky must apportion their net
capital.


16


Item 1A.  Risk
Factors





We may not be able to achieve
sufficient growth in our retail franchise to allow us to achieve the anticipated
benefits of our merger with Frankfort First Bancorp.





We intend to efficiently utilize excess
liquidity at either Bank or Kentucky First by buying and selling whole loans or
participations in loans between First Federal of Hazard and First Federal of
Frankfort, with the originating bank retaining servicing of any loans sold, or
by making deposits into accounts at either bank, subject to regulatory
limitations, in order to maximize the potential earnings of each
bank.  This strategy will not succeed if we do not maintain sufficient
loan demand at First Federal of Frankfort or sufficient deposit growth and
retention at First Federal of Hazard.  At June 30, 2009, Frankfort
First had total real estate loans of $98.5 million, compared to $106.2 million
at June 30, 2008, a decrease of approximately $7.7 million, or
7.3%.  Loans sold by First Federal of Frankfort to First Federal of
Hazard were $62.2 million and $41.9 million at June 30, 2009 and 2008,
respectively.  At June 30, 2009, First Federal of Hazard had total
deposits of $77.7 million, compared to total deposits of $79.9 million at June
30, 2008, a decrease of $2.2 million, or 2.8%.  There can be no
assurance as to if or when this strategy can be accomplished.  In an
attempt to increase the overall interest rate spread of the combined company,
management may adopt strategies that result in decreases in the assets and/or
liabilities of either or both Banks.





Rising interest rates may hurt our
profits and asset values.





If interest rates rise, our net
interest income would likely decline in the short term since, due to the
generally shorter terms of interest-bearing liabilities, interest expense paid
on interest-bearing liabilities increases more quickly than interest income
earned on interest-earning assets, such as loans and
investments.  In addition, a
continuation of rising interest rates may hurt our income because of reduced
demand for new loans, the demand for refinancing loans and the interest and fee
income earned on new loans and refinancings.  At June 30, 2009, in the
event of an instantaneous and permanent 200 basis point increase in interest
rates, our net portfolio value, which represents the discounted present value of
the difference between incoming cash flows on interest-earning and other assets
and outgoing cash flows on interest-bearing liabilities, would be expected to
decrease by approximately 17.8%.  While we believe that modest
interest rate increases will not significantly hurt our interest rate spread
over the long term due to our high level of liquidity and the presence of a
significant amount of adjustable-rate mortgage loans in our loan portfolio,
interest rate increases may initially reduce our interest rate spread until such
time as our loans and investments reprice to higher levels.





Changes in interest rates also affect
the value of our interest-earning assets, and in particular our securities
portfolio.  Generally, the value of fixed-rate securities fluctuates
inversely with changes in interest rates.  Unrealized gains and losses
on securities available for sale are reported as separate components of
equity.  Decreases in the fair value of securities available for sale
resulting from increases in interest rates therefore could have an adverse
effect on stockholders’ equity.





Future
FDIC assessments will hurt our earnings.





In May 2009, the FDIC adopted a final
rule imposing a special assessment on all insured institutions due to recent
bank and savings association failures.  The emergency assessment
amounts to 5 basis points of total assets minus Tier 1 Capital as of June 30,
2009, and will be collected on September 30, 2009.  The special
assessment amounted to approximately $100,000 and was charged, net of the
remaining $72,000 credit available to the banks, during the fiscal year ended
June 30, 2009.  The FDIC’s higher level of recurring assessments will
negatively impact the Company's earnings and the Company expects that
noninterest expenses will increase approximately $68,000 for the year ended June
30, 2010 as compared to the year ended June 30, 2009.  In addition,
the final rule allows the FDIC to impose additional emergency special
assessments of up to 5 basis points per quarter for the third and fourth
quarters of 2009 if necessary to maintain public confidence in federal deposit
insurance or as a result of deterioration in the Deposit Insurance Fund reserve
ratio due to institution failures.  Any additional emergency special
assessment imposed by the FDIC will further hurt the Company's
earnings.


17


Strong
competition within our market area could hurt our profits and slow
growth.





Although we consider ourselves
competitive in our market areas, we face intense competition both in making
loans and attracting deposits.  Price competition for loans and
deposits might result in our earning less on our loans and paying more on our
deposits, which reduces net interest income.  Some of the institutions
with which we compete have substantially greater resources than we have and may
offer services that we do not provide.  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 profitability will depend upon our continued ability to
compete successfully in our market areas.





The
distressed economy in First Federal of Hazard’s market area could hurt our
profits and slow our growth.





First Federal of Hazard’s market area
consists of Perry and surrounding counties in eastern Kentucky.  The
economy in this market area has been distressed in recent years due to the
decline in the coal industry on which the economy has been
dependent.  While there has been improvement in the economy from the
influx of other industries, such as health care and manufacturing, and there may
be signs that the coal industry is improving with the rising costs of petroleum,
the economy in First Federal of Hazard’s market area continues to lag behind the
economies of Kentucky and the United States.  As a result, First
Federal of Hazard has experienced insufficient loan demand in its market
area.  While First Federal of Hazard will seek to use excess funds to
purchase loans from First Federal of Frankfort, we expect the redeployment of
funds from securities into loans to take several years.  Moreover, the
slow economy in First Federal of Hazard’s market area will limit our ability to
grow our asset base in that market.





Proposed
regulatory reform may have a material impact on our operations.





On June 17, 2009, President Obama
published a comprehensive regulatory reform plan intended to modernize and
protect the integrity of the United States financial system.  The
President’s plan contains several elements that would have a direct effect on
First Federal MHC, Kentucky First Federal Bancorp, First Federal of Hazard and
First Federal of Frankfort.  Under the reform plan, the federal thrift
charter and the Office of Thrift Supervision would be eliminated and all
companies that control an insured depository institution must register as a bank
holding company.  Although the reform plan does not specify how
existing federal thrifts, such as First Federal of Hazard and First Federal of
Frankfort, would be treated, we expect that if the federal thrift charter is
eliminated First Federal of Hazard and First Federal of Frankfort could become a
national bank or adopt a state charter.  Registration as a bank
holding company would represent a significant change, as there currently exist
significant differences between savings and loan holding company and bank
holding company supervision and regulation.  For example, the Federal
Reserve imposes leverage and risk-based capital requirements on bank holding
companies whereas the Office of Thrift Supervision does not impose any capital
requirements on savings and loan holding companies.  Further, a change
in the bank regulatory structure could result in a change in the way that mutual
holding companies are regulated.  The reform plan also proposes the
creation of a new federal agency, the Consumer Financial Protection Agency,
which would be dedicated to protecting consumers in the financial products and
services market.  The creation of this agency could result in new
regulatory requirements and raise the cost of regulatory
compliance.  In addition, legislation stemming from the reform plan
could require changes in regulatory capital requirements, loan loss provisioning
practices, and compensation practices.  If implemented, the foregoing
regulatory reforms may have a material impact on our
operations.  However, because the legislation needed to implement the
President’s reform plan has not been introduced, and because the final
legislation may differ significantly from the reform plan proposed by the
President, we cannot determine the specific impact of regulatory reform at this
time.





We
operate in a highly regulated environment and we may be adversely affected by
changes in laws and regulations.





The regulatory environment for banks,
savings associations and other financial institutions is under scrutiny from
Congress at this time.  New legislation may lead to significant
changes in our regulatory environment.


18


Currently, we are subject to extensive
regulation, supervision and examination by the Office of Thrift Supervision, our
primary federal regulator, and by the FDIC, as insurer of our
deposits.  Such regulation and supervision governs the activities in
which an institution and its holding company may engage, and is intended
primarily for the protection of the insurance fund and the depositors and
borrowers of First Federal of Hazard and First Federal of Frankfort rather than
for holders of Kentucky First Federal Bancorp common
stock.  Regulatory authorities have extensive discretion in their
supervisory and enforcement activities, including the imposition of restrictions
on our operations, the classification of our assets and determination of the
level of our allowance for loan losses. Any change in such regulation,
oversight, and fees assessed by our regulators, whether in the form of
regulatory policy, regulations, legislation or supervisory action, may have a
material impact on our operations.





The current administration has proposed
comprehensive legislation intended to modernize regulation of the United States
financial system.  The proposed legislation contains several
provisions that would have a substantial impact on the operations of Kentucky
First Federal Bancorp, First Federal of Hazard and First Federal of Frankfort if
the legislation were enacted.  For example, under the proposed
legislation, the federal savings association charter would be eliminated and the
Office of Thrift Supervision would be consolidated with the Comptroller of the
Currency, the regulator or national banks, into a new regulator, the National
Bank Supervisor.  The proposed legislation would require each of the
Banks to become a national bank or convert to a state-chartered
institution.  The proposed legislation would also eliminate the status
of “savings and loan holding company” and mandate that all companies that
control an insured depository institution register as bank holding companies
subject to regulation by the Federal Reserve Board.





Registration as a bank holding company
would represent a significant change, as material differences currently exist
between savings and loan holding company and bank holding company supervision
and regulation.  For example, bank holding companies above a specified
asset size are subject to consolidated leverage and risk-based capital
requirements whereas savings and loan holding companies are not subject to such
requirements.  Additionally, Office of Thrift Supervision regulations
permit mutual holding company parents, such as First Federal MHC, to waive the
receipt of dividends paid by their mutual holding company subsidiaries. Mutual
holding companies in the bank holding company structure have generally not been
permitted to waive dividends.  Accordingly, if Kentucky First Federal
Bancorp were required to register as a bank holding company, First Federal MHC
may not be able to waive the receipt of dividends paid by Kentucky First Federal
Bancorp.  If it could not waive the receipt of dividends, Kentucky
First Federal Bancorp may have to reduce the rate of the dividends it pays to
its shareholders.





The proposed legislation would also
create a new federal agency, the Consumer Financial Protection Agency, that
would administer and enforce fair lending and consumer compliance laws with
respect to financial products and services, instead of the bank regulatory
agencies.  If enacted, that aspect of the legislation could result in
new regulatory requirements and increased regulatory costs for us.





Because any final legislation may
differ significantly from the current administration’s proposal, the specific
effects of the legislation cannot be evaluated at this
time.


19


We
expect that our return on equity will be low compared to other companies as a
result of our high level of capital.





Return on average equity, which equals
net income divided by average equity, is a ratio used by many investors to
compare the performance of a particular company with other companies. For the
year ended June 30, 2009, our return on average equity was
1.37%.  Over time, we intend to leverage our capital by continued
investment in higher-yielding assets, such as loans.  We also intend
to continue managing excess capital through our stock repurchase program, which
has been successful, given relatively low market prices of the Company’s common
stock.  However, this program could be curtailed or rendered less
effective if the market price of our stock increases, or if the Company’s liquid
funds are deployed elsewhere.  Our goal of generating a return on
average equity that is competitive with other publicly-held subsidiaries of
mutual holding companies, by increasing earnings per share and book value per
share, without assuming undue risk, could take a number of years to achieve, and
we cannot assure that our goal will be attained.  Consequently, you
should not expect a competitive return on average equity in the near
future.  Failure to achieve a competitive return on average equity
might make an investment in our common stock unattractive to some investors and
might cause our common stock to trade at lower prices than comparable companies
with higher returns on average equity.





Additional annual employee
compensation and benefit expenses may reduce our profitability and stockholders’
equity.





We will continue to recognize employee
compensation and benefit expenses for employees and executives under our benefit
plans.  With regard to  the employee stock ownership plan,
applicable accounting practices require that the expense be based on the fair
market value of the shares of common stock at specific points in the future,
therefore we will recognize expenses for our employee stock ownership plan when
shares are committed to be released to participants’ accounts.  We
will also recognize expenses for restricted stock awards and options over the
vesting periods of those awards.  In addition, employees of both
subsidiary Banks participate in a defined-benefit plan through
Pentegra.  Costs associated with the defined-benefit plans could
increase or legislation could be enacted that would increase the Banks’
obligations under the plan or change the methods the Banks use in accounting for
the plans.  Those changes could adversely affect personnel expense and
the Company’s balance sheet.





First
Federal MHC owns a majority of our common stock and is able to exercise voting
control over most matters put to a vote of stockholders, including preventing
sale or merger transactions you may like or a second-step conversion by First
Federal MHC.





First Federal MHC owns a majority of
our common stock and, through its Board of Directors, is able to exercise voting
control over most matters put to a vote of stockholders.  As a
federally chartered mutual holding company, the board of directors of First
Federal MHC must ensure that the interests of depositors of First Federal of
Hazard are represented and considered in matters put to a vote of stockholders
of Kentucky First.  Therefore, the votes cast by First Federal MHC may
not be in your personal best interests as a stockholder.  For example,
First Federal MHC may exercise its voting control to prevent a sale or merger
transaction in which stockholders could receive a premium for their shares,
prevent a second-step conversion transaction by First Federal MHC or defeat a
stockholder nominee for election to the Board of Directors of Kentucky
First.  However, implementation of a stock-based incentive plan will
require approval of Kentucky First’s stockholders other than First Federal
MHC.  Office of Thrift Supervision regulations would likely prevent an
acquisition of Kentucky First other than by another mutual holding company or a
mutual institution.





There
may be a limited market for our common stock which may lower our stock
price.





Although
our shares of common stock are listed on the Nasdaq Global Market, there is no
guarantee that the shares will be regularly traded.  If an active
trading market for our common stock does not develop, you may not be able to
sell all of your shares of common stock on short notice and the sale of a large
number of shares at one time could temporarily depress the market
price.




20


Item
1B.  Unresolved Staff Comments





None.





Item
2.Properties





We conduct our business through four
offices.  The following table sets forth certain information relating
to our offices at June 30, 2009.





Year
                                Opened/Acquired
                              
                              Owned or
                                Leased
                              
                              Net
                                Book Value at
                                June 30,
                                2009
                              
                              
                              Approximate
                                Square Footage(Dollars
      in thousands)First
      Federal of Hazard
                                Main
      Office:
                                479
      Main Street
                                  Hazard,
      Kentucky 41701
                              
                              1960
                              
                              Owned
                              
                              $
                              193
                              
                              
                              
                              15,000First
      Federal of FrankfortMain
      Office:
                                216
      West Main Street
                                Frankfort,
      Kentucky 40601
                              
                              2005
                              
                              Owned
                              
                              
                              1,386
                              
                              
                              
                              14,000East
      Branch
                                1980
      Versailles Road
                                Frankfort,
      Kentucky 40601
                              
                              2005
                              
                              Owned
                              
                              
                              534
                              
                              
                              
                              1,800West
      Branch
                                1220
      US 127 South
                                Frankfort,
      Kentucky 40601
                              
                              2005
                              
                              Owned
                              
                              
                              521
                              
                              
                              
                              2,480




The net
book value of our investment in premises and equipment was $2.8 million at June
30, 2009.  See Note E of Notes to Consolidated Financial
Statements.




Item 3.  Legal
Proceedings




From time to time, we may be defendants
in claims and lawsuits against us, such as claims to enforce liens, condemnation
proceedings on properties in which we hold security interests, claims involving
the making and servicing of real property loans and other issues incident to our
business.  We are not a party to any pending legal proceedings that we
believe could have a material adverse effect on our financial condition, results
of operations or cash flows.




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




Not
applicable.


21


PART
II




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




(a)           The
information contained under the sections captioned “Market Information” in the
Company’s Annual Report to Stockholders for the Fiscal Year Ended June 30, 2009
(the “Annual Report”) filed as Exhibit 13 hereto is incorporated herein by
reference.




(b)           Not
applicable.




(c)           The
Company repurchased the following equity securities registered under the
Securities Exchange Act of 1934, as amended, during the fourth quarter of the
fiscal year ended June 30, 2009.




Period
                              
                              (a)
                                Total
                                Number of
                                Shares
                                Purchased
                              
                              
                              (b)
                                Average
                                Price Paid
                                per Share
                              
                              
                              (c)
                                Total Number of
                                Shares Purchased
                                as Part of Publicly
                                Announced Plans
                                or Programs
                              
                              
                              (d)
                                Maximum
                                Number of Shares
                                That May Yet Be
                                Purchased Under
                                the Plans or
                                Programs (1)April
      2009
                                Beginning
      date: April 1
                                Ending
      date:  April 30
                              
                              
                              5,000
                              
                              
                              $
                              10.40
                              
                              
                              
                              5,000
                              
                              
                              
                              42,500May
      2009
                                Beginning
      date: May 1
                                Ending
      date:  May 31
                              
                              
                              —
                              
                              
                              $
                              —
                              
                              
                              
                              —
                              
                              
                              
                              42,500June
      2009
                                Beginning
      date: June 1
                                Ending
      date: June 30
                              
                              
                              —
                              
                              
                              $
                              —
                              
                              
                              
                              —
                              
                              
                              
                              42,500Total
                              
                              
                              5,000
                              
                              
                              $
                              10.40
                              
                              
                              
                              5,000





(1)
            On
      October 17, 2008, the Company announced a program (its sixth) to
      repurchase up to 150,000 shares of its Common
  Stock.





Item
6.Selected
Financial Data





The
information contained in the table captioned “Selected Consolidated Financial
and Other Data” in the Annual Report is incorporated herein by
reference.




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




The
information contained in the section captioned “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” in the Annual Report
is incorporated herein by reference.




Item
7A.Quantitative
and Qualitative Disclosures About Market Risk




The
information contained under the sections captioned “Market Risk” in the Annual
Report is incorporated herein by reference.


22


Item
8.Financial
Statements and Supplementary Data




The
Consolidated Financial Statements, Notes to Consolidated Financial Statements,
Independent Auditor’s Report and Selected Financial Data, which are listed under
Item 15 herein, are included in the Annual Report and are incorporated herein by
reference.




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




(a)
            Previous
      Independent Registered Public Accounting
Firm





On August
20, 2009, the Company formally notified BKD, LLP (“BKD”) that such firm would
not be retained as the Company’s independent registered public accounting firm
for the fiscal year ending June 30, 2010.  However, BKD did audit the
Company’s consolidated financial statements for the fiscal year ended June 30,
2009.





BKD's
reports on the Company's financial statements for the fiscal years ended June
30, 2009 and 2008 did not contain an adverse opinion or disclaimer of opinion
and were not qualified or modified as to uncertainty, audit scope, or accounting
principles.  During the Company's two most recent fiscal year ends
(the fiscal years ended June 30, 2008 and 2007) and through the date of this
filing, there were no disagreements with BKD on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreements, if not resolved to the satisfaction of BKD,
would have caused BKD to make reference to the subject matter of the
disagreements in their report on the financial statements for such
years.  During the Company’s two most recent fiscal year ends (the
fiscal years ended June 30, 2009 and 2008) and through the date of this filing,
there were no “reportable events” as defined in Item 304(a)(1)(v) of Regulation
S-K.





(b)
            Appointment
      of New Independent Registered Public Accounting
  Firm





On August
20, 2009, the Company engaged Crowe Horwath LLP to conduct the audit of the
Company’s consolidated financial statements for the fiscal year ending June 30,
2010.





During
the Company’s two most recent fiscal year ends (the fiscal years ended June 30,
2009 and 2008) and through the date of this filing, the Company did not consult
with Crowe Horwath LLP, regarding application of accounting principles to any
specified transaction or the type of report that might be rendered on the
Company’s financial statements or any other matters or “reportable events” as
defined in Item 304(a)(1)(v) of Regulation S-K.





Item
9A(T).Controls
and Procedures





(a)
            Disclosure
      Controls and Procedures





The
Company’s management, including the Company’s principal executive officer and
principal financial officer, have conducted an evaluation of the effectiveness
of the Company’s “disclosure controls and procedures,” as such term is defined
in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended, (the “Exchange Act”).  Based upon their evaluation,
management has concluded that as of June 30, 2009, the Company’s disclosure
controls and procedures were effective to ensure that information required to be
disclosed by us 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 regulations.


23


Item
9A(T).Controls
and Procedures (continued)





(b)
            Internal
      Controls Over Financial Reporting




MANAGEMENT’S
ANNUAL REPORT ON


INTERNAL
CONTROL OVER FINANCIAL REPORTING





Management
is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined under Exchange Act Rule
13a-15(f).  The Company’s internal control over financial reporting is
designed to provide reasonable assurance to its management and board of
directors regarding the preparation and fair presentation of published financial
statements.  Under the supervision and with the participation of our
management, including our principal executive officer and principal financial
officer, we conducted an evaluation of the effectiveness of our internal control
over financial reporting based on the framework in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.  Based on this evaluation, management has concluded that
the Company’s disclosure controls and procedures are effective. A material
weakness is a deficiency, or a combination of control deficiencies, in internal
control over financial reporting such that there is a reasonable possibility
that a material misstatement of the Company’s annual or interim financial
statements will not be prevented or detected on a timely basis.




Management
assessed the effectiveness of the Company’s internal control over financial
reporting as of June 30, 2009 based upon criteria set forth in Internal Control
– Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO).




Based on
this assessment and on the foregoing criteria, management has concluded that, as
of June 30, 2009, the Company’s internal control over financial reporting is
effective.




This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial
reporting.  Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
management’s report in this Annual Report on Form 10-K.




/s/
      Tony D. Whitaker
                  
                  /s/
      R. Clay HuletteTony
      D. Whitaker
                  
                  R.
      Clay HuletteChairman
      and Chief Executive Officer
                  
                  Vice
      President, Chief Financial Officer and
Treasurer




24


(c)
            Changes
      to Internal Control Over Financial
Reporting





In
connection with the above evaluation of our disclosure controls and procedures,
no change was identified that occurred in the Company’s internal control over
financial reporting during the three months ended June 30, 2009 that have
materially affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting.





Item 9B.  Other
Information





Not
Applicable.





PART
III





Item
10.Directors,
Executive Officers, and Corporate Governance





Directors





The
information contained under the section captioned “Proposal I — Election of
Directors” in the Company’s definitive proxy statement for the Company’s 2009
Annual Meeting of Stockholders (the “Proxy Statement”) is incorporated herein by
reference.





Executive
Officers





The
information regarding the Company’s executive officers is incorporated herein by
reference to “Proposal I –
Election of Directors” in the Proxy Statement.





Corporate
Governance





Information
regarding the Company’s Audit Committee and Audit Committee financial expert is
incorporated herein by reference to the section captioned “Proposal I ─ Election of Directors
─ Committees of the Board of Directors” in the Proxy
Statement.





Compliance
with Section 16(a) of the Exchange Act





Information
regarding compliance with Section 16(a) of the Exchange Act is incorporated by
reference to section captioned “Section 16(a) Beneficial Ownership
Reporting Compliance” in the Proxy Statement.





Disclosure
of Code of Ethics





Kentucky First has adopted a Code of
Ethics and Business Conduct that applies to all of its directors, officers and
employees.  To obtain a copy of this document at no charge, please
write to Kentucky First Federal Bancorp, P.O. Box 535, Frankfort, Kentucky
40602-0535, or call toll-free (888) 818-3372 and ask for Investor
Relations.




Item
11.Executive
Compensation




The
information contained under the section captioned “Executive Compensation” in
the Proxy Statement is incorporated herein by reference.


25


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







(a)
            Security Ownership of Certain
      Beneficial Owners.Information required by this item is
      incorporated herein by reference to the section captioned “Voting
      Securities and Security Ownership” in the Proxy
  Statement.




(b)
            Security Ownership of
      Management.Information required by this item is
      incorporated herein by reference to the sections captioned “Voting
      Securities and Security Ownership” in the Proxy
  Statement.




(c)
            Changes in
      Control.Management of the Company knows of no
      arrangements, including any pledge by any person of securities of the
      Company, the operation of which may at a subsequent date result in a
      change in control of the Company.




(d)
            Equity Compensation
      Plans.The following table sets forth certain
      information with respect to the Company’s equity compensation plans as of
      June 30, 2009.




(a)
                            
                            (b)
                            
                            (c)Number of securities to be
                              issued upon exercise of
                              outstanding options,
                              warrants and rights
                            
                            Weighted-average
                              exercise price of
                              outstanding options,
                              warrants and rights
                            
                            Number of securities
                              remaining available
                              for future issuance
                              under equity compensation
                              plans (excluding securities
                              reflected in column (a))Equity
      compensation plans approved by security holders
                            
                            _______
                            
                            $
                            ______
                            
                            
                            _______Equity
      compensation plans not approved by security holders
                            _______
                            
                            _______
                            
                            _______Total
                            _______
                            
                            $
                            ______
                            
                            _______





Item
13.Certain
Relationships and Related Transactions, and Director
Independence





Certain
Relationships and Related Transactions





The
information required by this item is incorporated herein by reference to the
section captioned “Transactions with Related
Persons” in the Proxy Statement.





Corporate
Governance





For information regarding director
independence, the section captioned “Proposal I – Election of
Directors” is incorporated herein by reference.





Item
14.  Principal Accountant Fees and Services




The information required by this item
is incorporated herein by reference to the section captioned “Audit and Other Fees Paid to
Independent Accountant” in the Proxy Statement.


26


PART
IV




Item
15.Exhibits
and Financial Statement Schedules




(a)  List of Documents Filed as
Part of This Report




(1)
            Financial
      Statements.  The
      following consolidated financial statements are incorporated by reference
      from Item 8 hereof (see Exhibit
13):




Report
      of Independent Registered Public Accounting FirmConsolidated
      Statements of Financial Condition as of June 30, 2009 and
    2008Consolidated
      Statements of Earnings for the Years Ended June 30, 2009 and
      2008Consolidated
      Statements of Shareholders’ Equity and Comprehensive Income for the Years
      Ended  June 30, 2009 and 2008Consolidated
      Statements of Cash Flows for the Years Ended June 30, 2009 and
      2008Notes
      to Consolidated Financial
Statements




(2)
            Financial
      Statement Schedules.  All
      schedules for which provision is made in the applicable accounting
      regulations of the Securities and Exchange Commission are omitted because
      of the absence of conditions under which they are required or because the
      required information is included in the consolidated financial statements
      and related notes thereto.




(3)
            Exhibits.  The
      following is a list of exhibits filed as part of this Annual Report on
      Form 10-K and is also the Exhibit
Index.




No.
              
              Description3.11
              
              Charter
      of Kentucky First Federal Bancorp3.21
              
              Bylaws
      of Kentucky First Federal Bancorp4.11
              
              Specimen
      Stock Certificate of Kentucky First Federal Bancorp10.12
              
              Employment
      Agreement between Kentucky First Federal Bancorp and Tony D. Whitaker, as
      amended†10.22
              
              Employment
      Agreement between First Federal Savings and Loan Association of Hazard and
      Tony D. Whitaker, as amended†10.32
              
              Employment
      Agreement between Kentucky First Federal Bancorp and Don D. Jennings, as
      amended†10.42
              
              Employment
      Agreement between First Federal Savings Bank of Frankfort and Don D.
      Jennings, as amended†10.52
              
              Employment
      Agreement between Kentucky First Federal Bancorp and R. Clay Hulette, as
      amended†10.62
              
              Employment
      Agreement between First Federal Savings Bank of Frankfort and R. Clay
      Hulette, as amended†10.72
              
              Employment
      Agreement between First Federal Savings Bank of Frankfort and Teresa Kuhl,
      as amended†10.82
              
              Amended
      and Restated First Federal Savings and Loan Association of Hazard Change
      in Control Severance Compensation Plan†10.92
              
              Amended
      and Restated First Federal Savings Bank of Frankfort Change in Control
      Severance Compensation Plan†10.102
              
              Amended
      and Restated First Federal Savings and Loan Association Supplemental
      Executive Retirement Plan†10.113
              
              Kentucky
      First Federal Bancorp 2005 Equity Incentive Plan†10.124
              
              Form
      of Restricted Stock Award Agreement†10.134
              
              Form
      of Incentive Stock Option Award Agreement†10.144
              
              Form
      of Non-Statutory Option Award Agreement†13
              
              Annual
      Report to Stockholders for the year ended June 30, 200921
              
              Subsidiaries




27




23.1
              
              Consent
      of BKD LLP31.1
              
              Rule
      13a-14(a) Certification of Chief Executive Officer31.2
              
              Rule
      13a-14(a) Certification of Chief Financial Officer32
              
              Section
      1350 Certifications








†
            Management
      contract or compensation plan or
arrangement.


(1)
            Incorporated
      herein by reference to the Company’s Registration Statement on Form S-1
      (File No. 333-119041).


(2)
            Incorporated
      herein by reference to the Company’s Quarterly Report on Form 10-Q for the
      quarter ended December 31, 2008 (File No.
  0-51176).


(3)
            Incorporated
      herein by reference to the Company’s definitive additional proxy
      solicitation materials filed with the Securities and Exchange Commission
      on October 24, 2005.


(4)
            Incorporated
      herein by reference to the Company’s Registration Statement on Form S-8
      (File No. 333-130243).





(b)
            Exhibits.  The
      exhibits required by Item 601 of Regulation S-K are either filed as part
      of this Annual Report on Form 10-K or incorporated by reference
      herein.




(c)
            Financial
      Statements and Schedules Excluded from Annual Report.  There are
      no other financial statements and financial statement schedules which were
      excluded from the Annual Report to Stockholders pursuant to Rule 14a-3(b)
      which are required to be included
herein.


28


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.





KENTUCKY
      FIRST FEDERAL BANCORPSeptember
      28, 2009
              By:
              /s/ Tony D. WhitakerTony
      D. WhitakerChief
      Executive Officer





Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.





/s/ Tony D. Whitaker
                                
                                September
      28, 2009Tony
      D. WhitakerChairman
      of the Board and Chief Executive Officer(Principal
      Executive Officer)/s/ R. Clay Hulette
                                
                                September
      28, 2009R.
      Clay HuletteVice
      President, Chief Financial Officer and Treasurer(Principal
      Financial and Accounting Officer)/s/ Don D. Jennings
                                
                                September
      28, 2009Don
      D. JenningsDirector/s/ Stephen G. Barker
                                
                                September
      28, 2009Stephen
      G. BarkerDirector/s/ William D. Gorman
                                
                                September
      28, 2009William
      D. GormanDirector/s/ Walter G. Ecton, Jr.
                                
                                September
      28, 2009Walter
      G. Ecton, Jr.Director/s/ David R. Harrod
                                
                                September
      28, 2009David
      R. HarrodDirector/s/ Herman D. Regan, Jr.
                                
                                September
      28, 2009Herman
      D. Regan, Jr.Director


29